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Liberia

Author(s):
International Monetary Fund. African Dept.
Published Date:
December 2012
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The Context

1. Liberia made strong macroeconomic gains under a just-completed Extended Credit Facility (ECF) Arrangement, but macroeconomic stability has been hard won, development challenges are daunting, and poverty remains pervasive. Following an initial post-conflict boost, economic growth has averaged 7 percent a year since 2009 (mostly from non-mining activities before the resumption of iron ore exports in late 2011), while inflation has been largely contained at or near single digits (Figure 1).1 Tax revenue has steadily increased as a share of GDP, the economy has rapidly monetized, and external debt has been reduced significantly, thanks to substantial debt relief. Nonetheless, Liberia remains a poor country, with massive infrastructure gaps and large development needs. Poverty is pervasive (at 84 percent of the population),2 and Liberia ranks near the bottom of the UN’s Human Development Index (HDI)3 and is unlikely to meet many of its Millennium Development Goals (MDG) (Table 1 and Figure 2). Job creation is slow, and the economy is unable to absorb the large number of youth and ex-combatants. Private sector development is further constrained by limited access to financial services and a weak credit environment. The economy also remains heavily dollarized (85 percent of commercial bank deposits), and monetary policy plays a limited role in economic management.4

Figure 1.Liberia: A Post-Conflict Comparison12

(Percent of GDP, unless indicated otherwise)
(Percent of GDP, unless indicated otherwise)
(Percent of GDP, unless indicated otherwise)

Source: OECD: IMF, 2012 Spring World Economic Outlook: and LBR country database.

1t refers to resumption of elected government. For Liberia, t = 2006: Sierra Leone, t = 2002.

2 The shaded area is the period of Liberia ECF which started in 2008.

3 Aid dependency is defined as official transfer/GDP. For Liberia, UNMIL related transfers are exclueded.

Table 1.Liberia: Millennium Development Goals
19901995200020052010SSAGoals
20102015
Goal 1: Eradicate extreme poverty and hunger
Employment to population ratio, 15+, total (%)575757585964
Employment to population ratio, ages 15-24, total (%)343433333346
Income share held by lowest 20%......6....
Malnutrition prevalence, weight for age (% of children under 5)....2320..2211.5
Poverty gap at $1.25 a day (PPP) (%)......41..21
Poverty headcount ratio at $1.25 a day (PPP) (% of population)......84..48
Vulnerable employment, total (% of total employment)......8079..
Goal 2: Achieve universal primary education
Literacy rate, youth female (% of females ages 15-24)..54..738169100
Literacy rate, youth male (% of males ages 15-24)..66..697077100
Primary completion rate, total (% of relevant age group)......696270100
Total enrollment, primary (% net)....46....76100
Goal 3: Promote gender equality and empower women
Ratio of female to male primary enrollment (%)....74929193100
Ratio of female to male secondary enrollment (%)....73....82100
Ratio of female to male tertiary enrollment (%)....55....63100
Goal 4: Reduce child mortality by two-thirds
Immunization, measles (% of children ages 12-23 months)....63636475
Mortality rate, infant (per 1,000 live births)161146112836171107
Mortality rate, under-5 (per 1,000 live births)24121916411783113161
Goal 5: Improve maternal health by three-fourths
Adolescent fertility rate (births per 1,000 women ages 15-19)..152149144131108
Births attended by skilled health staff (% of total)....5146..46
Contraceptive prevalence (% of women ages 15-49)....1011..22
Maternal mortality ratio (modeled estimate, per 100,000 live births)1,2001,9001,3001,100770500900
Pregnant women receiving prenatal care (%)....8479..73
Goal 6: Combat HIV/AIDS, malaria, and other diseases by half
Incidence of tuberculosis (per 100,000 people)199219242266293271100
Prevalence of HIV, female (% ages 15-24)........0.740
Prevalence of HIV, male (% ages 15-24)........0.320
Prevalence of HIV, total (% of population ages 15-49)0.33.13.32.21.560
Tuberculosis case detection rate (%, all forms)46302240566023
Goal 7: Ensure environmental sustainability
Forest area (% of land area)51.2..48.146.544.928.0
Improved sanitation facilities (% of population with access)..1112151831.0100
Improved water source (% of population with access)..5861677361.0100
Goal 8: Develop a global partnership for development
Internet users (per 100 people)00002.310.0
Mobile cellular subscriptions (per 100 people)00053945
Fertility rate, total (births per woman)766655
Memorandum items:
GNI per capita, Atlas method (current US$)2801201901202101,178
GNI, Atlas method (current US$) (billions)0.60.30.50.40.81,006
Life expectancy at birth, total (years)424246525654
Literacy rate, adult total (% of people ages 15 and above)..43..545963
Source: World Development Indicators.
Source: World Development Indicators.

Figure 2.Liberia: MDG Progress Report, 1990–2015

Source: World Bank, Millennium Development Goals database.

Note: Solid line indicates observed performance, while dotted line indicates required achievement.

2. Liberia remains a fragile state, with weak institutions. The sociopolitical situation is gradually improving in the wake of the second national elections in November 2011, but the country remains dependent on UN troops and police (UNMIL) to underpin security. The re-election of President Johnson Sirleaf has been endorsed by international elections observers as transparent and fair, and the UN recently approved a gradual drawdown of its peacekeeping operations (excluding UN police) from the current level of 8,000 troops to about 4,000 by 2015. But building domestic security capacity to undertake some critical security functions transferred from UNMIL is an ongoing challenge. Governance remains a serious concern, and Liberia still ranks high (91 out of 164 countries) in Transparency International’s (TI’s) latest global corruption barometer of the most corrupt nations.5

3. Much more needs to be done to address Liberia’s significant post-conflict development needs. The government has set an ambitious agenda to transform Liberia into a middle-income country by 2030, the underlying theme of their second Poverty Reduction and Growth Strategy (PRS2)—the Agenda for Transformation—and has requested a successor ECF arrangement to support its program (Box 1).6 The strategy focuses on achieving accelerated broad-based growth through scaling up investment in infrastructure and human capital, raising agricultural productivity, and fostering food security, employment creation, and deepening financial markets—areas where progress fell short under the first poverty reduction strategy (PRS1).

MEFP ¶ 8

4. Staff sees merit in a successor ECF arrangement. A successor program would help safeguard macroeconomic stability while bolstering donor support for public investment and social programs. The authorities’ have strengthened their policies, aligning them with advice from the last Article IV consultation and subsequent discussions under the previous ECF arrangement (Box 2). At the same time, there are several key administrative reforms on the government’s reform agenda that would benefit from continued close IMF engagement. There is also a medium-term need to build up reserve coverage to cope with global market uncertainties, but policy space is limited given the need to direct resources toward infrastructure and priority social spending.

Box 1.Liberia: The Agenda for Transformation (2012–17)

The Agenda for Transformation is a five-year development plan that underpins Vision 2030 to achieve middle-income status by 2030. The plan focuses on investments in five strategic pillars—at an estimated cost of $3.3 billion over the five-year period—to increase productivity, boost economic growth, and improve social inclusion, particularly among youth. The pillars are

  • Economic transformation, particularly rehabilitating the hydropower plant, roads, and ports, and updating information and communications technology;

  • Human development especially education and health;

  • Peace, security, and the rule of law;

  • Governance and public institutions to modernize the public sector and enhance transparency and accountability; and

  • Cross-cutting issues focussed on youth skills, child protection, gender equality, and human rights.

Financing the investment program

  • The government plans to cover 12–15 percent of investments with its own resources and is planning a pledging donors’ conference in late 2012 to secure loans and grants.

Liberia: Agenda for Transformation Costing Summary(US$, millions)
FY 12/13FY 13/14FY 14/15FY 15/16FY 16/17Five Year
Pillar 1. Economic transformation594.1532.4439.4354.9267.82,188.6
Pillar 2. Human development87.2100.9120.8121.1128.9558.9
Pillar 3. Peace, security, and rule of law73.190.392.177.173.0405.6
Pillar 4. Governance and public institutions40.316.514.514.110.095.5
Pillar 5. Cross-cutting issues19.528.722.522.119.2111.9
Total814.2768.9689.3589.2498.93,360.5
Source: Ministry of Finance, Agenda for Transformation (as of August 30, 2012).
Source: Ministry of Finance, Agenda for Transformation (as of August 30, 2012).

Box 2.Liberia: Performance Under the Previous ECF Arrangement and Lessons Learned

Performance under the first ECF arrangement (2008–12) was strong. All quantitative targets were met since the second review, and most of the structural reform agenda was implemented. Improved policies underlie this performance, aligned with advice from the 2010 Article IV Consultation and the program discussions. Prudent fiscal policy and strengthened public financial management contributed to a near doubling of government revenue, resumption of direct budget support, and initiation of significant infrastructure development projects without accumulation of expenditure arrears. Monetary policy focused on accumulating reserves, which sizably outperformed expectations during the program. Financial policies focused on strengthening the banking system and promoting intermediation.

Despite the progress, weaknesses remain in program implementation. These include significant delays in budget passage and implementation; slow pace of execution of donor-financed infrastructure projects; persistent weaknesses in the banking sector, including access to credit; and little or no progress in reforming state-owned enterprises (SOEs) or tackling poor governance.

Key lessons from the first ECF arrangement have been incorporated in the successor ECF arrangement. These include linking the Medium-Term Expenditure Framework (MTEF) to priorities in infrastructure development, security, and service delivery, in line with the PRS2, and aligning the MTEF with donor support; linking resource revenue to priority investment spending; focusing public investment initially on a few macro critical projects pending improved implementation capacity; customizing technical assistance to support policy design and program implementation; and implementing a more flexible debt management framework to support multiyear investment programs.

Continued Robust Economic Growth

5. Overall economic activity has remained robust in 2012, with inflation declining (Table 2 and Figure 3). Growth has been driven mainly by the iron ore sector—which resumed exports in 2011 for the first time since the end of the civil war—and rising activity in construction and services. Growth in the mining sector, however, has not spilled over to the non-mining economy. Short-term indicators point to a slowdown in non-mining activity in the first half of 2012 owing to declining rubber exports and the impact of elevated food and fuel prices on consumption. Following spikes in food and oil prices in 2011 and early 2012, U.S. dollar-denominated inflation declined to under 4 percent by end-June and is expected to remain in single digits through end-2012.

Table 2.Liberia: Selected Economic and Financial Indicators, 2009–15
2009201020112012201320142015
Prel.Prel.8th Rev1Proj.Proj.Proj.Proj.
(Annual percentage change, unless otherwise indicated)
National account and prices
GDP at constant prices5.36.18.28.88.98.35.67.1
Real GDP excluding mining sector5.35.85.83.13.86.16.87.3
GDP deflator (US dollars)−1.75.410.62.95.01.11.07.2
Nominal GDP (millions of US dollars)1,155.11,291.91,545.41,699.21,767.51,934.42,062.72,368.9
Consumer prices (average)7.47.38.55.26.65.65.05.0
Consumer prices (end of period)9.76.611.43.35.54.74.04.0
Consumer prices (US dollar denominated, year-on-year)2.41.310.21.93.21.31.81.6
External sector
Exports, f.o.b.−39.740.477.025.923.814.38.565.5
Imports, f.o.b−19.017.449.924.433.316.15.6−5.0
Terms of trade (deterioration -)−9.276.816.1−7.9−24.1−2.5−0.8−10.3
Average exchange rate (local currency per U.S. dollar)68.371.472.2
Average nominal effective exchange rate change (depreciation -)−1.7−3.7−4.8
Average real effective exchange rate (depreciation -)8.52.3−1.1
Gross official reserves (months of imports) 23.23.83.02.92.62.72.83.0
Gross official reserves (millions of U.S. dollars)312.2391.4415.8373.7372.1411.7440.2466.0
Money and credit
Net foreign assets1.4149.811.9−15.2−20.20.0−3.6−3.8
Net domestic assets5.7−89.9101.460.274.617.114.623.4
Net claims on central government−0.2−84.425.5−19.3−11.6−5.7−0.3−0.5
Claims on nongovernment42.227.030.656.260.915.911.719.3
Other items (net)1.9−10.0−2.22.22.20.00.00.0
Broad money (M2)24.133.532.711.413.29.37.013.2
Reserve money2.132.047.79.79.78.98.116.4
Velocity (GDP-to-M2)3.63.02.71.92.72.72.72.8
Money multiplier (M2/M0)4.85.45.45.55.65.75.66.0
(Percent of GDP)
External sector
Current account balance
(including official grants)−28.8−32.8−34.1−48.1−52.4−62.4−65.8−39.3
(excluding official grants)−108.4−108.5−97.2−97.5−99.9−106.4−100.3−65.9
Trade balance−36.4−35.5−40.7−44.4−49.5−53.0−51.8−25.5
Exports, f.o.b.13.316.724.627.526.727.928.340.8
Imports, f.o.b−49.7−52.2−65.4−71.9−76.2−80.9−80.1−66.3
Central government budget 3
Total revenue and grants20.723.526.429.327.827.328.827.6
Of which: total revenue18.622.523.627.226.124.926.525.8
Total expenditure and net lending21.923.127.029.431.033.335.433.8
Of which: current expenditure18.920.521.826.027.025.624.423.1
capital expenditure3.02.65.23.44.17.811.010.7
Overall fiscal balance (including grants)−1.20.5−0.6−0.1−3.2−6.0−6.6−6.2
Overall fiscal balance (excluding grants)−3.3−0.6−3.4−2.2−4.9−8.4−9.0−8.0
Public external debt145.48.810.79.112.114.821.124.9
Central government domestic debt26.124.020.618.117.615.714.412.8
Sources: Liberian authorities and IMF staff estimates and projections.

EBS/12/59. Data as percent of GDP re-calculated using rebased GDP.

Excludes UNMIL service and iron ore concessions–related imports.

Budget data expressed as fiscal year ending in June on a cash basis, i.e., 2011 = FY2010/11.

Sources: Liberian authorities and IMF staff estimates and projections.

EBS/12/59. Data as percent of GDP re-calculated using rebased GDP.

Excludes UNMIL service and iron ore concessions–related imports.

Budget data expressed as fiscal year ending in June on a cash basis, i.e., 2011 = FY2010/11.

Figure 3.Liberia: Recent Economic Developments

Sources: Liberian authorities and IMF staff estimates and projections.

Coincident Indicator

(Rate of change, Q-o-Q)

Note: This indicator of activity combines seven monthly series (exports, rice imports, cement production, government expenditure, broad money, private credit, and the exchange rate).

6. Trade has expanded, but the overall external position remains stable (Table 3).7 The trade deficit has widened in 2012 because of higher concession-financed capital imports and rising food and fuel import prices, offsetting the rise in iron ore exports. Reserve coverage has remained relatively stable at about 2½ months of imports. The Liberian dollar (LD), which was volatile in the first half of 2012, mirroring uncertainty on terms of trade and foreign inflows, has stabilized since June.

Table 3.Liberia: Balance of Payments, 2010–15(Millions of U.S. dollars, unless otherwise indicated)
201020112012201320142015
Prel.Prel.8th Rev1Proj.Proj.Proj.Proj.
Trade balance−459−630−754−876−1,026−1,068−603
Exports, f.o.b.215381467472539584967
Of which: rubber156250232185186200187
Of which: Iron026133138147162538
Imports, f.o.b−674−1,010−1,221−1,347−1,565−1,652−1,570
Services (net)−805−798−824−732−705−657−494
Of which: UNMIL services2−455−418−342−342−266−190−76
Income (net)−200−161−166−262−330−399−463
Of which: public interest payments due3−109−1−1−1−3−4−5
Of which: IMF−1−10000−1
Current transfers1,0411,062926943803647479
Donor transfers (net)978976838839695534365
Of which: UNMIL transfers600550450450350250100
Private transfers (net)63868889929697
Current account balance−424−526−818−926−1,257−1,477−1,081
Current account balance, excluding grants−1,402−1,503−1,656−1,765−2,059−2,068−1,560
Capital and financial account (net)1,2865137698651,2241,366940
Capital account (HIPC debt relief)41,586000000
Financial account−3005137698651,2241,366940
Foreign direct investment (net)286295724279328344270
Portfolio investment (net)0000000
Other investment (net)−586218465878961,023669
Official financing: Medium and long term (net)−8192221198126131
SDR allocation0000000
Disbursements062817104135143
Amortization−819−4−6−6−6−9−12
Private financing (net)423421624575798897538
Errors and omissions15000000
Overall balance820−14−49−6167129159
Financing−820−114961−67−129−159
Change in gross official reserves (increase -)5−78−244243−40−29−26
Net use of Fund credit and loans−84914718221917
Disbursements1414718222222
Of which: ECF financing1414718222222
Repayments−8630000−3−6
Donor financing000050120150
Exceptional financing108000000
Debt forgiveness1,586000000
Change in arrears6−1,586000000
Debt rescheduling plus HIPC interim debt relief7108000000
Memorandum items:
Current account balance (percent of GDP)
Including grants−32.8−34.1−48.14−52.4−65.0−71.6−45.6
Excluding grants−108.5−97.2−97.5−99.9−106.4−44.8−39.4
Trade balance (percent of GDP)−35.5−40.7−44.4−49.5−53.0−51.8−25.5
Donor transfers (net, percent of GDP)75.763.249.347.538.531.721.7
Public sector external debt (medium and long term)
Debt outstanding, including arrears114166154214287435589
(percent of GDP)8.810.79.112.114.821.124.9
Debt service charges (after relief)2.25.87.37.38.612.916.3
(percent of GDP)0.20.40.40.40.40.60.7
Terms of trade (2000=100)212246228187182180.8162.2
Gross official reserves391416374372412440466
Gross official reserves (months of imports)83.83.02.92.62.72.83.0
Sources: Liberian authorities and IMF staff estimates and projections.

EBS/12/59. Data as percent of GDP re-calculated using rebased GDP.

Net of estimated value of goods and services purchased by UNMIL (and its staff) in Liberia.

From 2007, interest charged on debt stock after application of traditional debt relief mechanisms.

Includes short-term trade credits and private sector operating balances abroad.

Includes SDR assets and excludes SDR liabilities of US$ 163.2 million.

Includes debt forgiveness from multilateral creditors and Paris Club creditors.

Includes deferred debt service payments in the interim period.

Excludes UNMIL service and iron ore concessions related imports.

Sources: Liberian authorities and IMF staff estimates and projections.

EBS/12/59. Data as percent of GDP re-calculated using rebased GDP.

Net of estimated value of goods and services purchased by UNMIL (and its staff) in Liberia.

From 2007, interest charged on debt stock after application of traditional debt relief mechanisms.

Includes short-term trade credits and private sector operating balances abroad.

Includes SDR assets and excludes SDR liabilities of US$ 163.2 million.

Includes debt forgiveness from multilateral creditors and Paris Club creditors.

Includes deferred debt service payments in the interim period.

Excludes UNMIL service and iron ore concessions related imports.

7. The overall fiscal deficit including grants for FY 2011/12 (July–June), at 3.2 percent of GDP, was larger than expected (Table 4). This reflects delays in collecting large one-off payments from iron ore concessions—which more than offset strong performance in trade taxes—and overruns in current and capital spending (including higher-than-budgeted spending on wages and salaries for new teachers).8 Capital expenditure was higher than previously estimated, reflecting the execution of unbudgeted projects including the dredging of a port and road rehabilitation. Expenditure overruns were financed domestically through drawing down government deposits and direct borrowing from the central bank.

MEFP ¶ 7

Table 4.Liberia: Fiscal Operations of the Central Government, FY2010–151(Millions of U.S. dollars)
FY2010FY2011FY2012FY2013FY2014FY2015
Actual8th RevProj.Proj.Proj.Proj.
Total revenue and grants288.0374.9470.8461.0505.6575.8611.4
Revenue275.0334.6437.3432.7460.8529.1571.4
Tax revenue207.8269.2338.9357.0364.2383.6424.7
Taxes on income, profits, and capital gains70.2111.2120.0145.4131.3142.3153.8
Taxes on goods and services39.248.472.053.761.064.668.7
Taxes on international trade91.7105.4147.0149.0162.4166.4191.1
Other taxes6.74.35.78.99.510.311.1
Non-tax67.365.498.375.896.6145.5146.7
Grants13.040.333.528.344.846.740.0
Expenditure and net lending282.2382.9472.9514.3616.6708.4748.1
Current expenditure250.5309.4418.8446.6473.1487.5512.0
Wages and salaries113.9138.6186.0187.3204.0216.0225.6
Goods and services76.786.3116.1134.0141.3135.0145.0
Subsides and transfers55.780.5112.0120.2121.3129.4133.1
Interest4.24.04.75.16.67.18.3
Capital expenditure31.773.554.167.8143.5220.8236.2
Foreign loan financed20.09.618.021.0104.6136.6143.9
Domestically financed31.763.936.146.838.984.392.3
Unallocated expenditure0.00.00.00.00.00.00.0
Net lending0.00.00.00.00.00.00.0
Overall balance
Including grants5.9−7.9−2.1−53.3−111.0−132.5−136.7
Excluding grants−7.1−48.2−35.6−81.5−155.8−179.3−176.7
Identified financing−5.98.02.153.3111.0132.5136.7
External financing (net)−3.33.812.515.1101.8133.1140.9
Loans0.09.618.021.0104.6136.6143.9
Amortization (-)−3.3−5.8−5.5−5.9−2.8−3.4−3.0
Domestic financing (net)−2.64.3−10.438.29.3−0.6−4.2
Central Bank of Liberia0.210.0−5.243.50.00.00.0
Use of deposits3.810.0−5.223.50.00.00.0
Gross borrowing0.00.00.020.00.00.00.0
Deposit money banks−0.9−3.0−1.5−1.59.3−0.6−4.2
Treasury bill purchases (net)0.00.00.00.015.00.00.0
Other lending to government0.00.00.00.00.00.00.0
Other (including repayment of arrears)−1.8−2.7−3.8−3.80.00.00.0
Unidentified financing/float0.0−0.10.00.00.00.00.0
Memorandum items:
Iron ore-related revenues29.933.144.718.213.931.233.9
Total public external debt31,679.9113.9140.6166.0286.7435.1589.1
Central government domestic debt4293.8292.0291.0290.9289.7288.7284.2
Of which: foreign currency denominated280.4278.9278.3278.3277.6277.0272.8
Basic balance537.665.552.014.532.488.399.4
Current balance624.625.218.5−13.8−12.341.659.4
Primary balance, including grants10.1−4.02.7−48.2−104.5−125.4−128.4
Fiscal year nominal GDP1,223.51,418.71,607.91,656.41,850.91,998.52,215.8
Sources: Liberian authorities and IMF staff estimates and projections.

Budget is shown on a cash basis (i.e., debt service payments are shown after all debt relief).

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget, grant-financed expenditure.

Includes debt to IMF.

Includes central government debt to the Central Bank of Liberia (which is excluded from domestic debt in the debt sustainability analysis).

Basic balance is defined as (total revenue and grants minus project grants) minus (total expenditure minus foreign and domestically financed investment spending).

Current revenue less current expenditure.

Sources: Liberian authorities and IMF staff estimates and projections.

Budget is shown on a cash basis (i.e., debt service payments are shown after all debt relief).

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget, grant-financed expenditure.

Includes debt to IMF.

Includes central government debt to the Central Bank of Liberia (which is excluded from domestic debt in the debt sustainability analysis).

Basic balance is defined as (total revenue and grants minus project grants) minus (total expenditure minus foreign and domestically financed investment spending).

Current revenue less current expenditure.

Table 4.Liberia: Fiscal Operations of the Central Government, FY2010–15 (continued)1(Percent of GDP)
FY2010FY2011FY2012FY2013FY2014FY2015
Actual8th Rev7Prel.Proj.Proj.Proj.
Total revenue and grants23.526.429.327.827.328.827.6
Revenue22.523.627.226.124.926.525.8
Tax revenue17.019.021.121.619.719.219.2
Taxes on income, profits, and capital gains5.77.87.58.87.17.16.9
Taxes on goods and services3.23.44.53.23.33.23.1
Taxes on international trade7.57.49.19.08.88.38.6
Other taxes0.50.30.40.50.50.50.5
Non-tax5.54.66.14.65.27.36.6
Grants1.12.82.11.72.42.31.8
Expenditure and net lending23.127.029.431.033.335.433.8
Current expenditure20.521.826.027.025.624.423.1
Wages and salaries9.39.811.611.311.010.810.2
Goods and services6.36.17.28.17.66.86.5
Subsides and transfers4.55.77.07.36.66.56.0
Interest0.30.30.30.30.40.40.4
Capital expenditure2.65.23.44.17.811.010.7
Foreign loans financed20.00.71.11.35.66.86.5
Domestic and grant financed2.64.52.22.82.14.24.2
Unallocated expenditure0.00.00.00.00.00.00.0
Overall balance
Including grants0.5−0.6−0.1−3.2−6.0−6.6−6.2
Excluding grants−0.6−3.4−2.2−4.9−8.4−9.0−8.0
Identified financing−0.50.60.13.26.06.66.2
External financing (net)−0.30.30.80.95.56.76.4
Loans0.00.71.11.35.66.86.5
Amortization (-)−0.3−0.4−0.3−0.4−0.2−0.2−0.1
Domestic financing (net)−0.20.3−0.62.30.50.0−0.2
Central Bank of Liberia0.00.7−0.32.60.00.00.0
Use of deposits0.30.7−0.31.40.00.00.0
Gross borrowing0.00.00.01.20.00.00.0
Deposit money banks−0.1−0.2−0.1−0.10.50.0−0.2
Treasury bill purchases (net)0.00.00.00.00.80.00.0
Other (including repayment of arrears)−0.1−0.2−0.2−0.20.00.00.0
Unidentified financing0.00.00.00.00.00.00.0
Memorandum items:
Iron ore-related revenues2.42.32.81.10.71.61.5
Total public external debt3137.38.08.710.015.521.826.6
Central government domestic debt424.020.618.117.615.714.412.8
Of which: foreign currency denominated22.919.717.316.815.013.912.3
Basic balance53.14.63.21.71.84.44.5
Current balance62.01.81.1−1.7−0.72.12.7
Primary balance, including grants0.8−0.30.2−5.8−5.6−6.3−5.8
Fiscal year nominal GDP (millions of U.S. dollars)71,223.51,418.71,607.91,656.41,850.91,998.52,215.8
Sources: Liberian authorities and IMF staff estimates and projections.

Budget is shown on a cash basis (i.e., debt service payments are shown after all debt relief).

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget, grant-financed expenditure.

Includes debt to IMF.

Includes central government debt to the Central Bank of Liberia (which is excluded from domestic debt in the debt sustainability analysis).

Basic balance is defined as (total revenue and grants minus project grants) minus (total expenditure minus foreign and domestically financed investment spending).

Current revenue less current expenditure.

EBS/12/59. Data as percent of GDP re-calculated using rebased GDP.

Sources: Liberian authorities and IMF staff estimates and projections.

Budget is shown on a cash basis (i.e., debt service payments are shown after all debt relief).

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget, grant-financed expenditure.

Includes debt to IMF.

Includes central government debt to the Central Bank of Liberia (which is excluded from domestic debt in the debt sustainability analysis).

Basic balance is defined as (total revenue and grants minus project grants) minus (total expenditure minus foreign and domestically financed investment spending).

Current revenue less current expenditure.

EBS/12/59. Data as percent of GDP re-calculated using rebased GDP.

8. The expansion in the financial system is decelerating because credit to the private sector has tightened on account of increasing bank fragilities. Broad money growth has nearly halved on account of a slowdown in bank credit (Table 5 and Figure 4). The financial sector has further weakened owing to high credit risk, increasingly high non-performing loans, and still-weak bank profitability.9

Table 5.Liberia: Monetary Survey, 2009–14(Millions of U.S. dollars; unless otherwise indicated)
200920102011201220132014
8th RevProj.Proj.Proj.
(Central Bank balance sheet)
Net foreign assets−749.1191.4236.3140.5147.2151.6145.6
Of which: IMF credit1−891.2−44.4−46.4−64.9−74.8−96.9−115.9
CBL’s gross foreign reserves2372.5467.0523.6494.4495.4546.7584.1
Commercial banks’ US$ denominated deposits at CBL60.275.5107.8120.7123.3135.0143.9
CBL’s gross official foreign reserves4312.2391.4415.8373.7372.1411.7440.2
Government US$ denominated deposits at CBL45.5103.784.277.084.284.284.2
CBL’s net foreign exchange position 456226.6243.1273.4238.6213.1230.6240.1
CBL’s net foreign exchange position excluding SDR holdings65.177.0107.772.250.067.677.2
Net domestic assets823.0−93.8−92.217.610.820.440.4
Net claims on government1,067.4170.6219.0178.2194.5183.9183.3
Claims on other public sector50.00.00.00.00.00.00.0
Claims on private sector1.84.95.86.56.77.33.1
Claims on commercial banks0.00.00.00.00.00.00.0
Other items (net)5−246.1−269.3−317.0−269.3−269.3−269.3−269.3
Base money73.997.6144.0158.0158.0172.0186.0
(Monetary survey)
Net foreign assets−664.3330.5369.9313.6295.0295.1284.5
Net domestic assets986.7100.1201.5322.7351.9412.0472.0
Net domestic credit1,241.3380.1487.8602.8632.0692.1752.0
Net claims on government1,074.3168.0210.8170.1186.3175.7175.1
Claims on nongovernment154.5199.6264.5432.8300.5516.4576.9
Claims on private sector136.5191.3253.2283.5289.6316.9240.4
Claims on public enterprises17.97.09.99.79.69.39.0
Claims on nonbank financial institutions0.01.31.41.41.31.31.3
Other Items (Net)−254.6−280.1−286.3−280.1−280.1−280.1−280.1
Monetary aggregates
Monetary base (M0)67.179.9105.9115.6115.0125.0135.7
Currency in circulation59.070.092.5100.299.2107.7117.2
Required reserves8.19.913.415.515.817.318.4
Commercial bank deposits263.4360.5478.9536.2547.7599.4639.2
Total demand deposits201.3260.1348.6360.8368.6196.1209.1
L$ denominated deposits12.316.423.626.426.949.152.3
US$ denominated deposits188.9243.7325.1334.4341.6147.0156.7
Time, savings and other deposits62.1100.4130.3175.4179.1403.4430.1
L$ denominated deposits19.424.539.243.944.829.531.4
US$ denominated deposits42.776.091.1131.5134.3373.9398.7
Broad money (M2)322.4430.6571.4636.4646.9707.1756.4
L$ component90.8110.9155.2170.4171.0186.2201.0
US$ component231.7319.6416.2465.9475.9520.9555.4
Memorandum items:
Broad money (annual change)24.133.532.711.413.29.37.0
L$ component as percent of beginning period broad money2.46.210.32.72.82.42.1
US$ component as percent of beginning period broad money21.727.322.48.710.56.94.9
Reserve money (annual change)2.132.047.79.79.78.98.1
Base money (annual change)6.019.132.59.28.68.78.5
Credit to government (annual change)−0.2−84.425.5−19.3−11.6−5.7−0.3
Credit to private sector (annual change)31.540.132.412.014.49.46.6
Velocity (GDP-to-M2)3.63.02.71.92.72.72.7
Sources: Liberian authorities and IMF staff estimates and projections.

Data for 2012 8th Review corrected from US$58.1 to US$64.9 million.

SDR holdings are included from December 2009.

3 Defined as gross official reserves less government foreign currency deposits at the central bank.

Including public enterprises and the local government.

Including valuation adjustment.

Excluding ECF disbursements.

Sources: Liberian authorities and IMF staff estimates and projections.

Data for 2012 8th Review corrected from US$58.1 to US$64.9 million.

SDR holdings are included from December 2009.

3 Defined as gross official reserves less government foreign currency deposits at the central bank.

Including public enterprises and the local government.

Including valuation adjustment.

Excluding ECF disbursements.

Figure 4.Liberia: Monetary and Financial Developments

Sources: Liberian authorities and IMF staff estimates and projections.

Meeting the Challenges of Maintaining Macroeconomic Stability While Scaling Up Public Investment

9. The Article IV consultation discussions focused on policies to consolidate macroeconomic stabilization and lay the basis for accelerated and diversified growth. The authorities and staff agreed that achieving high, broad-based growth and job creation in the next decade or so will require a significant increase in infrastructure and social investments, aligned with the PRS2. The authorities need to (i) build policy buffers to mitigate vulnerabilities; (ii) catalyze expected strong natural resource revenue to support the development agenda; and (iii) create a favorable business climate to support broad-based growth and job creation.

A. Favorable Outlook with Risks

10. The economic outlook is favorable but not without risks. Real GDP growth is projected at between 8 and 9 percent in 2012–13, above the average for Sub-Saharan Africa (SSA) and other fragile countries (Table 6 and Figure 5).10 Increasing commodity exports, strong foreign direct investment (FDI), and large infrastructure investment are expected to underpin medium-term economic activity. Mining activity will peak in 2012, reflecting the pickup of iron ore exports, and then will surge again in 2015 as production capacity in the only currently operating iron ore mine reaches full capacity. However, the weak outlook for iron ore prices may limit the macroeconomic impact of higher mining production, especially on revenue and export receipts. Following the one-off slow down in 2012, non-mining activity is projected to normalize and increase steadily over the medium term driven primarily by construction and services. Inflation is expected to moderate to 6–7 percent by end-2012. The external current account deficit is expected to widen further in 2012–14 owing to investment-related imports, and then narrow over the medium term as these imports unwind and exports rise. Reserve coverage would remain stable—albeit low—at about 2½ months of imports (Box 3).11

Table 6Liberia: Medium-Term Outlook, 2010–16
2010201120122013201420152016
Prel.Prel.Proj.Proj.Proj.Proj.Proj.
(Annual percentage change)
National income
Real GDP6.18.28.98.35.67.15.1
Agriculture & fisheries2.73.91.93.34.44.85.6
Forestry6.73.42.51.86.06.16.1
Mining & panning46.4166.3133.031.6−4.65.6−37.0
Manufacturing3.13.13.13.23.53.63.7
Services7.77.65.49.28.79.412.5
Real GDP excluding mining sector 15.85.83.86.16.87.39.2
Nominal non-mining per capita GDP (U.S. dollar)341.2384.3392.5412.6436.4458.5495.1
Prices
GDP deflator5.410.65.01.11.07.20.2
Consumer prices (annual average)7.38.56.65.65.05.05.0
Consumer prices (end of period)6.611.45.54.05.05.05.0
Population (millions)3.83.94.04.14.24.34.4
(Percent share)
Nominal GDP100.0100.0100.0100.0100.0100.0100.0
Agriculture & fisheries36.536.230.828.928.725.825.6
Forestry8.38.17.57.27.36.97.1
Mining & panning0.94.512.513.712.217.513.4
Manufacturing4.13.83.63.43.43.13.1
Services50.347.445.646.748.446.750.8
(Percent of GDP, fiscal year)
Central government operations
Total revenue and grants23.526.427.827.328.827.626.0
Total revenue22.523.626.124.926.525.824.4
Grants1.12.81.72.42.31.81.6
Total expenditure and net lending23.127.031.033.335.433.832.8
Current expenditure20.521.827.025.624.423.122.7
Capital expenditure2.65.24.17.811.010.710.1
Unallocated expenditure0.00.00.00.00.00.00.0
Overall fiscal balance, including grants0.5−0.6−3.2−6.0−6.6−6.2−6.8
Overall fiscal balance, excluding grants−0.6−3.4−4.9−8.4−9.0−8.0−8.4
Public external debt8.810.712.114.821.124.929.5
Central government domestic debt24.020.617.615.714.412.812.6
(Percent, unless otherwise indicated)
M2/GDP33.337.036.636.636.736.136.3
Private sector credit/GDP14.816.416.416.416.416.416.4
Velocity (GDP-to-M2)3.02.72.72.72.72.82.8
Money multiplier (M2/M0)5.45.45.65.75.66.05.9
(Percent of GDP, unless otherwise indicated)
External sector
Current account balance, including grants−32.8−34.1−52.4−62.4−65.8−39.3−24.7
Current account balance, excluding grants−108.5−97.2−99.9−106.4−100.3−65.9−50.2
Trade balance−35.5−40.7−49.5−53.0−51.8−25.5−15.9
Exports16.724.626.727.928.340.839.4
Imports−52.2−65.4−76.2−80.9−80.1−66.3−55.3
Grants (donor transfers, net)75.763.247.538.531.721.719.1
Gross official reserves (millions of U.S. dollars)391.4415.8372.1411.7440.2466.0470.8
Months of imports of goods and services 23.83.02.62.72.23.03.0
Sources: Liberian authorities and IMF staff estimates and projections.

Chained weighted sectoral average growth rate.

Excludes UNMIL service and iron ore concessions related imports.

Sources: Liberian authorities and IMF staff estimates and projections.

Chained weighted sectoral average growth rate.

Excludes UNMIL service and iron ore concessions related imports.

Figure 5.Liberia: Medium-Term Outlook, 2010–16

(Percent of GDP, unless indicated otherwise)
(Percent of GDP, unless indicated otherwise)
(Percent of GDP, unless indicated otherwise)

Sources: Liberian authorities and IMF staff estimates and projections.

Real GDP Growth

(Percent)
Liberia: Medium-term Outlook, 2009–15
2009201020112012201320142015
Prel.Prel.Proj.Proj.Proj.Proj.
(Annual percentage change)
GDP at constant prices5.36.18.28.98.35.67.1
Real GDP excluding mining sector5.35.85.83.86.16.87.3
Consumer prices (average)7.47.38.56.65.65.05.0
Consumer prices (US dollar denominated, year-on-year)2.41.310.23.21.31.81.6
(Percent of GDP, unless otherwise indicated)
Central government budget 1
Total revenue and grants20.723.526.427.827.328.827.6
Of which: total revenue18.622.523.626.124.926.525.8
Total expenditure and net lending21.923.127.031.033.335.433.8
Overall fiscal balance (including grants)−1.20.5−0.6−3.2−6.0−6.6−6.2
Current account balance (including official grants)−28.8−32.8−34.1−52.4−62.4−65.8−39.3
Gross official reserves (months of imports)23.23.83.02.62.72.83.0
Sources: Liberian authorities and IMF staff estimates and projections.

Budget data expressed as fiscal year ending in June on a cash basis, i.e., 2011= FY2010/11.

Excludes UNMIL service and iron ore concessions related imports, but includes IMF disbursements under the requested ECF.

Sources: Liberian authorities and IMF staff estimates and projections.

Budget data expressed as fiscal year ending in June on a cash basis, i.e., 2011= FY2010/11.

Excludes UNMIL service and iron ore concessions related imports, but includes IMF disbursements under the requested ECF.

Box 3.Liberia: Reserve Adequacy

International reserves are an important source of self-insurance against external shocks. Liberia is vulnerable to a variety of exogenous shocks stemming from sharp swings in terms of trade, weakly diversified exports, and reliance on international trade to import large quantities of essential goods. In addition, as a largely dollarized economy, reserves may also be needed to provide liquidity to the banking sector in the event of capital flight.

Reserves

(Months of imports)

Reserves

(Percent of broad money)

1 Dollarized countries: Cambodia, Sao Tomé and Príncipe.

2 ECF countries: Burundi, Mali, and Sierra Leone.

3 Liberia estimates do not include ECF disbursements.

Commonly used metrics that focus on import cover, broad money, and model-based estimates provide some limited guidance on reserve adequacy. Theoretical and empirical analysis on determining the optimal or desired level of precautionary reserves is limited, particularly for dollarized economies. In Liberia, reserves remain below the traditional rule of three months of imports, even when UNMIL services and iron ore-related imports are taken into account. They are also low compared to other low-income dollarized countries, and other ECF arrangement countries in the region. Broad money is a less firmly based indicator in the literature, but can capture the risk of outflows by domestic residents and the potential need for bank support in or after a crisis. However, this vulnerability may be limited in Liberia because of the foreign ownership of banks and the non-systemic nature of the banking system. Using this measure, reserve coverage of broad money in Liberia is close to peer countries and above the 20 percent of broad money rule of thumb.

Optimal reserve sm, monothnsthosf iomf pimorptsorts

Source: IMF staff estimates.

Model estimates that maximize the welfare benefits, subject to the cost of holding reserves, suggest optimal reserve holdings in Liberia in the range of one to six months of imports.1 The benefit is measured by a decline in the probability and cost of a crisis, given country-specific fundamentals and shocks. However, the methodology is particularly sensitive to the assumption on the opportunity cost of holding reserves, which can range between two and six percent. Given the large investment needs in Liberia, the opportunity cost of holding reserves is assumed to be on the higher end of the estimates. On balance, this suggests that three months of imports is adequate reserve coverage in the medium term and would align Liberia with peer countries.

1 Based on the metric proposed in the recent Board paper on Assessing Reserve Adequacy, 2011.

11. Liberia’s main risks are a protracted slow growing global economy and adverse movements in terms of trade (Table 7). Sluggish global demand for commodity exports—especially iron ore—poses risks to Liberian exports and may delay FDI, with negative impacts on the economy, the current account, and the fiscal balance (Figure 6). Downside risks come from weak public investment absorptive capacity. While Liberia will continue to fully pass through increases in fuel prices and maintain reduced import tariffs to mitigate high food prices, coping with further adverse external price movements could pose a challenge. In particular, Liberia is vulnerable to further increases in the import price of rice—the staple food in Liberia—although rice prices have so far not moved significantly in world markets. The authorities noted that importers are encouraged to hold six months of rice in the country, although the monitoring system relies on self-reporting by private agents. In an exogenous shock, the authorities would seek additional rice grants from donors. They are also evaluating existing interventions, including the school feeding program, and assessing new options to protect the most vulnerable while minimizing potential fiscal costs. On the upside, a pickup in iron ore and forestry production, positive developments in petroleum exploration, and high-return public investments present significant opportunities.

Table 7.Liberia: Risk Assessment Matrix1
Source of RisksRelative LikelihoodImpact if Realized
International food price increasesMediumLiberia is particularly exposed to increases in the import price of rice—the staple food in Liberia. Higher prices would affect the most vulnerable in society, putting pressure on additional assistance from the government and donors.
Strong intensification of the euro area crisisMediumPrimary channels of contagion are lower demand for exports and falling commodity prices causing a deterioration in the external position.
A global economic slowdownMediumA protracted global slowdown would lead to sharper commodity price declines and reduce prospects for ongoing investment in Liberia’s concessions sector. This risks future fiscal revenue and growth prospects.
Sharp slowdown in ChinaLowChina is a key driver of demand in commodity markets, where Liberia’s exports are concentrated, and has investments in the mining sector. A sharp slowdown in China would lower exports and risk the upside return of future mining investments.2
Disorderly withdrawal of UNMILLowSocial and political instability diverting resources from public investment and additional pressure on donor assistance.
Weak implementation of public investment program or insufficient financingMediumLower growth and ongoing high energy costs.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline. The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities.

Only one iron ore concession is included in the baseline. Investment from China represents an upside risk to the outlook.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline. The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities.

Only one iron ore concession is included in the baseline. Investment from China represents an upside risk to the outlook.

Figure 6.Liberia: Sensitivity to Iron Ore price

Sources: IMF staff estimates and World Economic Outlook.

12. The authorities agreed to build reserves to three months of imports. They agreed with staff’s assessment that this level of import coverage strikes a balance between building buffers to contain external risks and limiting the high opportunity cost of accumulating reserves given the high yield on public investment considering the massive infrastructure gaps. This level of reserves also leaves a margin for foreign exchange market intervention to address excess exchange rate volatility. Over the longer term, reserves accumulation beyond three months may be desireable, because the opportunity costs of holding reserves declines once the large investments are completed, and reserves will build confidence in the financial system as the economy continues to monetize.

MEFP ¶ 32

Authorities’ views

13. The authorities broadly agreed with staff’s views on the economic outlook, although they are targeting stronger growth over the longer term. PRS2 calls for growth of about 8½ percent a year over the longer term to achieve middle-income status by 2030. Achieving and maintaining this high growth rate, however, is challenging and will require fully securing the estimated $3 billion in financing needed to implement PRS2—some $2 billion above the baseline projections—including a substantial crowding-in of the private sector. Staff and the authorities discussed policies needed to remove bottlenecks to achieving higher growth, including improvements in competitiveness, diversification of the economy, especially agriculture, and execution of public investment projects.12 Staff analysis found improved efficiency of public investments can have a significant impact on growth (Box 4).

Box 4.Liberia: Macroeconomic Impact of Scaling Up Public Investment

Liberia can achieve significant growth dividends from scaling up public investment and improving efficiency of capital spending. Public investment has been low in Liberia—about 3 percent of GDP on average in recent years—and below that of other low-income countries. Liberia also has a weak track record of project implementation—historically around 50 to 60 percent of budgeted capital expenditure is executed. A dynamic economic model, calibrated to Liberia specifics, was used to estimate the economic return from higher public investment relative to steady-state trend growth, as well as the impact of improving project efficiency.1 Starting from Liberia’s low base, an average increase of 5 percentage points of GDP a year in investment in seven years contributes to an approximately 1 percentage point increase in the annual growth rate of real per capita income on average over ten years. The growth effect peaks 3 to 4 years after the initial investment and then gradually declines over time returning to trend growth of 3 percent in per capita terms. The estimate assumes an efficiency rate of public investment of around 60 percent.2 Assuming an improvement in the efficiency rate to 80 percent, consistent with improved project selection and strengthened execution capacity, real per capita income growth could potentially increase by an additional half percentage point over the medium term. On the other hand, the same amount of investment with a lower efficiency rate of 20 percent would result in lower growth over the longer term. Getting to higher growth faster, in turn, improves Liberia’s debt dynamics. This shows the critical need for stepped-up efforts to tackle bottlenecks to project implementation. The exercise, however, has some caveats, and the estimates should be seen as an approximation rather than as a forecast.

Public Investment Across Countries

(Percent of GDP)

Source: WEO database and IMF staff calculations.

Liberia: Real Per Capita Income Growth

(Percentage change, y.o.y)

Source: IMF staff calculations.

Liberia: Public Debt Under Different Growth Scenarios

(Percentage of GDP)

Source: IMF staff calculations.

1 EBS/12/139, Supplement 1.2 The average for low-income countries. The efficiency rate measures the rate at which executed public investment translates into productive capital. For more details see Buffie, E., A. Berg, C. Patillo, R. Portillo, and L. Zanna, 2012, “Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces.” IMF Working Paper No. 12/144.

B. Challenges: Managing Liberia’s Natural Resource Wealth

14. Over the longer term, proper management of revenue from natural resources will be important to support the development agenda.13 While iron ore-related revenue—estimated at around 1.1 percent of GDP or 4 percent of government revenue in 2012—is not expected to have a significant fiscal or macroeconomic impact in the near term, it is projected to rise over the medium term as more concessions begin production.14 There is also potential for one-off windfalls related to petroleum exploration. Considering the potential for strong mining revenue, staff encouraged the authorities to step up efforts to establish a fiscal framework for managing this windfall, including measures to (i) build buffers to cope with export price volatility; (ii) smooth spending and avoid boom-bust cycles; and (iii) channel resources toward high-return public investment and other priority spending aligned with the PRS2.

15. Liberia has an adequate tax code for taxing the mining sector, but concession agreements have ad hoc terms. Staff estimates of the impact of comparative fiscal terms on the only currently producing iron ore mine show that the revised Liberia Revenue Code (LRC) yields returns comparable to international standards, but tax breaks in existing iron ore concessions have limited potential fiscal returns. If these concessions come up for renegotiation, the authorities should aim to harmonize the terms with the LRC and avoid tax breaks. Moreover, the authorities need to improve monitoring of production and financial statements of concessions to ensure that income tax payments fully reflect operations.

Effective Tax Return Under Compartive Fiscal Terms

(Average effective tax return)1

Citation: 2012, 340; 10.5089/9781475542769.002.A001

1 Different fiscal regimes and iron ore concession agreements applied to the Liberian Yekepa iron ore project operated by ArcelorMittal. Discount rate = 0; iron ore $DMT FOB price converqes to $46 constant 2012 dollars.

Source: IMF staff estimates.

16. Concession agreements are transparent, but further actions are needed to improve governance. Liberia complies with the Extractive Industries Transparency Initiative (EITI); however, transparency and governance can still be improved in the petroleum sector. The authorities need to put in place governance structures that would delineate the responsibilities of regulation, oversight, and profit sharing in the petroleum sector, which are all currently held by the National Oil Company of Liberia (NOCAL). The authorities agreed with the staff’s assessment and are planning to revise the Petroleum Act by mid-2013 to improve governance in the sector. They will also update the fiscal regime to international best practices and have requested IMF technical assistance.

17. Some key concessions sectors have limited interaction with the non-concession economy owing to the scarcity of skilled domestic labor. Rubber is the only concession sector so far employing domestic labor on a significant scale. Improving education and training and setting up local supply chains to serve the concessions may help make mineral sector growth more broad based and inclusive. Activity in the palm oil sector has been bogged down by sociopolitical challenges stemming from land disputes in the concession areas, but the sector carries high potential for job creation because of labor-intensive production.

C. Boosting Competitiveness and Growth

18. Continued strong reforms are needed to improve Liberia’s competitiveness and the business environment. Given the high dollarization of the Liberian economy, the authorities broadly agreed that public investment and structural reforms are needed to improve cost competitiveness. The business climate remains constrained by continued high operating costs, particularly related to energy and transportation, as well as weak administrative capacity, a complicated and costly regulatory environment, uncertain property rights, and limited access to domestic finance (Box 5 and Figure 7). Ongoing regional integration within the Economic Community of West African States (ECOWAS)15 and World Trade Organization (WTO) accession16 will help to reduce barriers to trade and improve competitiveness.

Box 5.Assessing External Stability and Competitiveness in Liberia

Liberia’s external sector remains stable, with current account developments dominated by the activities in the concessions sector and aid flows. While the current account deficit is expected to widen significantly over the next three years from capital imports related to the iron ore sector, the expected acceleration of iron ore production and exports from 2015 will contribute to a narrowing in the current account deficit over the longer term. Iron ore production will also support a diversification of exports. (By 2015, iron ore exports are expected to rise to more than 60 percent of total exports, replacing rubber as the main export). Although this may help to offset idiosyncratic shocks in the rubber sector, commodity prices tend to move together such that the export sector is still vulnerable to falls in commodity prices. Moreover, if discovered, there is a potential for commercially viable oil which could have a significant impact on exports. Nonetheless, the current account deficit remains high as a share of GDP over the long term, especially given Liberia’s heavy dependence on imports to cover basic goods; and there is need for ongoing adjustment, especially to boost and diversify exports.

The real effective exchange rate has appreciated close to 25 percent since mid-2008 reflecting higher domestic inflation, particularly food and fuel prices.1 Given the high degree of dollarization in the economy, the authorities broadly agreed with the assessment that sustained policy measures are needed to improve cost competitiveness.

Liberia: Nominal and Real Effective Exchange Rates

(Index, 2002 = 100 percent)

Sources: Central Bank of Liberia and IMF staff calculations.

Structural bottlenecks are a key element holding back Liberia’s competitiveness. Liberia’s overall rank in the World Bank’s Doing Business Indicators improved four places in 2012, but growth remains constrained by continued high operating costs of energy and transportation. Electricity costs are the highest in sub-Saharan Africa because of reliance on batteries and generators, while access to electricity is one of the lowest in the world at close to zero compared with an average of 28.5 percent for sub-Saharan Africa. Sustained measures are also needed to streamline the complicated and costly regulatory environment, harmonize government business inspections, streamline payment of taxes, improve enforcement of contracts, and improve access to finance.

1 Real exchange rate assessment in Liberia is limited by serious data limitations. Further, given the high degree of dollarization, any real exchange rate overvaluation would need to be addressed by increasing productivity and reducing domestic costs.

Figure 7.Liberia: 2012 Business Climate—A Cross Country Comparison1

Sources: World Bank, Doing Business database and Governance Indicators database.

1 The numbers in parentheses show the change between the 2012 and 2011 rankings.

2 An increase signals an improvement.

The Pillars of An ECF-Supported Program

A. Three Key Pillars

19. The proposed ECF arrangement would support the authorities’ program to accelerate broad-based growth and poverty reduction, aligned with their PRS2, while maintaining macroeconomic stability. Consistent with these objectives, discussions centered on three key pillars

  • Creating fiscal space for higher capital spending by containing personnel costs and other current transfers;

  • Strengthening the financial sector through reducing vulnerabilities and improving access to credit; and

  • Underpinning growth with structural reforms to further improve public financial management, governance, and the business environment.

B. Creating Fiscal Space for Scaling Up Investment

20. The government’s medium-term fiscal policy plans (i) a widening of the fiscal deficit (including grants) to about 6 percent of GDP—larger than the average for fragile countries—to accommodate higher capital spending aligned with the PRS2; (ii) reallocating spending toward priority sectors; and (iii) improving public financial management and execution of public investment projects. The fiscal deficit increases by nearly 3 percent of GDP in 2012/13 to accommodate a 4 percent of GDP increase in capital spending—a near doubling from FY 2011/12 (Figure 8).17 Current spending is projected to decline 1 percent of GDP, mainly from lower personnel costs, cuts goods and services, and reductions in transfers to state-owned enterprises (SOEs) (including election-related transfers). Tax revenue as a share of GDP—which is already high compared to the region—is expected to remain broadly unchanged. Planned measures to broaden the tax base for services (notably for inbound telephone calls) and actions to strengthen the large taxpayers unit are expected to help make up for recent one-off tax payments—including windfall withholding taxes in FY 2011/12. Fiscal policy continues to be anchored by debt management, which allows for an increase in external borrowing to accommodate higher capital spending while maintaining debt sustainability and avoiding domestic arrears.18

Figure 8.Liberia: Fiscal Medium-Term Outlook, FY2010–16

(Percent of GDP)
(Percent of GDP)
(Percent of GDP)

Sources: Liberian authorities and IMF staff estimates and projections.

Liberia: Overall Fiscal Balance Including Grants, 2010–16

(Percent of GDP)

Source: WEO, country database

1 Fragile countries include Burundi, Comoros, Côte d’Ivoire, Guinea, Liberia, Sierra Leone, The Gambia, Togo, Zimbabwe.

Liberia: Overall Fiscal Balance Including Grants, 2010–16

(Percent of GDP)

Sources: World Economic Outlook and IMF staff calculations.

Liberia: Central Government’s Medium-Term Fiscal Framework, FY 2011–15(Percent of GDP)
FY 2011FY 2012FY 2013FY 2014FY 2015
Prel.Prel.Proj.Proj.Proj.
Total revenue and grants26.427.827.328.827.6
Total revenue23.626.124.926.525.8
Tax revenue18.9821.619.719.219.2
Non-tax revenue4.64.65.27.36.6
Grants2.81.72.42.31.8
Total expenditure27.031.033.335.433.8
Current21.827.025.624.423.1
Of which: one-off PSIP current spending….….2.91.91.4
Salaries and wages9.811.311.010.810.2
Capital5.24.17.811.010.7
Overall balance (including grants)−0.6−3.2−6.0−6.6−6.2
Overall balance (excluding grants)−3.4−4.9−8.4−9.0−8.0
Net financing0.63.26.06.66.2
Foreign0.30.95.56.76.4
Domestic0.32.30.50.0−0.2
Sources: Ministry of Finance and IMF staff estimates.
Sources: Ministry of Finance and IMF staff estimates.

21. The authorities agreed on the importance of streamlining current spending—particularly the wage bill—and reallocating savings toward capital outlays. Liberia’s wage bill, which is among the highest in the region both as a percentage of GDP and of total spending, is expected to decline by about 1 percent of GDP over the medium term. The FY 2012/13 wage policy thus has no salary increases and minimal net new hires. The authorities are working to clean up the payroll by eliminating ghost workers and duplicates—with an estimated savings of 1.5 percent of GDP. Staff urged the authorities to use such savings and any other unspent current allocations to pay for capital spending, particularly given uncertainties surrounding the timing of external financing. However, given political constraints, the authorities indicated that, if realized, the savings will be allocated to increase salaries for all public servants. The authorities also introduced fiscal rules—starting in the FY 2012/13 budget—that limit the share of the budget allocated to personnel costs (to no more than 34 percent of the budget) and limit transfers of unspent investment allocations to recurrent spending. Staff recommended more ambitious rules, in particular, by bringing personnel costs to around 31 percent of the budget and reducing transfers from capital to current spending to zero. The authorities plan to assess savings during the first half of the 2012/13 fiscal year to tighten the rules in subsequent budgets. Staff indicated that additional savings could also be achieved during the current fiscal year by reducing discretionary spending on food, travel, transportation, communications, and other special allowances.

MEFP ¶s 12-13

Cross-country Public Sector Wage Bill Comparisson

(Percent of GDP and percent of total spending, average 2008-10)

Sources: World Economic Outlook and IMF staff calculations.

22. The medium-term fiscal deficit is expected to be financed mainly from foreign loans, but includes some limited domestic financing in FY 2012/13. The authorities pushed for flexibility to use central bank reserves as bridge financing for their large strategic investments, in advance of loan disbursements that are under negotiation. The mission emphasized the need to maintain reserves at comfortable levels to mitigate external vulnerabilities and the authorities agreed to advance the planned issuance of LD treasury bills—now set for end-2012—to help to cover their financing needs from the highly liquid domestic market, and abstain from direct financing from the central bank.

MEFP ¶18

C. Improving Monetary Policy and Deepening the Financial Sector

23. In the dollarized economy, monetary policy will continue to play a limited role focused on containing Liberian dollar-denominated inflation through the exchange rate. Liberian dollars remain important to the vulnerable poor, and any sudden depreciation can have a severe impact on their purchasing power and welfare. Thus, monetary policy will continue to aim at containing excessive volatility in the exchange rate while aiming for a modest increase in the foreign exchange position.

MEFP ¶31

24. The absence of an anchor for monetary policy, however, remains a challenge. There is no target or band for exchange rate policy or monetary interventions to anchor market expectations on Liberian dollar inflation. At the same time, given the already high reserve requirement (22 percent), the CBL’s monetary tool to mop up excess liquidity is limited to the weekly foreign exchange auctions, but the use of this instrument is limited by reserve accumulation objectives. While the planned launch of the local currency treasury bill market will add a new liquidity management instrument, the authorities did not concur that an announced monetary target would anchor expectations given the volatility in the shallow foreign exchange market. They also see a need to maintain policy flexibility in addressing liquidity demands and external shocks. The CBL will continue to improve its liquidity forecasting to strengthen policy effectiveness though capacity constraints remain an obstacle. Staff reiterated the need for improved collaboration and information sharing between the CBL and the Ministry of Finance (MoF).

25. The authorities expressed commitment to de-dollarization and plan to take steps to strengthen demand for the LD. These include improving the quality and increasing the denomination of LD notes and de-dollarizing civil servant wages and tax payments. The issuance of LD denominated treasury bills should also help absorb excess Liberian dollar liquidity while increasing incentives for banks to hold Liberian dollar deposits. Staff emphasized that strengthening the monetary framework including through establishing a transparent anchor will help support confidence in the LD and potentially de-dollarization. The authorities agreed that policies to strengthen the demand for the Liberian dollar should be market based and serve to enhance the credibility of economic policy and develop the financial market.

MEFP ¶32

26. Overall, the banking system remains capitalized and liquid, but risks are elevated stemming from high non-performing loans and low profitability. System-wide capitalization remains high though it has been eroded by the stock of bad loans with a few banks falling below capital requirements. The CBL is working with the affected banks on their recapitalization plans to ensure full compliance with regulatory requirements by end-2012. The authorities introduced a commercial court in 2012 to improve asset recovery from defaulting borrowers, but loans predating the court are outside of the court’s purview; and it is not a court of final appeals, which limits its effectiveness. Moreover, the CBL’s roll out of risk-based supervision—which is now in its second round of bank inspections—is progressing and plans to allow greater adaptability to the multitude of risks and vulnerabilities in the system.

Liberia: Barometer of Financial Soundness

Source: Central Bank of Liberia.

27. Deepening the financial sector remains a high priority. Despite rapid monetization and growth in private sector credit, access to credit remains weak and limited to a few borrowers. Small- and medium-size enterprises (SMEs)—and rural borrowers in particular—have difficulties accessing credit. Banks are reluctant to extend credit to the sector given weaknesses in the legal and judicial framework, weak property rights, limited collateral and credit reference systems, and weak capacity of commercial banks to appraise SMEs and rural farmers. Moreover, interest rate rigidity and the short maturities of bank liabilities and credit impede lending to productive sectors (Box 6). To improve access to credit, especially for small borrowers, the CBL is strengthening the commercial court, expanding the credit reference system, and establishing a collateral registry.

Liberia: M2/GDP

Source: IMF staff estimates.

Liberia: Private Sector Credit/GDP

Source: IMF staff estimates.

Box 6.Liberia: Interest Rate Rigidities and Short-Maturity of Deposits and Credit

Despite poor bank returns, lending and deposit rates have remained rigid. CBL moral suasion, absence of a money market, and banks’ capacity constraints in analyzing market liquidity and credit demand all serve to contain lending rates.1 The low net interest margins by regional comparison lead banks to rely on non-interest income, which accounts for nearly 60 percent of revenue.

Lending and Depasit Rates in Liberia

Percentage

Source: Central Bank of Uberla.

Long-term financing sources are scarce. The supply of time and savings deposits to meet the high demand for long-term financing from sectors such as agriculture, construction, and manufacturing is limited in the current term structure. Most commercial bank deposits are demand deposits, and most of the loans are short-term or overdrafts.

The authorities are using ad hoc methods to boost credit to small borrowers. The CBL has undertaken a few initiatives to stimulate long-term lending to SMEs and agriculture by placing long-term U.S. dollar deposits at commercial banks. This approach carries potential reputational risks to the CBL while exposing their balance sheet to possible credit risk should they be pressured to share losses.

Short-term Deposit Maturity and Money Creation (2011)

Sources: IMF staff and national authorities.

1 EBS/12/59, Appendix II; and EBS/12/139, Supplement 1.

D. Attaching Priority to Improving Governance and Transparency

28. Improving governance and transparency also remains a high priority. The authorities will draw on a recently completed Public Expenditure and Financial Assessment (PEFA) to further improve public financial management (PFM) (Box 7). Staff urged the authorities to step up efforts to strengthen financial oversight and reporting of SOEs—an outstanding issue from the last ECF arrangement—and further roll out the Integrated Financial Management Information System (IFMIS) especially to include the civil service payroll; strengthen government cash management; streamline procurement procedures and improve project execution; and establish a natural resource revenue unit in the MoF to improve monitoring of concessions. The authorities are also advancing reforms to strengthen debt and aid management capacity, especially proper recording and monitoring of all public debt, including off-budget financing. The authorities’ anti-corruption strategy is also advancing through enforcement of a recently introduced Code of Conduct for public sector employees.

MEFP ¶20-30

29. Financial structural reforms to alleviate risks and streamline regulation and payments are also important. The CBL plans to submit to the legislature a revised Insurance Act to streamline regulations in the sector and establish the central bank as the sole regulator. A national payments law—recently submitted to the legislature—and capacity building at the CBL should help improve bank settlements and reduce overhead for transactions.

Box 7.Liberia: Public Financial Management—Achievements and Challenges

The 2012 Public Expenditure and Financial Accountability (PEFA) assessment showed improvements in public financial management (PFM) but important challenges remain (21 out of 30 PEFA indicators were rated C or lower). The main challenges are

  • Comprehensiveness and transparency of budget documents has improved slightly; but financial reporting remains below standard, and timely publication is lacking. State-owned enterprise (SOE) reporting is incomplete and reports on externally financed projects are not available.

  • Policy-based budgeting has improved and is aligned with the 2009 PFM Act. Nonetheless, the budget is not approved on time which limits cash planning, procurement, and budget execution.

  • Predictability and controls in the budget execution have improved; but payroll controls and cash planning remain weak.

  • Budget credibility remains to be fully established. Although arrears have been controlled and fiscal stability maintained, credibility in revenue and expenditure estimates is weak.

  • External audit remains weak. Despite the significant efforts to strengthen the General Audit Commission, none of its audits has lead to remedial actions.

  • Bringing donor support on-budget has not advanced.

E. Maintaining Debt Sustainability and Strengthening Management Capacity

30. Liberia continues to have a low risk of debt distress—as confirmed by the debt sustainability analysis (DSA) (EBS/12/139, Supplement 3). Staff and the authorities agreed to raise the foreign currency borrowing ceiling (including concessional and nonconcessional borrowing) to 4 percent of GDP in net present value (NPV) terms on average in 2012–15, monitored by an indicative target.19 The larger borrowing amount (equivalent to about $300–400 million depending on the level of concessionality) averaged over three years would provide increased flexibility to accommodate higher capital expenditure over the period—taking account of capacity constraints and “lumpy” investments—while maintaining low debt vulnerabilities. In the event that sufficient concessional financing cannot be secured, the government has expressed interest in commercial borrowing for some of their strategic high-yielding infrastructure projects, assessed by a credible third party. Staff urged the authorities to carefully assess their financing options and take advantage of available grants and highly concessional financing to the maximum amount possible, but indicated that limited nonconcessional financing could be considered, if requested, tied to specific projects.

MEFP ¶36-41

31. HIPC Initiative debt restructuring negotiations are nearing completion, and discussions are advancing with development partners on new financing commitments. Debt restructuring negotiations with the Saudi Fund and the Arab Development Bank have concluded; however discussions with Taiwan, Province of China, have not advanced, despite the authorities’ efforts. To finance part of the rehabilitation of the hydroelectric plant, the authorities are discussing concessional loans with bilateral and multilateral partners.

MEFP ¶38

F. Improving the Quality of Statistics for Economic Management

32. Improving national account statistics remains a priority. National account data is very weak with real GDP being benchmarked to 1992 owing to shortcomings in data for later years. The authorities recently conducted an establishment survey (covering all registered business enterprises) to help compile new national accounts. A household income and expenditure survey (HIES) is being planned for 2013, but is yet to secure sufficient financing. Staff urged the authorities to mobilize resources for the HIES and to seek donor financing. Better national account estimates may help in the compilation of balance of payments statistics, which also need improvement.

MEFP ¶45

Access, Program Monitoring, and Risks

33. Access is proposed at 40 percent of quota (SDR 51.68 million) phased in seven equal disbursements (Table 8). This level of access would allow reserves to increase to three months of import coverage over the course of the program. Although the proposed access is lower than the norm for second-time ECF users (access varies widely between 40–120 percent of quota), it is aligned with comparable countries such as Sierra Leone (30 percent of quota), Mali (32 percent), and Burundi (39 percent). The arrangement could be augmented at a later date, if needed, to address external shocks.

Table 8.Liberia: Schedule of Disbursements Under the Proposed ECF Arrangements, 2012–15
Amount

(Total: SDR 51.68 million)
Date of AvailabilityConditions for Disbursement1
SDR 7.382 millionNovember 19, 2012Executive Board approval of the three-year ECF arrangement
SDR 7.382 millionMay 15, 2013Executive Board completion of the first review under the three-year ECF arrangement
SDR 7.382 millionNovember 15, 2013Executive Board completion of the second review under the three-year ECF arrangement
SDR 7.382 millionMay 15, 2014Executive Board completion of the third review under the three-year ECF arrangement
SDR 7.382 millionNovember 15, 2014Executive Board completion of the fourth review under the three-year ECF arrangement
SDR 7.382 millionMay 15, 2015Executive Board completion of the fifth review under the three-year ECF arrangement
SDR 7.388 millionNovember 15, 2015Executive Board completion of the sixth review under the three-year ECF arrangement
Source: IMF staff estimates.

In addition to the conditions that normally apply to an ECF arrangement.

Source: IMF staff estimates.

In addition to the conditions that normally apply to an ECF arrangement.

34. The program would monitor six quantitative performance criteria (PC), streamlined from the previous ECF arrangement (MEFP Table 1). Proposed structural benchmarks for the first year of the ECF arrangement—which include the measures pending from the last ECF arrangement—are geared toward further enhancing budget control and monitoring, improving execution of capital spending, controlling payroll growth, and further developing the financial sector (MEFP Table 2).

35. Liberia’s capacity to repay the IMF is strong (Table 9). Projected debt financing to the Fund is low as a share of GDP, exports, and government revenue. Public external debt will remain well below thresholds of debt distress over the medium term. Liberia’s IMF credit outstanding will peak at 68 percent of quota, far below the norm for ECF countries. The ECF arrangement is expected to be fully financed (Table 10). The mission followed up on outstanding recommendations of the 2011 safeguards assessment update, and a draft Memorandum of Understanding (MOU) between the CBL and the MoF on repayment of the IMF’s credit will be finalized by end-2012.

Table 9Liberia: IMF Credit Position and Projected Payments to the IMF, 2012–24(Millions of SDRs, unless otherwise indicated)
2012201320142015201620172018201920202021202220232024
Prospective drawings
ECF211.814.814.814.8
Projected debt service to the IMF10.00.023.95.77.912.011.412.713.110.88.25.2
Repayments and repurchases2.13.75.57.711.811.212.613.010.88.15.2
ECF-current0.00.02.13.75.57.79.66.04.42.70.40.00.0
ECF-projected0.00.00.00.00.00.02.25.28.110.310.38.15.2
Interests0.00.00.20.20.20.20.20.20.10.10.10.00.0
ECF-current0.00.00.10.10.10.10.10.00.00.00.00.00.0
ECF-projected0.00.00.10.10.10.10.10.10.10.10.10.00.0
In percent of
GDP0.00.00.20.20.30.40.60.50.60.50.40.30.2
Gross official reserves0.00.00.81.31.82.53.93.74.24.53.62.71.7
Exports of goods and services0.00.00.40.50.71.01.41.31.31.31.00.80.5
Fiscal revenue (excluding grants)0.00.00.61.01.31.62.21.92.01.91.51.00.6
Fund credit outstanding49.464.276.887.982.474.862.951.739.226.215.47.32.1
In percent of
GDP4.35.05.65.65.04.33.22.51.71.10.60.30.1
Gross official reserves20.223.626.428.526.423.720.316.913.18.95.12.40.7
Exports of goods and services9.511.513.310.810.09.27.25.74.22.61.50.70.2
Fiscal revenue (excluding grants)16.417.920.222.118.314.811.68.86.23.82.10.90.2
Quota38.249.759.568.063.857.948.740.030.320.311.95.61.6
Sources: Liberia Finance Department and IMF staff estimates.

The IMF Board extended the waiver of interest payments for concessional loans through December 31, 2012. For 2013, the interest rate will be 0 percent for ECF loans. After 2013, projected interest charges are based on 0.25 percent a year for the ECF. The IMF will review the interest rates for all PRGT facilities by end-2013 and every two years thereafter.

2012 includes ECF augmentation of SDR 4.4 million under the previous arrangement.

Sources: Liberia Finance Department and IMF staff estimates.

The IMF Board extended the waiver of interest payments for concessional loans through December 31, 2012. For 2013, the interest rate will be 0 percent for ECF loans. After 2013, projected interest charges are based on 0.25 percent a year for the ECF. The IMF will review the interest rates for all PRGT facilities by end-2013 and every two years thereafter.

2012 includes ECF augmentation of SDR 4.4 million under the previous arrangement.

Table 10Liberia: External Financing Requirements and Sources, 2010–15(US$ millions)
Est.Projections
201020112012201320142015
I.Total financing requirement−4,733−1,531−1,728−1,998−2,053−1,489
Current account (excluding donor grants)−1,402−1,503−1,765−1,952−2,011−1,446
Debt amortization−1,669−4−6−6−9−12
NFA−78−2443−40−32−31
Of which: gross reserves−79−2443−40−29−26
Reduction in arrears−1,58600000
II.Total available financing3,0261,5171,7101,9762,0301,467
Donor transfers978976839745654515
Debt forgiveness1,58600000
Foreign direct investment286295279328344270
Official medium- and long-term flows0617104135143
Private financing177240575798897539
III.Exceptional financing1,7071418222222
IMF141418222222
Debt forgiveness1,58600000
Debt rescheduling10800000
1,707
IV.Financing gap000000
Sources: Liberian authorities and IMF staff estimates and projections.
Sources: Liberian authorities and IMF staff estimates and projections.

36. Although the authorities are firmly committed to reform, considerable risks exist. The government faces substantial political pressure to reduce poverty and accelerate public investments—areas where progress was slow in the past. Lack of policy coordination and weaknesses in technical capacity, institutions, and governance, however, will continue to test the government’s ability to implement its ambitious development plans. Nonetheless, the government has demonstrated a solid track record of program implementation under the previous ECF arrangement and is benefiting from continued large-scale technical assistance, including from the IMF. Liberia also remains vulnerable to external shocks, particularly volatility in commodity prices, food and fuel price increases, and a prolonged global slowdown in growth.

Staff Appraisal

37. Liberia recorded strong macroeconomic gains under the recently completed three-year ECF Arrangement, but development challenges remain with large infrastructure gaps and poverty still at very high levels. Economic activity has picked up, inflation has been contained, institutions have been partially rebuilt, and fiscal accounts have been consolidated, including restoration of debt sustainability. However, much more needs to be done to ensure that the benefits of rapid growth lead to job creation and poverty reduction.

38. The economic outlook is favorable, but with challenges. The most immediate challenge is to maintain the hard-won stabilization gains while creating fiscal space to boost spending on infrastructure and human development, promote financial sector deepening and access to credit, and create a favorable business climate to support broad-based growth and job creation.

39. The budget for FY2012/13 is appropriately aligned to PRS2 and envisages scaling up public investment and investing in people and in institutions. While execution of capital spending improved in FY 2012, the government’s effectiveness in substantially increasing investment is still far from complete. Achieving higher investment levels is challenging and will require addressing capacity constraints including political, institutional, and technical skills. The planned measures to establish a Project Management Office are welcome.

40. Scaling up infrastructure investment without jeopardizing hard-won macroeconomic stability requires efforts to expand revenue collection and contain current spending. The recent measures to contain current spending are welcome, especially cleaning up the wage bill and introducing fiscal rules that limit the share of wages and salaries in total spending and the share of capital spending that could be transferred to current spending. However, a stronger commitment is required to tighten the fiscal rules and ensure that savings in current spending are reallocated to capital expenditure. The authorities’ plan to strengthen revenue collections by a combination of tax policy and administrative measures is welcome, but more needs to be done to increase revenue over the longer term. Strengthening administrative reforms is warranted to support growth and investment, and the recently completed PEFA is a clear road map to strengthen public financial management.

41. The monetary framework remains very basic. Significant scope remains to improve monetary policy implementation by anchoring the framework to a transparent target and introducing treasury bills to improve liquidity management.

42. Over the longer term, proper management of revenue from natural resources will be crucial to support the development agenda and maintain macroeconomic stability. While current natural resource revenue accounts for less than 10 percent of government revenue, it is expected to rise over the medium term as iron ore production picks up and the potential windfalls related to petroleum exploration materialize.

43. Liberia has a low risk of debt distress, which, together with improved debt management skills, supports a higher external borrowing ceiling to accommodate the scaling up of public investment. The DSA suggests there is room to accommodate higher borrowing—on concessional and possibly nonconcessional terms—without worsening the risk of debt distress. Any request for limited nonconcessional borrowing could be considered in future program discussions as long as it remains within the overall borrowing ceiling and is tied to specific projects that have been independently evaluated for high economic and social returns.

44. The external payments position remains stable, but Liberia could benefit from building reserves to cover three months of imports. Although the authorities’ view is that reserves accumulation carries a high opportunity cost given the country’s development financing needs, building reserves will support CBL’s foreign exchange market intervention to address excess exchange rate volatility, and will be a buffer against domestic and external shocks. The authorities should avoid direct borrowing from the CBL—with the exception of short-term bridge delays in disbursement from external creditors—and rely on treasury bills to cover any domestic financing needs, as well as to develop the domestic financial market.

45. Financial sector reform is advancing, but promotion of financial sector deepening and access to credit is needed to improve private sector development and boost economic growth. The CBL is commended for introducing risk-based supervision. Given the high levels of non-performing loans and the low bank profitability, expanding access to financial services will require enhancing the collection and dissemination of credit information while strengthening supervision, including improving the credit reference system, establishing a collateral registry, and strengthening the asset recovery framework.

46. Staff supports the authorities’ request for a successor arrangement under the ECF. The ECF arrangement will allow Liberia to maintain an adequate level of international reserves to cope with global market uncertainties, while bolstering donor support for public investment and social programs. Liberia remains a fragile state and risks remain to program implementation from ongoing capacity weaknesses. Nevertheless, the authorities’ commitment to strong fiscal management and administrative reforms mitigate these risks.

47. It is proposed that during the ECF arrangement Liberia stay on a 24-month Article IV cycle in accordance with the decision on consultation cycles.20

Appendix I. Summary Memo on GDP Revision for Liberia

The GDP for Liberia has been revised by IMF staff (AFR and STA) on account of uncertainty over the previous estimates and evidence of underestimation (high tax revenue to GDP ratio relative to peer countries, significantly higher monetization ratios than in peer countries).

Estimates of nominal contribution of non-services sectors are unchanged. For sectors such as agriculture, mining, forestry and manufacturing, value added at market prices is calculated based on output estimates derived from CBL monthly surveys on production and exports as well as the Production Estimates of Major Crops and Animals 2008.1 Retail price data is not available and so international price data from the IMF’s World Economic Outlook (WEO) Global Assumptions are used.

The revisions in the 2008 GDP are in the value added by the services sectors including: construction, education, health, financial services, government services, and trade and hotels and other services. Additionally, the revision includes rough estimates of imputed rents on occupied dwellings (previously not incorporated due to lack of data). The revision took into consideration results from the Supply and Use Tables (SUT) for 2008 and their limitations, as well as the share of these sectors in the GDP of comparator countries such as Sierra Leone and Gambia.

Construction was revised upward based on deflating estimates from the SUT estimates, which used an excessively high value added ratio to gross output. Government services are revised to incorporate the wage bill plus 20 percent of capital expenditure. Financial services were revised to include noncommercial bank activities including the CBL and rough estimates of activity in the insurance sector. Trade, hotels and similar services (restaurants, haircuts, etc.) are revised based on estimates from peer countries (about 30 percent of total services). Other services such as private education and health are revised based on the report Appraisal of the 2010–20 education sector plan2 and SUT outcomes.

The revised GDP estimates results in aggregate monetary indicators for 2008 (broad money to GDP, private sector credit to GDP) comparable to neighboring Sierra Leone for the same year. Revenue to GDP declined by around one-third, but remains somewhat elevated relative to the region, which is mostly on account of higher tax revenue from international trade—on account of heavy reliance on imports—and non-tax revenue related to concessions and the Liberia Maritime Authority.

Table 1 shows a comparison between the break down for the nominal contribution of each sector to 2008 GDP under the old and revised estimates, while Table 2 shows the share of each sector. The revision shows a higher share for the services sector. Table 3 compares between old and revised GDP series at the time of the rebasing following the eighth review under the previous ECF arrangement for Liberia approved in 2008 and expired on May 31, 2012.

Table 1Breakdown of GDP for 2008 by sectors
(US$ Millions)2008 (Old GDP)2008 (Revised GDP)
GDP at market prices831.61100.5
Agriculture & fisheries460.0460.0
Rubber104.7104.7
Coffee0.10.1
Cocoa2.72.7
Rice145.1145.1
Cassava101.5101.5
Palm oil0.00.0
Other105.8105.8
Forestry92.692.6
Logs & timber....
Charcoal & wood92.692.6
Mining & panning9.29.2
Iron ore0.00.0
Diamonds5.35.3
Other3.93.9
Manufacturing51.151.1
Cement13.013.0
Beverages & beer31.731.7
Other6.36.3
Services218.6487.5
Electricity & water6.06.0
Construction20.344.0
Imputed rent (Occupied dwellings)..80.0
Trade, hotels, etc46.2151.9
Transportation & communication30.330.3
Transport related to iron ore
Financial institutions20.235.7
Government services70.286.2
Other services25.553.4
Import Duties + Taxes on G&S – Subsidies on G&S78.778.7
GDP at factor costs752.91021.8
Table 2Sectors as share of GDP for 2008
Share of GDP at market prices (Percentage)2008 (Old GDP)2008 (Revised GDP)
GDP at market prices100.0100.0
Agriculture & fisheries55.341.8
Rubber12.69.5
Coffee0.00.0
Cocoa0.30.2
Rice17.513.2
Cassava12.29.2
Palm oil0.00.0
Other12.79.6
Forestry11.18.4
Logs & timber....
Charcoal & wood11.18.4
Mining & panning1.10.8
Iron ore0.00.0
Diamonds0.60.5
Other0.50.4
Manufacturing6.14.6
Cement1.61.2
Beverages & beer3.82.9
Other0.80.6
Services26.344.3
Electricity & water0.70.5
Construction2.44.0
Imputed rent (Occupied dwellings)..7.3
Trade, hotels, etc5.613.8
Transportation & communication3.62.8
Transport related to iron ore0.00.0
Financial institutions2.43.2
Government services8.47.8
Other services3.14.9
Table 3.Comparison Between Old and Revised GDP Estimates for 2008–2011 at the Eighth Review Under the Previous ECF 1
(US$ Million)2008200920102011
Revised IMF nominal GDP (at market prices)1,100.51,155.91,291.91,545.4
Old IMF nominal GDP (at market prices)831.6844.7941.41,105.8
Revised IMF GDP real growth (%)8.26.76.18.2
Old IMF GDP real growth (%)4.72.85.06.4

Previous ECF arrangament for Liberia approved in 2008 and expired on May 31, 2012.

Previous ECF arrangament for Liberia approved in 2008 and expired on May 31, 2012.

Appendix II. Fiscal Information Under the Government Finance Statistics Manual 2001
Table 1.Liberia: Fiscal Operations of the Budgetary Central Government, FY2010–15 1(Millions of U.S. dollars)
FY2010FY2011FY2012FY2013FY2014FY2015
Actual8th Rev4Proj.Proj.Proj.Proj.
Revenue288.0374.9470.8461.0505.6575.8611.4
Taxes207.8269.2338.9357.0364.2383.6424.7
Social contributions2
Grants13.040.333.528.344.846.740.0
Other revenue (non-tax revenue)67.365.498.375.896.6145.5146.7
Expense250.5309.5418.8446.5473.1487.5514.0
Compensation of employees (wages & salaries)113.9138.6186.0187.3204.0216.0225.6
Use of goods and services76.786.3116.1134.0141.3135.0145.0
Subsidies and transfers55.780.6112.0120.2121.3129.4133.1
Consumption of fixed capital2
Interest4.24.04.75.16.67.18.3
Grants0.00.00.00.00.00.02.0
Social benefit 2
Other expenses0.00.00.00.00.00.00.0
Net acquisition of nonfinancial assets31.773.554.167.8143.5220.8236.2
Foreign loan financed30.09.618.021.0104.6136.6143.9
Domestically financed31.763.936.146.838.984.392.3
Gross operating balance37.665.452.014.532.488.397.4
Net lending (+)/borrowing (-) (overall balance)5.9−8.0−2.1−53.3−111.0−132.5−138.7
Net financial worth, transactions5.9−8.0−2.1−53.3−111.0−132.5−136.7
Net acquisition of financial assets−2.9−10.05.2−43.5−15.00.00.0
By instrument
Currency and deposits−3.8−10.05.2−23.50.00.00.0
Debt securities0.90.00.00.0−15.00.00.0
Loans0.00.00.0−20.00.00.00.0
Net incurrence of liabilities−8.8−2.07.29.996.0132.5136.7
By residency and instrument
Domestic−5.4−5.8−5.3−5.3−5.7−0.6−4.2
Currency and deposits0.0−3.0−1.5−21.5−5.7−0.6−4.2
Securities0.00.00.00.00.00.00.0
Revenue23.526.426.429.327.827.328.827.6
Taxes17.019.019.021.121.619.719.219.2
Social contributions 2
Grants1.12.82.82.11.72.42.31.8
Other revenue (non-tax revenue)5.54.64.66.14.65.27.36.6
Expense20.521.821.826.027.025.624.423.2
Compensation of employees (wages & salaries)9.39.89.811.611.311.010.810.2
Use of goods and services6.36.16.17.28.17.66.86.5
Subsidies and transfers4.55.75.77.07.36.66.56.0
Consumption of fixed capital 2
Interest4.24.04.04.75.16.67.18.3
Grants0.00.00.00.00.00.00.02.0
Social benefit 2
Other expenses0.00.00.00.00.00.00.00.0
Net acquisition of nonfinancial assets2.65.25.23.44.17.811.010.7
Foreign loan financed 30.00.70.71.11.35.66.86.5
Domestically financed2.64.54.52.22.82.14.24.2
Gross operating balance3.14.64.63.20.91.84.44.4
Net lending (+)/borrowing (-) (overall balance)0.5−0.6−0.6−0.1−3.2−6.0−6.6−6.3
Net financial worth, transactions0.5−0.6−0.6−0.1−3.2−6.0−6.6−6.2
Net acquisition of financial assets−0.2−0.7−0.70.3−2.6−0.80.00.0
By instrument
Currency and deposits−0.3−0.7−0.70.3−1.40.00.00.0
Debt securities0.10.00.00.00.0−0.80.00.0
Loans0.00.00.00.0−1.20.00.00.0
Net incurrence of liabilities−0.7−0.1−0.10.40.65.26.66.2
By residency and instrument
Domestic−0.4−0.4−0.4−0.3−0.3−0.30.0−0.2
Currency and deposits0.0−0.2−0.2−0.1−1.3−0.30.0−0.2
Securities0.00.00.00.00.00.00.00.0
Loans−0.30.00.00.01.20.00.00.0
Other accounts payable−0.1−0.2−0.2−0.2−0.20.00.00.0
External−0.30.30.30.80.95.56.76.4
Currency and deposits0.00.00.00.00.00.00.00.0
Securities0.00.00.00.00.00.00.00.0
Loans−0.30.30.30.80.95.56.76.4
Other accounts payable0.00.00.00.00.00.00.00.0
Sources: Liberian authorities and IMF staff estimates and projections.

GFS 2001 presentation with budget shown on a cash basis (i.e., debt service payments are shown after all debt relief).

Not available.

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget grant-financed expenditure.

EBS/12/59, GDP data was significantly revised after the 8th review based on improved estimates of the size of the services sector.

Sources: Liberian authorities and IMF staff estimates and projections.

GFS 2001 presentation with budget shown on a cash basis (i.e., debt service payments are shown after all debt relief).

Not available.

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget grant-financed expenditure.

EBS/12/59, GDP data was significantly revised after the 8th review based on improved estimates of the size of the services sector.

Appendix III. Letter of Intent

Monrovia, November 2, 2012

Madame Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Madame Lagarde,

1. The attached Memorandum of Economic and Financial Policies (MEFP) summarizes the economic and financial policies of the government of Liberia for the period July 2012–June 2015. These policies are anchored in the government’s Agenda for Transformation—the new Poverty Reduction Strategy (PRS2), which the government intends to formally launch in November 2012.

2. The government requests that the MEFP be supported by the International Monetary Fund (IMF) under a three-year Extended Credit Facility (ECF) and requests the first disbursement under the ECF. We hereby request the approval by the Executive Board of a three- year ECF arrangement in an amount equivalent to SDR 51.68 million (40 percent of Liberia’s quota). To monitor progress in implementing our reform agenda, the program includes a set of quantitative performance criteria, indicative targets, and structural benchmarks, outlined in the attached Memorandum of Economic and Financial Policies (MEFP) and the Technical Memorandum of Understanding (TMU).

3. The previous ECF-supported program, approved in 2008, was successfully completed on May 31, 2012. Over the last four years, Liberia made substantial progress: macroeconomic and financial stability was achieved, key institutions were largely rebuilt, external debt profile improved and a mechanism was put in place to ensure a sustainable position going forward, and social conditions were improved. Nonetheless, important challenges remain. This MEFP outlines our recent economic performance and economic and social policies planned for FY 2012/13 (July–June).

4. The outlook for the second half of 2012 and over the medium term remains favorable. We expect the expansion of Government spending to provide additional employment and increase household incomes. The global economic outlook still presents risks, especially with the slowdown in China and continued economic problems in Europe. These factors largely present risks to the continued growth in the export sector.

5. Macroeconomic performance in 2011 and during the first half of 2012 has been strong. Growth is estimated to have reached 8.2 percent in 2011, U.S. dollar-denominated inflation closed at 10.2 percent. Gross official reserves rose to 3 months of imports at end-2011. These positive results have carried over into the first half of 2012. Growth is estimated at close to 9 percent this year due mainly to the resumption of iron ore exports. Inflation has declined to 4 percent year-on-year at end-June 2012.

6. Liberia’s new Poverty Reduction Strategy 2 (PRS2)–the Agenda for Transformation–focuses on investment in human development, infrastructure and institutions. The focus of PRS2 will be on laying the foundation for broad-based and inclusive growth; taking the achievements we have made under the first PRS and using those as an opportunity to work on reforms that will promote business activity, rebuilding educational institutions, enhancing governance reforms and borrowing to invest in large capital projects that will open up Liberia to industry. Developing the Liberian private sector is a priority goal of the Government’s transformation agenda. The budget for FY 2013 focuses on this agenda, and there has been a large expansion of capital investment to at least 25 percent of the budget. It has been prepared in the context of a Medium Term Expenditure Framework (MTEF) to maintain the Government’s focus on critical investments in infrastructure and capacity building. This year’s budget introduces a multi-year budgeting framework, and ensures resources are aligned to the policy priorities in the Agenda for Transformation. It focuses on the main fiscal challenges including containing recurrent spending and boosting capital spending.

7. Monetary policy over the medium term will focus on containing inflation by maintaining stability in the exchange rate. The CBL aims to build reserve coverage to about three months of imports over the medium term to buttress the macroeconomic stability, giving due consideration to the high opportunity cost of holding reserves in the face of strong development needs and massive infrastructure gaps. The government also intends to strengthen policies aimed at improving confidence and widespread use of the Liberian dollar.

8. The Government of Liberia and the CBL believe that the economic and financial policies set forth in the attached memorandum provide an adequate basis for achieving the objectives and targets of our program, but we will take any additional measures that may become necessary for this purpose. We will consult closely with the IMF staff on the adoption of such measures, and in advance of any revisions to the policies contained in the MEFP. We will provide the Fund with all information necessary to monitor implementation of the program supported by the ECF in a timely manner as outlined in the Technical Memorandum of Understanding.

9. We remain committed to transparent policy-making and are willing to make the contents of this letter and those of the attached MEFP and Technical Memorandum of Understandings (TMU), as well as the Staff Report for the 2012 Article IV consultation discussions available to the public.

Sincerely yours,
/s//s/
Amara KonnehJoseph Mills Jones
Minister of FinanceExecutive Governor
Ministry of FinanceCentral Bank of Liberia

Attachments: Memorandum on Economic and Financial Policies

Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies

I. Introduction

1. The Government of Liberia remains committed to achieving poverty reduction through sustained economic growth and inclusive development while maintaining broad macroeconomic stability. The strategies to achieve these goals are set out in the Agenda for Transformation—Poverty Reduction Strategy 2 (PRS2)—and the medium-term priorities set in the long term national vision “Liberia Rising 2030”. The Government and the International Monetary Fund (IMF) are cooperating on a second three-year Extended Credit Facility (ECF) to support prudent macroeconomic policies and structural reforms that underlie strategies in the PRS2 and Liberia Rising 2030.

2. This memorandum of economic and financial policies (MEFP) reviews the main achievements since 2008 under the previous ECF arrangement, recent developments during 2012, and describes policies and targets for 2012/13 (July-June) and the medium term (2014/15).

II. Recent Economic Developments and Performance Buttressed Under Previous Extended Credit Facility (ECF) Arrangement

3. In 2011, economic growth continued its solid performance with an estimated growth of 8.2 percent. The growth forecast for 2012 is put at 8.7 percent, expected to be largely driven by the restart of the iron ore and higher quantity of timber exports, as well as growth in the construction and services sectors.

4. The Government of Liberia continued on its path of commitment to sound macroeconomic management underpinned by transparency and accountability. Performance buttressed by the previous ECF arrangement was strong and very constructive. The Government implemented an Integrated Financial Management Information System (IFMIS), passed a new PFM law, and set out rules for controlling debt. Also, bank regulation and supervision were strengthened and efforts are in place to regulate and supervise the insurance companies and microfinance institutions. Concrete steps were taken to improve the credit environment with the passing into law of a commercial code and the subsequent establishment of a commercial court, in addition to the credit reference system established at the CBL. These, inter alia, have led to expansion in commercial deposits and credit. Exchange rate broadly stabilized and inflation remained largely contained with strong growth continuing even during the global financial crisis. The Government rebuilt internal audit capacity and strengthened the General Auditing Commission (GAC) ability to conduct audits of all Government Ministries and Agencies. The Automated System for Custom Data (ASYCUDA) system was rolled out at the major entry ports and the Government increased the level of tax revenues coming from domestic sources. During the course of the last five years the overall budget increased from around US $185 million in 2007/08 to US $516 million in 2011/12. Despite Liberia’s progress so far, important challenges remain. The largest of these remains the huge infrastructure deficit (i.e., electricity, roads, and sea and air ports). The Mount Coffee Hydroelectric plant and much of the road system outside of Monrovia are still incomplete, even though much progress has been made in expanding the road and power networks. The Government has demonstrated commitment to improve the power system; this is demonstrated by the US $45.3 million allocated to energy in the FY2013 budget. Liberia has also joined the West African Power Pool scheme (WAPP). Despite the efforts that have already been put in place to control recurrent spending and set a minimum level of capital spending within the budget at 25 percent, the infrastructure funding needs far exceed the available resources requiring external assistance.

5. The Government introduced an interim policy measure, the 150 Day Action Plan with the objective of making short-term, high impact policy interventions aimed at creating temporary jobs at different entities in Government; expanding the service network of the national transit authority, and developing the MTEF and the associated budget.

6. The government is still in the process of reconciling GoL accounts for FY2011/12 using the newly-installed Integrated Financial Management Information System (IFMIS). On the basis of IFMIS data, revenue collection for 2011/12 is estimated at US $475.2 million, including a carry forward (re-appropriation from unspent funds from previous fiscal year) of US $8.6 million from FY2010/11 and US$ 7.5 million in borrowing from the CBL. Excluding these two items,1 revenue for FY2011/12 amounted to about US $460 million, compared to the ECF 8th Review target of US $470.2 million. According to IFMIS, government expenditures for FY2011/12 amounted to US $488 million (including expenditures made during July–September in line with the 90-day rule to cover commitments from the previous fiscal year).2 In addition, US $21 million was spent on off-budget projects including road construction and rehabilitation financed by multilaterals. There was also US $12 million spent on dredging the port which was not included in the budget and executed off-budget, financed by direct borrowing from the central bank. These off-budget expenditures are not included in IFMIS. Including the off-budget items, total expenditures amounted to US $514 million, compared to the 8th review ECF target of US $473 million.3 The full extent of the FY2011/12 budget outturn will be known once the on-going reconciliation of the GoL accounts is finalized.

III. Objectives and Economic Policies for the Three-Year ECF Period

7. Over the next three years, the successor ECF arrangement will help support our new Poverty Reduction Strategy 2, the Agenda for Transformation (AfT), which builds on the gains made from the previous PRS1. Under this AfT, investment will be made in infrastructure; institutions and in people with efforts exerted at directing a significant portion of expenditure towards capital projects, which is expected to double in the 2012/13 budget. The AfT aims to consolidate the gains made at maintaining macroeconomic stability and building a foundation for strong economic growth. The AfT sets out to ensure stable, strong economic growth with the end objective of meeting middle income status by 2030. Our current estimates suggest that this would require around 8 percent real growth annually. In the context of the Agenda for Transformation (PRS2), the strategy for economic growth and poverty reduction is anchored in a six-point strategy:

  • Investing in infrastructure, particularly in energy and roads. This is the key to the economic renewal; transforming Liberia into a West African hub and a major trading partner in the region.

  • Investing in people. An educated population is the key to innovation, growth, good business, and good governance. There will be an expansion of vocational and technical training, of business apprenticeship and university training.

  • Invest in agriculture. Investing in agriculture is the key to generating incomes for the poorest households, stable and low-priced food and to controlling inflation and reducing poverty. With investment in agriculture, we can build a consumer base amongst the poorest, and we can reduce the insecurity that holds back investment.

  • Developing the private sector with emphasis on Liberian entrepreneurship. Steps will be taken to remove impediments to private sector growth as well as to provide the necessary investment incentives for small and medium businesses.

  • Prioritizing policies that facilitate job creation, especially for the young. This will promote stability and the building of skills. This year the Government has set aside $15 million for training and creating employment opportunities entirely focused on youth.

  • Reducing inequality. We must ensure that the proceeds of growth benefit all of society, and that the abundance of natural resources is used wisely to create economic and employment opportunities.

8. The Government, under the AfT, aims to ensure that we target interventions that will promote incomes among the poorest households. The key objectives of AfT as seen below are set out in 4 main pillars and cross-cutting considered as the 5th pillar:

Security and Rule of Law: the Government will invest in the security sector in preparation for the UNMIL drawdown; this will include developing a strategy for the necessary areas of security investment to meet the major areas of UNMIL activity. Together with the Ministry of Justice, we will prepare by October 31, 2012 a proposed budget for FY 2014 which we will discuss with UNMIL by November 30 to finance training needs and start assuming some non-peace keeping and other related activities. Spending on security will be part of the MTEF starting with FY 2014.

Governance and Public Institutions: the Government will work to promote reforms to enhance governance and economic management, including continuing the program-based MTEF budget next year; and reforming the reporting mechanism to ensure that, prior to allotments being disbursed, the Ministry of Finance is aware of performance and shortfalls by Ministries and Agencies. The Government will continue to roll out reforms to our budget process, and our expenditure management, support the work of LACC and the GAC in monitoring government activities and continue to ensure we provide operational support to M&As.

Human Development: education and an expansion of vocational training will be funded and free access to basic education for all children will be enhanced. The easiest way to lift people from poverty is to provide the opportunity for growth; the Government will work on developing work readiness training, and eradicate illiteracy.

Cross Cutting: funding has been put aside in this budget for youth schemes to promote youth empowerment; the Government will support the Ministry of Gender Development in its efforts to ensure workplace fairness. We will fund anti-HIV programs and implement the new Children’s Law and establish National Council for Children’s’ Well-being.

9. The cost of the AfT/PRS2 is estimated at around US $2.2 billion over the period of the IMF program. This will be funded by the Government and donor partners with externally funded donor efforts aligned with the PRS. The MTEF budget sets out the major priorities for funding of the Government. This includes: the rebuilding of the Mount Coffee Hydroelectric plant (which will be co-financed between Government and Donors); the construction of new roads and bridges in line with the Transport Master Plan. Generally, however, the Government priorities are: rebuilding power infrastructure and generation (and connecting to the West African Power Pool), rebuilding roads, controlling recurrent spending and rebuilding educational institutions (and expanding the role of vocational education).

IV. The Policy Agenda for 2012/13

A. Fiscal Policy

10. The budget for FY 2013 has been prepared in the context of the recently introduced Medium Term Expenditure Framework (MTEF). This year budget introduces multi-year budgeting framework, and ensures resources are aligned to the policy priorities in the Agenda for Transformation. It focuses on the main fiscal challenges including containing recurrent spending and boosting capital spending.

11. Over the medium term, we plan to continue to gradually increase capital spending as a share of the budget through further reallocation from current spending. To support this objective, already this fiscal year, we have put in place a current spending savings policy to reduce spending on gasoline, foreign and domestic travel, as well as other non-priority spending. Savings will be allocated to priority spending, particularly capital investment. For FY 2014 plans are being made to collapse public sector employees’ basic salary with the current special allowances to better control payroll spending. We will create a Liberia Development Fund in FY 2013 to save the unspent investment appropriation ensuring that unfinished infrastructure projects’ funding is not constrained in the upcoming fiscal years.

12. The budget for FY 2013 was built around fiscal rules. These rules included efforts to promote capital spending, reduce transfers between spending lines, and control recurrent expenditures. The key rules (see details in the Budget Framework Paper) are as follows:

  • No more than 34 percent of FY 2013 budget should be allocated to salaries and wages. And we are committed to reducing it further down by FY 2015 as a way to create the necessary fiscal space to increase capital spending.

  • At least 25 percent of the budget must be capital spending, of which at least 10 percent must be on the energy sector.

  • 25 percent of GoL expenditure on goods and services will be spent on Liberian businesses (25 percent of furniture spending must also be on Liberian sourced products).

  • no more than 15 percent of capital spending must be on administrative overheads.

  • transfers from investment to recurrent must be no more than 5 percent of investment appropriations.

13. Revenue collection will be strengthened by a combination of additional tax policies and tax administrative measures. These include the migration from General Sales Tax (GST) to Common External Tariff (CET); taxation on inbound calls; strengthening tax enforcement and compliance by conducting comprehensive audits of the largest 20 taxpayers including commercial banks, logging and insurance companies, as well as by launching a robust anti-smuggling campaign; and strengthening taxpayers services by establishing a one-stop customer care center, with technical assistance from the IMF, which will include a special call center to answer tax questions that would be accessible to all Liberians within and out of the country. For FY 2012/13, total revenue collection (including grants) is projected at 27 percent of GDP.

14. There are also contingent revenues—where there are uncertainties in the timing of their collection and are currently not included in the revenue projections. Among these, US $45 million is expected from the sale of the contract for Block 13 and is dependent on the finalization of the contract negotiation. If received, and assuming that total revenue collection is on track, these resources will be aligned to specific expenditures under the PSIP.

15. Some of the money in the grant revenue is ‘at risk’; this year the Government has developed a measure of risk for the grant revenue, and has put in place a strategy to minimize the risk of the grant revenue which is tied to specific deliverables. This will include regular reporting from M&As responsible for the deliverable areas, and monthly follow up by the Ministry of Finance Aid Management Unit to determine interventions required to meet targets.

16. Total expenditure in FY 2013 are expected to increase to around 33 percent of GDP from around 31 percent of GDP in the last fiscal year, reflecting a 3.7 percentage point increase in capital spending. For FY 2013, all investment projects had to be justified, scored and aligned with Government and Ministry priorities. Efforts will be exerted to improve the efficiency and execution in the implementation of projects. To do this, we plan to set up the Project Management Office (PMO) by end-December 2012 (structural benchmark) which will focus on the evaluation (project costing and appraisal) and selection process of investment projects and reviewing feasibility studies for projects. This Unit will monitor the implementation of the PSIP and capital spending component of the Agenda for Transformation. Ministries and Agencies will develop timelines for sector projects and itemized spending plans to ensure that allotments and releases of funds occur in time for them to be useful for Ministries and Agencies, and itemized plans will help with outturn reporting at the end of the fiscal year.

17. Government treasury bills in Liberian Dollars will be launched by end-December 2012 (structural benchmark) to be used for cash management purposes and for the Government’s domestic financing needs.

18. Private investment promotion is a key aim of this Government’s agenda, fully recognizing the importance of increasing the level of private investment as part of the effort to meet the Vision 2030 objective of middle income status. This objective cannot be achieved by borrowing and Government investment alone. With this in mind, there are planned interventions in the short to medium term which include:

  • Working with development financing institutions to provide SME guarantees: the Government will work with development partners to set up a fund to offer guarantees to small and medium size enterprises, to reduce their capital costs.

  • Promoting SMEs representative organizations: the Government has taken steps towards promoting the views of the business organizations within Liberia. This has included setting up a communication between the Minister of Finance’s office and the Liberian Chamber of Commerce to find out what they believe could encourage business activity.

  • Work to equalize fees for Liberian and Non-Liberian businesses, a commitment of the Government under its WTO accession plans.

B. Governance and Public Financial Management

19. We plan to introduce a Treasury Single Account approach by end-December 2012 (structural benchmark) as a tool to strengthen the central government’s cash management capacity. Line ministries and agencies (M&As) accounts will be monitored on a monthly basis to provide consolidated cash balances held by the GoL with the purpose of reducing idle balances and inactive accounts to improve liquidity management. In line with the new cash flow planning approach, line ministries have been asked to submit their rolling plans for the preparation of a consolidated annual cash plan.

20. As part of the PFM reform agenda, the introduction of IFMIS has been completed in 8 Ministries, including the 5 largest (Education, Health, Public Works, Finance, Foreign Affairs, and Agriculture); and the General Auditing Commission (GAC) has also installed the IFMIS infrastructure. The GAC should be fully connected to IFMIS, giving GAC full access to IFMIS, by the end of December 2012 (structural benchmark). The GAC will then start conducting the auditing of the FY 2011/12 budget by January 2013 using IFMIS, beginning with the 8 ministries currently connected to IFMIS. Prior to this action, full testing of the system in the above mentioned M&As will be completed by October 2012. The GAC will complete audits of the FY2011/12 budget for the eight (8) big ministries and agencies using IFMIS by end-September 2013. We will continue to rollout IFMIS to an additional 8 M&As by the end of FY 2013.

21. The Government will continue its effort to remove ghost names from the payroll system and has started work in this regard including the introduction of biometric technology to strengthen payroll controls. This will continue with all employees eventually expected to be covered by the system by end-June 2014.

22. The Government will introduce the Civil Service Management (CSM) module within IFMIS and the Human Resource Management Information System (HRMIS) sub-module within the CSM, both by end-June 2013 (structural benchmark). Currently, 22 out of 29 M&As payrolls have been cleaned up and the personnel records will be uploaded to IFMIS. Cleaning up of the remaining 7 institutions4 will be completed by end-June 2013 (structural benchmark), including in the Ministry of Education where an attendance monitoring system with TA support from USAID is also being launched in January 2013. By end-June 2013, the payrolls of all M&As will be uploaded to IFMIS and used for payroll payments.

23. Progress has been made at initially strengthening of internal audits of high spending M&As, consistent with the Government’s internal audit strategy. Currently, 8 out of 16 institutions have their system (institutional and human capital) in place and we plan to complete an additional 8 institutions by September 30, 2012 and fully rollout the process to all M&As by June 30, 2013.

24. The Code of Conduct Executive Order was signed by the President on the 9th of January 2012 and the Government has begun an effort to implement the Code, including having staff throughout the Government, sign copies to signify their commitment to comply with this Executive Order.

25. The Civil Service Agency (CSA) and the General Auditing Commission carried out a joint audit of the pension system to verify all people on the pension payroll. Schemes like this will continue in the future including all other payrolls.

26. The government is advancing on the introduction of the Public Expenditure Tracking System (PETS), which is expected to be in place by end-2012. It links public resources to outcomes; the framework would allow the Ministry of Finance and line ministries and agencies to track spending levels and deliverables.

27. In order to improve financial oversight of SOEs/public financial entities, an SOE unit within the Ministry of Finance will be set up by end-December 2012 (structural benchmark) which will be responsible for collecting quarterly financial reports from the 8 largest SOEs/public financial entities5 and ensuring they are in line with the PFM law. By end-June 2013, the 8th largest SOEs will be required to report to the SOE unit within the Ministry of Finance their financial performance for the quarter January–March 2013 (Structural Benchmark). Thereafter, SOEs will regularly report their quarterly financial performance, three months after the end of each quarter. In the meantime, the Government is improving governance of SOEs by ensuring that SOEs which do not provide financial reports will not receive any subsidies. Steps will also be taken to work with SOEs to build their reporting capacity. The SOE Unit will also strengthen oversight of SOE performance to ensure timely and accurate transfer of revenues to the Ministry of Finance. By end-December 2012, the Unit, working with other GoL stakeholders, will also prepare a strategy to manage fiscal risks of SOEs and determine which SOEs should be privatized and whether or not Government subsidies should remain for enterprises.

28. Management of natural resource revenue: the Government notes the importance of ensuring that natural resource revenues are properly managed. The Government will: (i) create a resource revenue sub-unit in the large taxpayers unit of the Ministry of Finance by June 2013 (structural benchmark) to improve the monitoring of concessions to more accurately determine the quality and quantity of natural resource production, and exports and estimate royalty requirements; and (ii) begin reporting natural resources revenues separately in fiscal outturns starting in FY 2014.

29. The Government will prepare monthly reports (to form part of the consolidated monthly fiscal report) by December 2012, on off-budget externally financed projects reconciling data with the Budget and Expenditure offices at the Ministry of Finance.

C. Monetary Policy and Financial System

30. Monetary policy over the medium term will focus on containing inflation in Liberian dollar-denominated prices by maintaining stability in the exchange rate through the weekly foreign exchange auctions. The CBL recognizes the need to build up foreign exchange reserves to mitigate adverse shocks especially given the vulnerabilities to food and fuel price spikes and sluggish global economic growth. However, the CBL is also taking into account the high opportunity cost of holding reserves given the strong development needs and massive infrastructure gaps. To this end, the CBL aims to maintain adequate reserve coverage of about three months of imports over the medium term to buttress the macroeconomic stability while creating some policy buffers. 6

31. An orderly and market driven de-dollarization is a strategic objective of the Government. The ongoing measures being taken to improve confidence and to promote widespread use of the Liberian dollar, including improving the quality of notes and issuing higher denomination bills, will be strengthened. Moreover, the Government will set a plan to de-dollarize public expenditure including paying all public sector salaries in Liberian dollars over the medium term. Additionally, the Government’s issuance of treasury bills by December 2012 will help mop up excess Liberian dollar liquidity in the system and to encourage mobilization of Liberian dollar deposits.

32. The CBL is taking active measures aimed at strengthening the banking system and other financial institutions. Specifically, the CBL is engaging banks below minimum capital requirements to oversee recapitalization plans. As a result of this engagement, affected banks received capital injections from their foreign parents in 2011 and 2012. The CBL will continue working with banks remaining below minimum capital requirement to ensure full compliance with the capital and provisioning regulations by end-2012. Moreover, the current risk-based supervision regime of the CBL, whose first cycle of bank inspections successfully ended, will focus on emerging credit risks, aggressive monitoring of banks to ensure that they remain healthy, and improving banks’ risk management. In addition, the CBL will submit to legislature a revised Insurance Act by end-June 2013 (structural benchmark) to streamline regulation in the insurance sector and establish the central bank as the sole regulator of all insurance agencies.

33. In order to strengthen financial inclusion and promote lending to small borrowers, the CBL will seek to improve the credit environment through: (i) strengthening the commercial court; ii) enhancing the credit reference system by widening its database and improving its accessibility; iii) establishing, by end-June 2013, a collateral registry to support execution of collateral on bad loans and improve the credit culture (structural benchmark). The monetary authority will also work together with donors to mobilize long-term financing of bank’s lending to agriculture and small- and medium-sized enterprises and to improve financial literacy and business practices.

D. Debt Management, Resolution and External Policies

34. The Government has put in place fiscal rules to guide borrowing, to ensure that we never again have to ask the world for forgiveness from our debt. This Government has achieved in the last six years remarkable write downs on our debt stock of around US $4.7 billion. We will ensure, through sensible management of our finances and never again build up debt with nothing to show for the cost. Our borrowing rules will ensure that:

  • We use borrowing to boost capital, and where the cost is borne by future generations so will the benefit;

  • Total public sector borrowing (including public, publicly guaranteed debt and debt of SOEs) in foreign currency (including concessional and nonconcessional borrowing) will be limited to 4 percent of GDP in NPV terms averaged over three years.

  • The Government will seek nonconcessional borrowing, with agreement with the Fund, for specific economic viable projects with high economic and social returns and assessed by an independent entity, should the need arise.

  • Borrowing is managed sustainably and we never build a debt stock too high for repayment; the Government has set as its fiscal rules for borrowing:

    • All borrowing must be undertaken for the purposes of investment, consistent with the Public Sector Investment Plan (PSIP)

    • Total debt stock must not exceed 60% of the previous year’s GDP as contained in the PFM regulations.

    • Prior to new borrowing being undertaken a Debt Sustainability Analysis (DSA) must be carried out and presented to the Debt Management Committee (DMC) to ensure debt rules are not breached

35. SOEs taking on debt will be conditional on SOEs providing full and accurate reports of finances, as well as the presentation of an economically beneficial project with good loan terms. SOE and SOE guarantees will be included within our debt stock, in line with the PFM law.

36. The Debt Management Unit will develop a forward looking medium-term debt strategy to identify specific borrowing plans and negotiate new debt in line with the fiscal rules to achieve borrowing targets in the most cost effective way by the end of 2012. The three year strategy will be refreshed in line with annual Budget preparations to enable timely execution of new borrowing upon Budget approval.

37. We will continue making progress on finalizing bilateral and multilateral debt agreements. The debt rescheduling with BADEA has been signed, increasing the maturity of the loan to 40 years with a 5-year grace period and zero percent interest rate. The debt with Saudi Arabia has been finalized as the negotiation has been concluded and signed.

38. We are making efforts to ensure timely and accurate reporting of debt and off-budget project financing. The IDA credits have been incorporated into measures of debt accumulation in the Budget Framework Paper and have been included in sustainable debt profiles produced by the Ministry of Finance. Both IDA debt and the IMF reserves support are included in published measures of debt stock.

39. The Aid Management Unit within the Ministry of Finance will work to ensure better management of grants and off-budget aid programs ongoing in Liberia. As part of this effort we will:

  • Introduce new aid management software to track aid projects; eventually this will be rolled out to a public facing platform which will allow donors to log in and include and edit their ongoing projects.

  • Introduce a system by end-2012 to follow up on conditional grant aid: the grants which are tied to specific conditions will be identified with responsible Ministries and Agencies and will be required to provide monthly reports on progress and correcting measures to reduce future deviations.

40. We are making progress towards the WTO accession: we have submitted answers to initial questions the WTO has sent in response to our memorandum on foreign trade; and have begun technical meetings with the WTO. ECOWAS trade: the Government will work to implement the Common External Tariff (CET) by early next year, and work to remove the final tariffs on internal ECOWAS trade in line with the liberalization scheme. The CET will then form the basis for the negotiations with the WTO.

41. The CBL will implement the recommendations of a safeguards assessment that was finalized in October 2011 and will undergo an update assessment in relation to the new arrangement. In this context, we will finalize by December 2012, a Memorandum of Understanding between the CBL and the government to clarify the rights and obligations for Liberia’s accounts and transactions with the IMF. These formalized institutional arrangements will be reflected in the CBL financial statements beginning with the 2012 annual accounts.

E. Other Structural Reforms

42. Concessions: we will strengthen the role of the National Bureau of Concession within negotiations and ensure it has the resources to operate effectively; and we will redraft the Petroleum Act to separate responsibility for revenue collection, oversight and regulation; and ensure that petroleum agreements are in line with the redraft. The revised Petroleum Act will be submitted to Parliament in the first quarter of 2013.

43. Risk analysis in the budget: the Government will begin producing a risk management handbook, with details of likely risks to budget execution revenue collection and debt levels. The Government will begin publishing regular reports of risk, and monitoring the risks presented to the overall macro economy.

44. Data collection and forecasting: we will expand the Government’s data collection. As we recognize the importance of good data in the implementation of effective policies, measures we will take to improve data gathering will include:

  • Ensuring LISGIS has the required resources in FY 2013 to complete the planned national accounts surveys, providing us with the data required for Government policy development.

  • Commencing the household income expenditure survey and compile and publish the establishment survey (covering all registered business enterprises), both by end-June 2013 (structural benchmarks) as this is an integral part of the efforts towards better data collection and we will ensure that we work with donors to complete this.

  • Compiling national accounts for 2013 by June 2014 using the results of the completed household income expenditure and enterprise surveys.

F. Program Monitoring

45. Program implementation will be monitored with quantitative financial targets and structural benchmarks (Tables 1 and 2 below), and semi-annual reviews. Definitions of key concepts and indicators, as well as reporting requirements, are set out in the accompanying Technical Memorandum of Understanding. The first review is scheduled to be completed by May 15, 2013 based on the end-December 2012 PC and the second review by November 15, 2013 based on the end-June 2013 PC.

Table 1.Liberia: Proposed Quantitative Performance Criteria and Indicative Targets, 2012–13(Millions of US dollars, unless otherwise indicated)
Dec. 12Mar. 13Jun. 13Sep. 13
Performance criteria1/2/
Floor on total revenue collection of the central government203.0325.7460.0120.3
Ceiling on new external arrears of the central government (continuous basis)0.00.00.00.0
Ceiling on new non-concessional external debt of the public sector (continuous basis) 3/0.00.00.00.0
Ceiling on new domestic borrowing of the central government 4/15.015.015.015.0
Floor on CBL’s net foreign exchange position4/, 5/210.0207.0226.0226.0
Ceiling on CBL’s gross direct credit to central government 4/290.0290.0270.0270.0
Indicative Targets
Ceiling on gross borrowing by the public sector in foreign currency 6/126.7126.7126.7126.7
Ceiling on net domestic assets of the CBL4/5/−10.0−19.0−12.04.0
Ceiling on new domestic arrears/payables of the central government (continuous basis)0.00.00.00.0
Floor on social and other priority spending (percent of total budgeted expenditure, excluding contingencies) 7/30.030.030.030.0
Memorandum items:
Memorandum item: Programmed receipt of external budget support and committed external financing 2/4.449.8

Test dates for performance criteria at end-December 2012 and end-June 2013, otherwise indicative targets.

Fiscal targets are cumulative within each fiscal year (July 1-June 30).

Non-concessional financing will be adjusted by amount of agreed non-concessional borrowing tied to projects independently evaluated as of high economic return.

Bridge financing from the CBL is available under the program for shortfalls in programmed receipt of external budget support and committed external financing up to a maximum of US$20 million. In this event, floors will adjust downwards and ceilings adjust upwards by the extent this financing is utilized, up to a maximum of US$20 million.

Includes SDR holdings net of ECF liabilities. SDR holdings converted at program exchage rate of 1 SDR=1.5844 US dollar.

Three-year average annual ceiling.

Includes spending on education, health care, social development services, and energy.

Test dates for performance criteria at end-December 2012 and end-June 2013, otherwise indicative targets.

Fiscal targets are cumulative within each fiscal year (July 1-June 30).

Non-concessional financing will be adjusted by amount of agreed non-concessional borrowing tied to projects independently evaluated as of high economic return.

Bridge financing from the CBL is available under the program for shortfalls in programmed receipt of external budget support and committed external financing up to a maximum of US$20 million. In this event, floors will adjust downwards and ceilings adjust upwards by the extent this financing is utilized, up to a maximum of US$20 million.

Includes SDR holdings net of ECF liabilities. SDR holdings converted at program exchage rate of 1 SDR=1.5844 US dollar.

Three-year average annual ceiling.

Includes spending on education, health care, social development services, and energy.

Table 2.Liberia: Proposed Structural Benchmarks, 2012–13
MeasureTarget DateJustification
Enhancing national accounts statistics
Commence Household Income Expenditure Survey.Second ReviewSurvey needed to validate national accounts data needed for macroeconomic policy.
Compile and Publish Results of Establishment SurveySecond ReviewSurvey results needed to validate national accounts data needed for macroeconomic policy.
Enhancing budget programming, control and monitoring
Set up the state owned enterprises (SOE) Unit at Ministry of Finance.First ReviewImprove monitoring of public sector contingent liabilities and total public sector borrowing.
Reporting by 8 largest State Owned Enterprises (SOEs) on their financial performance to the SOE unit at Ministry of Finance for the quarter January–March 2013.Second ReviewImprove monitoring of public sector contingent liabilities and total public sector borrowing.
Fully connect the General Auditing Commission (GAC) to the Integrated Financial Management Information System (IFMIS) giving GAC full access to IFMIS.First ReviewImprove expenditure control for effective budget implementation.
Set up the Treasury Single Account approach at Ministry of Finance.First ReviewMove towards stronger central government liquidity management to reduce idle balances at line ministries and agencies accounts.
Create the Resource Revenue Unit in the Large Tax Payers Unit in the Ministry of Finance.Second ReviewSupport effective taxation of the natural resource sector.
Improving capital spending execution and curbing current expenditure
Establish Project Management Office (PMO) at Ministry of FinanceFirst ReviewMonitor progress in capital spending associated with PRS2 and debt sustainability.
Introduce the Civil Service Management (CSM) module within IFMIS and the Human Resource Management Information System (HRMIS) submodule within the CSM.Second ReviewReduce payments to ghost workers and increase fiscal space for capital investment.
Complete clean-up of payrolls of 7 remaining Ministries and Agencies (M&As) and upload payrolls of all M&As to IFMISSecond ReviewReduce payments to ghost workers and increase fiscal space for capital investment.
Developing the financial sector
Issue government treasury bills.First ReviewSupport financial market development and add a liquidity management tool to the central bank, and for treasury cash management purposes.
Establish a collateral registry at CBLSecond ReviewSupport more secure lending practices and prevent borrowers from contracting loans from multiple banks based on the same collateral.
Submit to legislature a revised Insurance ActSecond ReviewStreamline regulation in the insurance sector and establish the central bank as the sole regulator of all insurance agencies.
Attachment II. Technical Memorandum of Understanding

This memorandum sets out the understandings between the Liberian authorities and the International Monetary Fund (IMF) regarding the definitions of the quantitative and structural performance criteria and benchmarks for the three-year Extended Credit Facility (ECF), as well as the reporting requirements. The definitions are valid at the start of the program but may need to be revisited during the program reviews to ensure that the memorandum continues to reflect the best understanding of the Liberian authorities and the IMF staff in monitoring the program.

I. Quantitative Performance Criteria and Benchmarks

A. Test Dates

1. Quantitative performance criteria have been set for end-December 2012 and end-June 2013 and quantitative performance benchmarks have been set for end-March 2013 and end-September 2013.

B. Definitions and Computation

2. For the purposes of the program, the Government is defined as the Central Government of Liberia (GoL). This definition excludes legally autonomous state-owned enterprises whose budgets are not included in the central government budget. The operations of the central government will be presented in U.S. dollars with all revenues and expenditures that are denominated in Liberian dollars converted at the end of period exchange rate. The public sector comprises the central government, the Central Bank of Liberia, and public enterprises (enterprises and agencies in which the government holds a controlling stake—typically owns more than 50 percent of the shares, but which are not consolidated in the budget).

3. Total Central Government revenue collection includes all tax and nontax receipts transferred into the U.S. dollar GoL accounts at the CBL, including income and transfers from state-owned enterprises and public institutions (excluding external loans and grants). The GoL accounts at the CBL include the GoL General Account No. 2, the GoL Special Rice Fund, and the Liberian dollar account at the CBL comprising the GoL General Account. Any new accounts opened by the GoL at the CBL or at any other local financial agency shall be reported to the IMF as well. For the purposes of the program, the revenues of the GoL are measured on the basis of cash deposits in the four accounts specified above converted to U.S. dollars using the end of period exchange rate.

4. For end-December 2012 and end-June 2013, social and other priority spending is defined as education, health, social development services, and energy sector spending from the FY2013 budget of the units listed below (payment vouchers approved by the Ministry of Finance) excluding contingent expenditure. It is evaluated as a share of total budgeted expenditure, where total budgeted expenditure excludes contingent expenditure and off budget expenditure.

Education, Health, Social Development Services, and Energy Spending
End Dec. 2012End June 2013
Total Education and Health
Education
Ministry of Education
University of Liberia
Monrovia Consolidated School System (MCSS)
Lofa Community College
Nimba Community College
Booker Washington Institution (BWI)
Gbarnga Central High
Forestry Training Institution (FTI)
Cuttington University (CUC)
National Commission on Higher Education (NCHE)
W. V. S. Tubman Technical College (WVSTC)
West African Examination Council (WAEC)
Liberia Institute for Public Administration
Health
Ministry of Health and Welfare
JFK Medical Center (JFKMC)
Phebe Hospital
LIBR
Jackson F. Doe Medical Hospital
Social Development Services
Energy Sector
Thermal diesel (HFO) power station
Transmissions and distribution
Mount Coffee rehabilitation, transmission, and distribution to Bushrod Island

5. Social and other priority spending will be adjusted downward by the undisbursed amounts from budgeted external financing allocated to projects in the energy sector within the public sector investment program.

6. New domestic borrowing of the Central Government is defined as new domestic claims on the central government since the start of the program. It will be measured by the change in the stock of all outstanding claims on the central government (domestic loans, advances, and any government debt instruments, such as long-term government securities issued in the domestic market) by the banking system. The definition also includes the issuance of debt instruments by the GoL to the nonbank sector. For the purposes of measurement, all claims in Liberian dollars will be converted at the end of period exchange rate.

7. Gross borrowing by the public sector in foreign currency is defined as cumulated new external claims by residents and non-residents from July 1, 2012 on the public sector excluding borrowing for reserve management purposes by the CBL.

8. The definition of external debt by the public sector, for the purposes of the program, applies not only to the meaning set forth in point No. 9 of the “Guidelines on Performance Criteria with Respect to External Debt” (Executive Board Decisions No. 6230-(79/140) August 3, 1979, as amended and effective December 1, 2009 attached in Annex I), but also to commitments contracted or guaranteed for which value has not been received.

9. The concessional nature of debt will be determined on the basis of the commercial interest reference rates published by the Organization for Economic Cooperation and Development (OECD). A debt is defined as concessional if, on the date of signature, the ratio between the present value of debt computed on the basis of reference interest rates and the face value of the debt is less than 65 percent (equivalent to a grant element of at least 35 percent).

10. The ceiling for contracting and guaranteeing nonconcessional external debt by the public sector will be set at zero continuously throughout the program period except as agreed with Fund staff. The ceiling for contracting and guaranteeing nonconcessional debt excludes short-term (debt contracted for the period less than one year) import-related credits, rescheduling arrangements, and borrowing from the Fund.

11. The government undertakes not to incur payments arrears on external debt that it owes or guarantees, with the exception of external payments arrears arising from government debt that is being renegotiated with creditors, including Paris Club creditors. Arrears on external debt are defined as any unpaid obligation on the contractual due date. In cases where a creditor has granted a grace period after the contractual due date, arrears are incurred following the expiration of the grace period.

12. New domestic arrears/payables of the government are calculated as the difference between government payment commitments and the actual payments made on such commitments, providing for a processing period of no more than 15 days from the date of commitment. Actual payments are defined as having taken place on the date of issuance of the checks by the Ministry of Finance. Government payment commitments include all expenditure for which commitment vouchers have been approved by the Director of the Bureau of General Accounting (BGA), and expenditure that are now automatically approved, namely, wages and salaries, pensions, debt payments to the CBL and commercial banks, CBL bank charges, and transfers of ECOWAS levies into the ECOWAS account.

13. CBL gross direct credit to central government is defined as the sum of claims on central government, including loans, advances, accounts receivable, and any government debt instrument as defined in the monetary survey template excluding CBL purchases of treasury bills in the secondary market and non-competitive purchases in the primary market. The gross credit to government is expressed in U.S. dollars. Claims denominated in Liberian dollars are valued at end-of-period exchange rate.

14. The net foreign exchange position of the CBL is defined as the difference between (a) the CBL’s gross foreign reserves including SDR holdings, and (b) the sum of its gross foreign liquid liabilities, ECF arrangement liabilities, and liquid liabilities denominated in U.S. dollars. The net foreign exchange position floor at end-December 2012 and end-June 2013 is US $15 million below the projected net foreign exchange position. The net foreign exchange position of the CBL is presented in the U.S. dollar. SDR holdings are valued at a fixed rate of the U.S. dollar against SDR, 1.5844 as of June 30, 2012. Other currencies are valued at cross-rates against the U.S. dollar as of June 30, 2012.

15. The net domestic assets of the CBL are defined as base money minus the net foreign assets of the CBL converted into United States dollars at program exchange rates as defined in paragraph 14. Base money is defined as the stock of currency in circulation plus reserve deposits of commercial banks at the CBL, plus sight deposits of commercial banks at the CBL and plus vault cash of commercial banks. The net foreign assets of the CBL are defined as foreign assets minus foreign liabilities of the CBL balance sheet.

16. External financing adjustor. The program ceilings for CBL gross credit to government and CBL net domestic assets will be adjusted upward and the program floor on the net foreign exchange position of the CBL will be adjusted downward, by the amount of the difference between actual and programmed external budget support and committed budgeted external loan disbursements up to a maximum of US$20 million. The adjuster will be calculated on a cumulative basis from the start of the financial year (July 1).

Cumulative Program External Budget Support and Committed Budgeted External Loan Disbursements(In millions of U.S. dollars)
September 20120.0
December 20124.4
March 201316.6
June 201349.8

II. Program Monitoring

A. Data Reporting to the IMF

17. To allow monitoring of developments under the program, the Ministry of Finance will coordinate and regularly report the following information to the staff of the IMF:

  • Detailed reports on monthly core and contingent revenue and expenditure on both a cash and a commitment basis by budget line and a completed summary table on central government operations (monthly, within three weeks after the end of the month);

  • Outstanding appropriations, allotments and commitments, and disbursements for line ministries and agencies (monthly, within three weeks after the end of the month);

  • Disbursements of budget support grants and budgeted and off-budget loans, by donor (monthly, within three weeks after the end of the month);

  • End-month balances in the GoL accounts at the CBL. These comprise the U.S. dollar accounts: GoL General Account; and GoL Special Rice Fund; and Liberian dollar accounts: the GoL/CBL Civil Servant Payroll Account, and the GoL General Account. Any new accounts opened by the GoL at the CBL or at any other local financial agency shall be reported to the IMF also (monthly, within three weeks from the date of the statement);

  • End-of-month balances of all operating and other accounts of the line ministries and agencies receiving budgetary appropriations (monthly within three weeks after the end of the month);

  • A table providing the end-of-period stock of domestic arrears accumulated and payments made on arrears during the program period, by budget category (wages, goods and services, etc) (monthly, within three weeks after the end of the month);

  • The amount of new external debt contracted or guaranteed by the public sector (monthly, within three weeks after the end of the month);

  • The amount of new domestic debt contracted or guaranteed by the public sector (monthly, within three weeks after the end of the month);

  • A detailed report on monthly payments on external debt by category and creditors and the stock of external debt (monthly, within three weeks after the end of the month);

  • A detailed report on monthly payments on domestic debt by category and the domestic debt stock (monthly, within three weeks after the end of the month);

  • The balance sheet of the CBL in the monthly monetary survey (monthly, within three weeks after the end of the month);

  • The full monthly monetary survey of the monetary sector (monthly, within three weeks after the end of the month);

  • The detailed table of commercial banks loans and advances by sector (monthly, within three week of end of month);

  • The core set of financial soundness indicators for the banking system, including the overall profitability of the banking sector (quarterly, within three weeks after the end of the quarter);

  • The report on the results of foreign exchange sales/purchases by the CBL through foreign exchange auctions held by the CBL (weekly) and other currency exchange facilities;

  • Regular sale of U.S. dollars by the Ministry of Finance to the CBL, including amount date, and rate of exchange (monthly, within three weeks after the end of the month);

  • Indicators of overall economic trends, including but not limited to:

    • ➢ detailed tables of the monthly harmonized consumer price index (within three weeks after the end of the month);

    • ➢ daily foreign exchange rates (monthly);

    • ➢ export volumes and values by major commodity, import values by standard international trade classification (SITC), import volumes of rice (by commercial and noncommercial use) and petroleum products (monthly, within three weeks after the end of the month);

    • ➢ interest rates and commercial bank remittance inflows and outflows (monthly, within three weeks after the end of the month); and

    • ➢ production data in value and volume (monthly, within six weeks after the end of the month);

  • Quarterly reports of state owned enterprise financial operations submitted to Ministry of Finance;

  • The report on the status of implementation of the structural performance criteria and benchmarks specified in Table 2 of the MEFP (monthly, within three weeks after the end of the month).

18. The above data and reports will be provided in hard copies and electronically to the IMF Resident Representative to Liberia, with copies to the local IMF economist, Mr. Deline (adeline@imf.org) for further transfer to the African Department of the IMF in Washington, D.C.

19. Moreover, we will provide the Fund with such information as the Fund requests in connection with the progress in implementing the policies and reaching the objectives of the program.

Annex 1. Guidelines on Performance Criteria with Respect to External Debt

Excerpt from Executive Board Decision No. 6230-(79/140) August 3, 1979, as amended in 2009

  • (a) The term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    • (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    • (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

    • (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. The debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.

  • (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

Staff revised the entire GDP series for Liberia significantly upward on account of newly available data from the national authorities and the World Bank on activity in the services and iron ore sectors (Appendix I).

Purchasing Power Parity (PPP) basis using a poverty line of US$1.25 per day.

Liberia is ranked 182 out of 187 countries in the 2011 HDI.

Liberia has been heavily dollarized since its founding in 1847. Both the LD and the U.S. dollar are legal tender in Liberia. The de jure exchange rate policy is a managed float.

Transparency International’s 2011 Corruption Perceptions Index (CPI).

The PRS2 covers 2012–17. It is planned to be formally launched in late 2012.

Foreign inflow breakdown was revised significantly on account of re-classification of some financing to the iron ore sector from foreign direct investment to borrowing consistent with concession agreements.

An anticipated decline in trade taxes resulting from adoption of GATT valuation and the first step of adopting the regional common external tariff did not materialize.

EBS/11/164.

Sub-Saharan Africa Fragile States as defined in the IMF Regional Economic Outlook: Sub-Saharan Africa: Maintaining Growth in an Uncertain World, October 2012. The countries include Burundi, Central African Republic, Comoros, the Democratic Republic of the Congo, Côte d’Ivoire, Eritrea, Guinea, Guinea-Bissau, Liberia, São Tomé & Príncipe, Togo, and Zimbabwe. In 2015 and 2016, Guinea and São Tomé & Príncipe are non-iron ore and non-oil GDP.

Excluding IMF disbursements.

Legal, institutional and managerial bottlenecks hamper selection and implementation of public investment projects. These bottlenecks include weaknesses in prioritizing high-return projects, conducting feasibility and pre-feasibility studies, monitoring the project investment cycle, and coordinating efforts of the Ministry of Finance (MoF) and implementing ministries. Project execution could also benefit from broadening the list of construction companies to include non-resident firms and pre-qualifying them; limiting the number of projects allocated to a single contractor; and pooling similar small projects.

EBS/12/139, Supplement 1.

Three major iron ore concessions are yet to commence production. By 2015, iron ore is projected to account for around 15 percent of GDP, exceeding all other commodity exports (rubber, palm oil, timber, other metals) combined. Outside of iron ore, palm oil and forestry have significant potential to boost exports, revenue, and growth although land disputes and capacity constraints are slowing implementation.

Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, The Gambia, Ghana, Guinea (suspended), Guinea-Bissau, Liberia, Mali, Niger (suspended), Nigeria, Senegal, Sierra Leone, and Togo. Liberia’s adoption of the regional Common External Tariff (CET) remains stalled because of concerns from regional partners on compensatory measures to cushion potential revenue losses.

Liberia requested membership in the WTO in 2007 and attended the first Working Party on WTO Accession in July 2012. The authorities are seeking to achieve membership in five years and are pressing ahead on reforms, particularly to reduce non-tariff barriers.

The FY 2012/13 budget law was signed into law in August 2012 and is consistent with the ECF-supported fiscal program.

There are no new domestic arrears beyond those settled in 2008.

The debt ceilings would include SOEs.

Decision No. 14747-(10/96) (9/28/2010).

Produced by the Ministry of Agriculture of Liberia, Liberia Institute of Statistics & Geo-information services (LISGIS), United Nations Food and Agriculture Organization (FAO), Catholic Relief Services and Samaritan Purse.

Carry-forward of re-appropriations and borrowing from CBL are recorded as domestic financing in ECF macroeconomic framework.

Expenditures made during the 90 day period are not included in the ECF macro framework. IFMIS in 2011/12 (US $488) includes US $10 million in amortization and arrears payments that are recorded as financing in the ECF macro framework, and does not include US$ 2 million in interest payments which are included as expenditures in the ECF framework.

The 8th Review included the off-budget items in government expenditures.

Ministries of Education, Health, Public Works, Justice, Internal Affairs, Lands and Mines, Agriculture.

National Ports Authority (NPA), Liberia Electricity Company (LEC), Liberia Petroleum and Refinery Company (LPRC), National Oil Company of Liberia (NOCAL), Liberia Telecommunications Authority (LTA), Liberia Maritime Authority (LMA), Robert International Airport (RIA), Liberia Water and Sewerage Company (LWSC).

Excluding UNMIL and iron ore related imports.

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