My Liberian authorities thank the Executive Board, Management and staff for their continued support, particularly since the end of the civil conflict. They appreciate staff input in identifying the policy opportunities and challenges as well as presenting options for the structural transformation of the economy. While significant progress has been achieved in transitioning from post-conflict reconstruction to the path of macroeconomic stability, underpinned by a credible medium-term fiscal framework and sound policies, more remains to be done in the areas of infrastructure and social development to spur robust inclusive growth.
Against this backdrop, my authorities have clearly articulated a comprehensive medium-term strategy to help toward the end goal of reaching middle income status by 2030 in their second generation Poverty Reduction and Growth Strategy (PRS-II), referred to as the “Agenda for Transformation”. The authorities’ ambitious agenda focuses on investments in infrastructure, human development and institutions to accelerate broad-based growth and attain middle income status. However, the implementation of my authorities’ development agenda is severely challenged by inadequate fiscal space and dwindling external financing. It is in this regard that they are asking for the Executive Board’s approval of their request for a successor Extended Credit Facility to consolidate macroeconomic stability and boost growth while supporting their Agenda for Transformation.
Recent economic developments
Supported by a strong medium-term fiscal framework and sound macroeconomic policies, economic performance during 2008-2010 was impressive, with real GDP growth averaging 5.9 percent. Inflationary pressures however heightened, due largely to the spike in global food and fuel prices while gross international reserves increased substantially over the period. The external current account deficit widened, reflecting the broad-based expansion in imports to meet the increased domestic demand as the economy expanded. During this period, the country received HIPC debt relief resulting in a large reduction in external debt.
Macroeconomic performance in 2011 continued to be robust with real GDP growth estimated at 8.2 percent compared to 6.1 percent in 2010, reflecting increased activity in agriculture and the resumption of iron ore exports. Inflation increased to 11.4 percent in 2011, largely because of the surge in global food and fuel prices, which also contributed to the widening of the external trade deficit. The exchange rate of the Liberian dollar remained stable and gross international reserves stood at 3.0 months of import cover at the end of 2011.
My authorities’ overriding policy objective over the near to medium term is to restructure the economy so that it will grow faster, create more jobs, spread the benefits of growth more widely and thereby reduce inequality. As a result, they are determined to invest in key infrastructure and sectors that have high economic and social returns as well as expansionary economic benefits. To this end, real output growth is projected to rise to 8.9 percent in 2012. The major risk to maintaining single-digit inflation in 2012 remains the high global food and energy prices.
My authorities’ Agenda for Transformation prioritizes increased allocation of resources to the development of roads, ports, power and water infrastructure as well as human capital. Accordingly, they seek to gradually increase real output growth in the outer years as investment in basic infrastructure and agricultural productivity are realized. The medium-term outlook envisions single digit inflation, decelerating from 11.4 percent in 2011 to 6.6 percent in 2012. With the volatility in the Liberian dollar subsiding, the Central Bank of Liberia (CBL) is expected to rebuild gross international reserves over the medium term.
My authorities are committed to maintaining fiscal sustainability over the medium term by pursuing prudent fiscal management, while creating much needed fiscal space to support their Agenda for Transformation. In this context, the overarching objective of fiscal policy is to maintain a sustainable fiscal position consistent with the Public Financial Management Law of 2009. To meet these objectives, a Budget Framework Paper has been prepared outlining some of the macroeconomic assumptions and funding plans for the national budget.
Cognizant of the need to intensify revenue mobilization, my authorities plan to introduce new taxes on inbound telephone calls. They also intend to strengthen the large tax payer unit. In this regard, they plan to establish a natural resource unit in the large taxpayers unit, which will help to monitor prices and ensure that government receives the optimal amount of tax from the sector. In addition, the authorities are working on a new petroleum policy to maximize future revenue windfalls from the oil sector. In this regard, a draft petroleum policy has been prepared and national consultations are ongoing. The draft policy will inform the new petroleum law and management of petroleum revenue. The authorities are working with FAD in these efforts. In the area of tax administration, my authorities are addressing revenue leakages. They plan to launch a robust anti-smuggling campaign and comprehensive audits starting with the largest 20 tax payers, including banks, logging and insurance companies. In addition to these new measures, my authorities plan to maintain the tax reforms introduced last fiscal year.
On expenditure, my authorities are creating fiscal space to boost public investment. This year, the budget allocates sufficient resources to capital projects in order to meet the government’s infrastructure investment program. Special attention is given to the restoration of power, rebuilding of roads and ports as well as investing in youth empowerment while augmenting capacity for national development. In the medium term, the authorities intend to complete the Mount Coffee hydroelectric plant and link it to the West African Power Pool to provide cheaper electricity. In this respect, my authorities introduced key fiscal rules. They intend to spend no more than 34 percent of the budget on personnel costs and no more than 15 percent of capital expenditures on administrative overheads, among other things.
The thrust of monetary policy in 2012 and over the medium term is to maintain price stability in order to support the government’s objective of achieving sustainable economic growth and broad-based development. At the moment, efforts are being made to widen the scope of monetary policy instruments available to the CBL to enhance the potency of monetary policy, including the introduction of a Treasury-bill market.
Financial sector policy
In the recent past, the CBL has endeavored to transform the Liberian financial landscape and enhance the soundness of the financial system. This has involved improving access to financial services and taking steps to ensure a relatively stable exchange rate, while strengthening the reserve position of the CBL. Going forward, financial sector policy will continue on the path of reform to promote viability of the banking system, with emphasis on further improving the credit environment and reducing the level of non-performing loans. Furthermore, work will focus on deepening the financial system, increasing private sector access to credit, strengthening consumer protection and consolidating the renewed confidence in the banking system.
The monetary authorities will continue to strengthen the capacity of the regulation and supervision department in critical skills such as risk-based supervision, information technology-based examinations and international financial reporting standards. Already work is in progress to develop a framework for stress testing and conducting macro-prudential analysis of the banking sector as part of efforts to strengthen early warning tools and addressing issues of systemic risk on a more proactive and timely basis.
In promoting financial inclusion, the CBL is committed to supporting the establishment of specialized rural community financial institutions in partnership with interested banks. These institutions will be owned by the local communities and would assist in mobilizing local savings while providing the much needed financial services to the respective communities. In addition, the CBL has been working with credit union movements in Liberia, leading to the hosting of a national congress for credit unions in April 2012 where the internal governance policies and procedures of the Liberian Credit Union National Association were revised and adopted.
Debt management policy
In spite of the post HIPC low risk of debt distress, improved public debt management remains a priority to the authorities. They remain committed to observing the rules governing debt and to never again accumulate an unsustainable debt burden. To meet the required levels of investment in order to fully implement the Agenda for Transformation and position Liberia on a trajectory to a middle income country by 2030, the government intends to pursue opportunities to borrow within sustainable levels. The borrowing will be done responsibly in accordance with the following fiscal rules:
All borrowing must be undertaken for the purposes of investment, consistent with the public sector investment plan;
Total cumulative outstanding debt stock, including domestic debt, must not exceed 60 percent of previous calendar year’s GDP as contained in the PFM Regulation; and
Prior to new borrowing being undertaken a debt sustainability analysis must be carried out and presented to the debt management committee to ensure debt rules are not breached.
Meanwhile, all efforts will be made to ensure that all borrowing is done on concessional terms consistent with the Fund’s concessional threshold. However, non-concessional financing for certain projects may be considered in consultation with the Fund.
My Liberian authorities remain mindful of the challenges ahead and are committed to proceed with their five-year medium term development plan, the Agenda for Transformation and the long term strategy, Liberia Rising 2030 to attain middle income status. In this regard, they are resolute in their commitment to implement appropriate revenue enhancing measures to mobilize substantial resources to complement external funding to finance their development plan. However, given the large financing gap and the need for implementing sound macroeconomic policies, my authorities consider the Fund’s and other development partners’ support essential to achieving their post-conflict development needs.