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Liberia: Third Review Under the Extended Credit Facility Arrangement and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance criteria—Debt Sustainability Analysis Update

Author(s):
International Monetary Fund. African Dept.
Published Date:
July 2014
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Key Assumptions Under the Baseline Scenario

1. The Debt Sustainability Analysis (DSA) update indicates that Liberia continues to have a low risk of debt distress. Although recent external debt accumulation, on a contractual basis, has been faster than initially envisaged, the pace of disbursements has been slower than anticipated. Compared with the last DSA update, the medium-term external debt profile (2014–17) is somewhat less favorable due to a relatively slower real GDP growth and a larger stock of restructured loans. However, the long-term debt profile is more favorable, with the improvement coming from higher nominal GDP after 2020. External debt would rise to 17.6 percent of GDP in FY2014, from 12.2 percent of GDP in FY2013, and would peak at 32.8 percent of GDP in FY2021, while in the previous update external debt would peak at 34.2 percent of GDP by FY2022. Public sector debt would rise from 13.7 percent of GDP in FY2013 to 20.1 percent of GDP in FY2014, peaking at 34.9 percent of GDP in FY2021 (compared with 39.3 percent in the previous update).

2. The analysis reflects the impact of the following changes compared with the previous DSA update.

  • GDP growth and current account developments. Compared with the December 2013 DSA update, the medium-term real GDP growth forecast has been revised slightly downward, mainly due to delays in mining activity, trends in world iron-ore prices and unresolved issues in the forestry sector. At the same time, higher projected inflation is raising nominal GDP.2 In the long run, the effect of higher inflation on nominal GDP dominates. The current account deficit is projected to only gradually narrow over the projection period, reaching about 15 percent of GDP by 2030. It will continue to be sustainably financed by FDI and private flows associated with mining and forestry concessions.

  • Restructured Loans. The Government of Liberia has completed the restructuring of pre-HIPC external debt with several creditors including EIB/EU, ECOWAS, BADEA,3 OFID, Kuwait, Saudi Arabia, ADB-NTF4 and France. Overall the terms of the restructurings are less favorable than previously assumed. As a result, the end-June 2013 external debt stock (US$123 million, excluding loans from the IMF and Taiwan, Province of China) is US$26 million higher than envisaged in the previous DSA. There has been no progress on the restructuring of the Taiwanese loan.

  • New external loan agreements. After initial delays in securing external financing, the amount of newly-contracted external loan agreements has increased significantly since FY2013. The amount of external post-HIPC loan agreements ratified before the current ECF program (which started in November 2012) is US$142 million. From November 2012 to December 2013, excluding the ECF credit, the sum of ratified loan agreements amounts to US$377 million, with another US$228.3 million signed external loan agreements pending ratification. The amount of loans under negotiation is about US$476 million, of which US$416 million will be from IDA and the AfDB on highly concessional terms. In line with this rapid contracting of external loan agreements, the baseline macro-framework reflects higher borrowing and disbursements (US$3.5 billion, compared with US$2.9 billion in FY2014–FY2033 in the previous DSA update).

  • Despite the rapid increase in contracted external loans, actual disbursements have been slow. Excluding the ECF credit, only US$45 million (out of US$519 million ratified post-HIPC loan contracts) has been disbursed by the end of FY2013. Therefore, in the baseline scenario, although we assume that total disbursements will increase by about 20 percent between FY2014 and FY2033 compared with the amount assumed in the last DSA update, most of the increase is assumed to materialize after FY2023 (total disbursements between FY2014 and FY2022 are now assumed to be close to US$1.5 billion compared with US$1.4 billion in the previous DSA update).

Public and External Debt Sustainability

3. The external debt profile is less favorable than in the previous DSA update in the medium term but more favorable in the long term. Compared with the last DSA update, due to slower real GDP growth and a larger stock of restructured loans, all external public and publicly-guaranteed (PPG) debt indicators (including the debt-to-GDP ratio) are now higher during 2014–17. The public sector debt-to-GDP ratio is also higher during the same period (Figures 1, 2 and Tables 1, 2). In the long term, however, despite the assumption of larger disbursements, the projected higher nominal GDP leads to more favorable external and public debt-to-GDP ratios.

Figure 1.Liberia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2014–341

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Terms of borrowing shock; in c. to a Terms of borrowing shock; in d. to a Terms of borrowing shock; in e. to an Exports shock and in figure f. to a One-time depreciation shock. In the alternative scenarios of external DSA, historical average and standard deviation of major variables are calculated by using the data from 2008 due to the structual change of the economy.

Figure 2.Liberia: Indicators of Public Debt Under Alternative Scenarios, 2014–341

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.

2/ Revenues are defined inclusive of grants.

Table 1.Liberia: External Debt Sustainability Framework, Baseline Scenario, 2011–34(Percent of GDP, unless otherwise indicated)
ActualHistorical 7/

Average
Standard 7/

Deviation
Projections
2011201220132014201520162017201820192014-2019

Average
202420342020-2034

Average
External debt (nominal) 1/13.211.812.217.622.626.328.329.730.731.826.0
of which: public and publicly guaranteed (PPG)13.211.812.217.622.626.328.329.730.731.826.0
Change in external debt2.0−1.40.35.55.03.62.01.41.00.1−0.1
Identified net debt-creatng fows1.3−0.41.43.54.13.21.91.11.0−0.10.5
Non-interest current account deficit36.831.731.427.212.140.840.527.822.628.830.116.715.217.8
Deficit in balance of goods and services95.684.572.172.066.448.839.440.939.319.617.4
Exports44.548.749.245.341.140.240.439.138.236.927.7
Imports140.1133.2121.3117.3107.589.079.880.077.556.445.1
Net current transfers (negative = inflow)−73.1−66.8−57.9−102.736.4−48.8−41.1−34.5−29.5−24.9−21.1−12.3−8.1−11.3
of which: official−28.4−26.8−25.2−24.2−22.8−21.0−19.2−17.3−15.6−10.9−7.1
Other current account flows (negative = net inflow)14.314.017.217.615.213.612.712.911.99.45.9
Net FDI (negative = inflow) 2/−34.1−30.4−28.8−17.818.3−36.5−35.5−23.4−19.0−25.6−26.9−15.6−14.5−16.9
Endogenous debt dynamics 3/−1.5−1.7−1.2−0.7−0.8−1.2−1.7−2.1−2.2−1.1−0.1
Contribution from nominal interest rate0.10.10.10.10.20.20.30.30.30.30.3
Contribution from real GDP growth−0.7−0.9−0.9−0.8−1.0−1.4−1.9−2.4−2.4−1.5−0.4
Contributionfrompriceandexchangeratechanges−0.9−0.9−0.4
Residual (3-4) 4/0.7−1.0−1.12.00.90.40.10.30.00.2−0.7
of which: exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 5/7.710.913.715.216.016.717.318.315.5
In percent of exports15.624.033.237.839.642.845.249.755.9
PV of PPG external debt7.710.913.715.216.016.717.318.315.5
In percent of exports15.624.033.237.839.642.845.249.755.9
In percent of government revenues27.847.061.466.870.074.979.788.263.9
Debt service-to-exports ratio (in percent)0.70.90.80.91.93.12.02.22.02.53.9
PPG debt service-to-exports ratio (in percent)0.70.90.80.91.93.12.02.22.02.53.9
PPG debt service-to-revenue ratio (in percent)1.31.61.41.83.45.53.43.93.54.44.4
Total gross financing need (Millions of U.S. dollars)42.828.855.394.3128.1141.9122.7130.3141.2116.7209.7
Non-interest current account deficit that stabilizes debt ratio34.833.131.135.335.424.220.627.429.116.615.3
Key macroeconomic assumptions
Real GDP growth (in percent)7.08.18.57.41.97.36.47.08.39.69.38.05.01.55.2
GDP deflator in US dollar terms (change in percent)8.87.03.66.62.43.13.64.03.73.63.53.62.93.73.2
Effective interest rate (percent) 6/1.20.81.21.10.30.81.31.21.11.11.11.11.11.11.1
Growth of exports of G&S (US dollar terms, in percent)25.026.613.617.516.41.80.28.712.89.910.67.34.35.76.3
Growth of imports of G&S (US dollar terms, in percent)15.610.02.416.825.46.91.1−7.90.713.79.64.05.25.14.7
Grant element of new public sector borrowing (in percent)43.543.048.252.248.148.147.248.148.148.1
Government revenues (excluding grants, in percent of GDP)23.726.327.723.122.322.822.922.321.720.824.222.4
Aid flows (in Millions of US dollars) 8/40.328.345.780.559.670.056.063.671.9119.5245.5
of which: Grants40.328.345.780.559.670.056.063.671.9119.5245.5
of which: Concessional loans0.00.00.00.00.00.00.00.00.00.00.0
Grant-equivalent financing (in percent of GDP) 9/6.85.86.24.84.64.43.42.93.3
Grant-equivalent financing (in percent of external financing) 9/65.058.363.165.262.263.168.974.470.9
Memorandum items:
Nominal GDP (Millions of US dollars)141416361840203422422494280131803596597312276
Nominal dollar GDP growth16.515.712.410.510.211.212.313.513.111.88.05.28.5
PV of PPG external debt (in Millions of US dollars)137.0210.0296.0369.4437.4520.5611.11077.91873.3
(PVt-PVt-1)/GDPt-1 (in percent)4.04.23.32.73.02.93.31.60.71.4
Gross workers’ remittances (Miilions of US dollars)
PV of PPG external debt (in percent of GDP + remittances)7.710.913.715.216.016.717.318.315.5
PV of PPG external debt (in percent of exports + remittances)15.624.033.237.839.642.845.249.755.9
Debt service of PPG external debt (in percent of exports + remittances)0.80.91.93.12.02.22.02.53.9
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Includes private financing flows, including for iron-ore related investment which was included in FDI in the previous DSA

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Includes private financing flows, including for iron-ore related investment which was included in FDI in the previous DSA

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.Liberia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–34(Percent of GDP, unless otherwise indicated)
ActualAverage 5/Standard 5/

Deviation
EstimateProjections
2011201220132014201520162017201820192014-19 Average202420342020-34 Average
Public sector debt 1/15.113.413.720.125.028.030.031.932.833.828.0
of which: foreign-currency denominated15.113.413.720.125.028.029.030.030.931.926.1
Change in public sector debt1.5−1.70.26.45.02.92.01.90.90.1−0.1
Identified debt-creating flows−113.91.30.42.74.92.72.31.80.8−0.2−1.1
Primary deficit0.43.31.4−0.42.03.66.75.05.15.14.25.01.9−0.10.9
Revenue and grants26.528.030.227.124.925.624.924.323.722.826.2
of which: grants2.81.72.54.02.72.82.02.02.02.02.0
Primary (noninterest) expenditure26.931.331.630.731.730.629.929.427.924.726.2
Automatic debt dynamics−2.0−2.0−1.0−0.9−1.8−2.3−2.8−3.3−3.4−2.1−1.1
Contribution from interest rate/growth differential−1.0−1.3−1.1−0.9−1.2−1.7−2.3−2.8−3.0−1.8−0.6
of which: contribution from average real interest rate−0.1−0.2−0.10.00.10.0−0.2−0.2−0.2−0.2−0.2
of which: contribution from real GDP growth−0.9−1.1−1.1−0.9−1.2−1.6−2.1−2.6−2.7−1.6−0.4
Contribution from real exchange rate depreciation−1.0−0.70.10.1−0.7−0.7−0.4−0.5−0.5
Other identified debt-creating flows−112.40.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)−112.40.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes115.4−3.0−0.23.70.10.3−0.30.10.20.31.0
Other Sustainability Indicators
PV of public sector debt9.213.316.016.917.718.919.420.417.5
of which: foreign-currency denominated9.213.316.016.916.717.017.518.515.6
of which: external7.710.913.715.216.016.717.318.315.5
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/0.93.82.34.27.96.86.86.45.93.82.0
PV of public sector debt-to-revenue and grants ratio (in percent)30.549.164.466.171.177.781.989.666.8
PV of public sector debt-to-revenue ratio (in percent)33.257.572.174.277.384.689.598.272.3
of which: external 3/27.847.061.466.870.074.979.788.263.9
Debt service-to-revenue and grants ratio (in percent) 4/1.61.73.02.04.67.26.95.47.18.27.9
Debt service-to-revenue ratio (in percent) 4/1.81.83.22.35.18.17.55.97.79.08.6
Primary deficit that stabilizes the debt-to-GDP ratio−1.15.01.2−2.81.82.13.03.23.31.80.1
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)7.08.18.57.41.97.36.47.08.39.69.38.05.01.55.2
Average nominal interest rate on forex debt (in percent)1.10.71.21.00.21.42.01.71.31.11.11.41.11.11.1
Average real interest rate on domestic debt (in percent)−8.0−5.2−6.2−6.51.44.91.33.11.30.41.0
Real exchange rate depreciation (in percent, + indicates depreciation)−8.0−5.11.0−3.94.10.4
Inflation rate (GDP deflator, in percent)12.08.17.69.53.712.513.110.59.18.57.510.26.16.96.5
Growth of real primary spending (deflated by GDP deflator, in percent)24.225.79.56.810.74.39.63.36.07.93.65.85.03.94.7
Grant element of new external borrowing (in percent)43.543.048.252.248.148.147.248.148.1
Sources: Country authorities; and staff estimates and projections.

It includes the gross debt contracted or guaranteed by the central government, excluding borrowing from the Central Bank of Liberia.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

It includes the gross debt contracted or guaranteed by the central government, excluding borrowing from the Central Bank of Liberia.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

4. Stress tests indicate that external and public debt would remain sustainable, even under extreme scenarios, although the baseline forecast is subject to significant risks (Figures 1, 2 and Tables 3, 4). On the upside, the baseline scenario only reflects the two mining projects currently under exploitation, although two additional major projects in their developmental phase are expected to come on stream around 2018. Furthermore, there is a potential for an upward revision of the GDP base,5 which would lower debt-to-GDP ratios. On the downside, delays in the coming on stream of new mining projects could also lead to lower growth and government revenues. In the stress test of the new probability approach, Liberia’s external public and publicly-guaranteed (PPG) debt-to-GDP ratio temporarily exceeds the threshold (Figure 4). However, given that other debt distress measures are well below the thresholds, staff’s view is that Liberia’s external risk rating should remain “low”. Public sector debt also continues to be sustainable, although the debt-to-GRP ratio and the debt-to-revenue ratio would increase in the long run under the scenario with a fixed primary balance (Figure 2 and Table 4).

Figure 3.Liberia: Indicators of Public and Publicly Guaranteed External Debt Under Sustained Borrowing Scenarios, 2014–341

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Terms of borrowing shock; in c. to a Terms of borrowing shock; in d. to a Terms of borrowing shock; in e. to an Exports shock and in figure f. to a One-time depreciation shock. In the alternative scenarios of external DSA, historical average and standard deviation of major variables are calculated by using the data from 2008 due to the structual change of the economy.

Figure 4.Liberia: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014–341

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Terms of borrowing shock; in c. to a Terms of borrowing shock; in d. to a Terms of borrowing shock; in e. to an Exports shock and in figure f. to a One-time depreciation shock

Table 3.Liberia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014–34(Percent)
Projections
20142015201620172018201920242034
PV of debt-to GDP ratio
Baseline10.913.715.216.016.717.318.315.5
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/10.912.613.614.415.516.420.422.4
A2. New public sector loans on less favorable terms in 2014-2034 210.915.018.620.722.323.727.326.5
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-201610.913.315.115.916.617.318.315.5
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/10.914.219.319.820.220.520.416.1
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-201610.913.214.915.716.417.018.115.3
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/10.96.4−8.4−5.9−3.4−1.25.510.7
B5. Combination of B1-B4 using one-half standard deviation shocks10.9−1.2−21.9−18.4−14.9−11.8−1.87.8
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/10.918.620.822.023.023.925.421.4
PV of debt-to-exports ratio
Baseline2433384043455056
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/2431343640435581
A2. New public sector loans on less favorable terms in 2014-2034 22436465157627496
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20162432373942444955
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/2436575862646669
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20162432373942444955
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/2416−21−15−9−31538
B5. Combination of B1-B4 using one-half standard deviation shocks24−3−57−48−40−32−530
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/2432373942444955
PV of debt-to-revenue ratio
Baseline4761677075808864
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/4757606369759892
A2. New public sector loans on less favorable terms in 2014-2034 247678290100109132110
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20164760666975808864
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/4764858690949867
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20164759656974798763
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/4729−37−26−15−62744
B5. Combination of B1-B4 using one-half standard deviation shocks47−6−96−81−67−55−932
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/4783929610311012288
Debt service-to-exports ratio
Baseline12322224
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/12322223
A2. New public sector loans on less favorable terms in 2014-2034 212223336
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-201612322224
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/12433345
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-201612322224
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/12311102
B5. Combination of B1-B4 using one-half standard deviation shocks123011−21
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/12322224
Debt service-to-revenue ratio
Baseline23534344
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/23534344
A2. New public sector loans on less favorable terms in 2014-2034 223445567
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-201623644444
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/23644455
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-201623634344
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/23522202
B5. Combination of B1-B4 using one-half standard deviation shocks234111−31
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/25855566
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/4646464646464646
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. Historical averages and standard deviations used in external DSA stress tests are derived from post-2008 data due to structural changes of the economy.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. Historical averages and standard deviations used in external DSA stress tests are derived from post-2008 data due to structural changes of the economy.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 4.Liberia: Sensitivity Analysis for Key Indicators of Public Debt 2014–34
Projections
20142015201620172018201920242034
PV of Debt-to-GDP Ratio
Baseline1316171819192018
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages13121198845
A2. Primary balance is unchanged from 20141314151516162035
A3. Permanently lower GDP growth 1/1316171820202327
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015-20161316181920212321
B2. Primary balance is at historical average minus one standard deviations in 2015-20161313131415161816
B3. Combination of B1-B2 using one half standard deviation shocks1313121315161817
B4. One-time 30 percent real depreciation in 20151320191919191917
B5. 10 percent of GDP increase in other debt-creating flows in 20151321222223232319
PV of Debt-to-Revenue Ratio 2/
Baseline4964667178829067
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages4949413735321918
A2. Primary balance is unchanged from 201449585860646888132
A3. Permanently lower GDP growth 1/496567738186102103
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015-201649656975838810082
B2. Primary balance is at historical average minus one standard deviations in 2015-20164954505663697962
B3. Combination of B1-B2 using one half standard deviation shocks4952465361667863
B4. One-time 30 percent real depreciation in 20154982767679808365
B5. 10 percent of GDP increase in other debt-creating flows in 201549858589949810273
Debt Service-to-Revenue Ratio 2/
Baseline25775788
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages25765674
A2. Primary balance is unchanged from 201425775789
A3. Permanently lower GDP growth 1/25776799
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015-201625776799
B2. Primary balance is at historical average minus one standard deviations in 2015-201625765788
B3. Combination of B1-B2 using one half standard deviation shocks25765788
B4. One-time 30 percent real depreciation in 201525109791010
B5. 10 percent of GDP increase in other debt-creating flows in 201525886798
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

5. While not an immediate concern for debt sustainability, the rapid pace of new borrowing might trigger a change in the external risk rating if it were to be sustained over the medium term. In an alternative scenario, we assume that the government will sign another US$1.1 billion in new loan agreements (which is the same as the total amount of loan agreements that have been signed or in pipeline since the start of the current ECF program) from FY2016 to FY2018 so that the total amount of newly-signed external loans would be US$2.2 billion between FY2013 and FY2018. Whether this “sustained borrowing scenario” will result in a change of external risk rating depends on whether the faster contracting of loans would lead to an increase in total disbursements. In the baseline scenario, we assume that all loans signed before FY2015 will be disbursed before FY2021. Therefore, in the “sustained borrowing scenario” we assume all loans signed between FY2016 and FY2018 will be disbursed before FY2024 and that no other new loans will be signed from FY2019 to FY2024. This implies an increase of total disbursement by US$0.45 billion, compared with the baseline scenario. As shown in Figure 3, this will result in a change in the external risk rating from “low” to “medium”.

6. The authorities agreed with the assessment that external risk rating remains to be low. They also emphasized that the large amount of new borrowings will finance the important infrastructure projects that contribute to addressing the country’s binding growth constraints.

Conclusion

7. The updated DSA shows that Liberia’s debt profile remains sustainable under most scenarios. Under the ECF-supported program, the government’s borrowing plans are consistent with implementation of its poverty reduction strategy, the Agenda for Transformation. In particular, the government is actively seeking financing for strategic projects in the energy and transportation sectors in order to address the main binding constraints to broad-based economic growth. However, it must also be noted that, if the fast borrowing pace continues, a change in the external risk rating might be triggered. This highlights the need for the authorities to prioritize new financing for strategic projects and on highly concessional terms to ensure that public debt remains sustainable. Further strengthening project preparation, procurement, and monitoring would also help ensure that public investment is of high quality.

This document is the annual update of the analysis presented at the time of the current ECF request in November 2012 (IMF Country Report No. 12/340).

At the time of the 2nd ECF review staff lowered projected inflation over the long-run to reflect the lower utility costs associated with the execution of infrastructure projects in the energy sector. The projected inflation path has been revised upward to take into account real appreciation pressures from higher mining exports and to ensure consistency of long-run U.S. dollar inflation with the growth of the U.S. GDP deflator.

BADEA: Arab Bank for Economic Development in Africa.

ABD-NTF: African Development Bank-Nigeria Trust Fund.

A revised set of national accounts for 2008–13 is expected to be published by the end of 2014.

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