- Annalisa Fedelino
- Published Date:
- October 2010
Liberia has historically been a very centralized country.1 Political decision making was primarily concentrated in the capital Monrovia, creating a significantly skewed economic and political system that alienated much of the population in the outlying counties—one of the root causes of Liberia’s civil wars. Increased inclusion and participation by local communities has been viewed as key to sustaining peace and stability since the return to political normalcy in 2005. Accordingly, a move toward decentralized government is perceived as a way to reverse and safeguard against the past imbalances of centralized decision making.
Liberia is a unitary country with a complex structure of subnational administrations. Below the existing 15 counties, a multitude of districts, cities, townships, and towns exist, with no clearly defined responsibilities. The territorial division into counties plays a central role in the structure of the state and the organization of the legislature.2 The functions and competencies of all the various government entities are not clearly defined—the constitution is silent on their nature and purposes, although it does contain provisions on appointing or electing administrators (counties are the only subnational government entities mentioned in the constitution). Similarly, the relationships between different layers of local government remain unspecified. Traditional structures operate alongside modern administrative entities. Paramount, clan, and town chiefs are explicitly mentioned in the constitution as holding elected positions. The chiefs perform an essentially consultative role to the appointed officials at the county and district levels; they are also responsible for law and order under customary (traditional) law.
|Type of government||Unitary|
|Population (million, 2007)||3.5|
|Area (million km2)||1.0|
|Levels of government||3|
|IMF technical assistance mission on||2009|
Some political players are advocating ambitious plans for fiscal decentralization. The Governance Commission (an independent advisory body appointed by the president) has prepared a draft “National Policy on Decentralization and Local Governance.” This document lays out a strategy for decentralization with far-reaching taxation and spending powers for counties, requiring complex administrative and political arrangements. However, the implementation of fiscal decentralization faces significant challenges. Basic central government functions are being reestablished and strengthened, but institutional capacity remains weak. The legal framework and the supporting systems and procedures would require significant changes to support successful decentralization. In addition, severe infrastructure limitations, including the absence of paved roads, electricity, and telecommunications in vast parts of the country, make provision of public services at the local level (let alone full-fledged fiscal decentralization) particularly challenging.
IMF staff provided technical assistance on fiscal decentralization in early 2009. Although recognizing that fiscal decentralization is primarily a political choice, advice was premised on the consideration that Liberia’s progress toward macro-economic stabilization should not be jeopardized by ill-designed and hastily implemented decentralization. On this basis, IMF staff advised a sequenced framework based on three stages:
- In Stage 0, the government should take stock of current administrative arrangements with a view to streamlining them.
- In Stage 1, the current roles and responsibilities of subnational entities would be clarified and strengthened. This process would allow increased deconcentration,3 whereby a stronger government presence at the county level would yield significant gains; it would allow local administrations to build needed capacity for broader fiscal responsibilities over time; and it would help address perceptions that the government is not sufficiently taking care of local needs.
- In Stage 2, the effective devolution of some spending and taxation powers would take place, and fiscal decentralization would be finally implemented. A move to the second stage would be difficult (if not unwise) without first implementing the steps identified in the first stage.
There are currently 15 counties in Liberia.4 They differ in population size and density, geography, and ethnic composition. About one-third of the 3.5 million citizens of Liberia are concentrated in Monrovia. All county officials are appointed by (and directly accountable to) the president, with the role of representing the president and coordinating government activities. On this basis, virtually no officials are directly accountable to local citizens.
Relative to its size and population, Liberia’s current administrative structure appears unnecessarily complex. The number of local governments and officials (which increased during the 1990s as a way of extending political patronage) seems disproportionate to the size or population of some counties. As a result, some counties receive more central funding, in proportion to their size, than larger ones, and are endowed with more staff. Certain of these issues are being addressed by a new legislative proposal (Liberia, Ministry of Internal Affairs, 2009), which, if implemented, would significantly streamline current administrative structures. The elimination of redundant government levels would free considerable resources that could then be used to strengthen the functions and responsibilities of those remaining.
The rationalization of county and subcounty administrations should be an integral part of any fiscal decentralization strategy—some current local jurisdictions are too small to be viable, and will be even less so when decentralization strains their capacity to undertake newly devolved functions. The prospect of increased responsibilities for local governments under fiscal decentralization could help counteract possible political resistance to administrative reorganization. Therefore, the planned fiscal decentralization reform provides an opportunity to review current mechanisms of allocating staff and spending to the local level by ministries, and rationalize county-level staffing assignments by ministries.
Strengthening Subnational Roles before Decentralization
At present, fiscal operations at the county level follow a limited deconcentrated model. Counties have virtually no taxing powers, and all county-level spending is decided upon and managed by line ministries at the center. Some elements of fiscal decentralization are nonetheless taking place, through the assignment of limited spending autonomy through the County Development Fund (CDF; discussed below). The prospective assignment of social contributions to affected communities under concession agreements in resource sectors (mining, oil exploration, forestry, and agriculture) also implies some degree of spending autonomy outside current fiscal arrangements.
The CDF is a first attempt at allowing counties a limited degree of spending autonomy. It is financed by appropriations from the budget, and will progressively increase to reach US$3 million in the 2008/09 budget (about 0.3–0.4 percent of GDP). The CDF is intended to finance small investment projects identified at the county level. Allocations to the 15 counties have been made in equal amounts, regardless of their population size or needs. Delays are occurring in spending the allocated CDF allotments, despite the development needs of counties, because of a number of factors: (1) lags in identifying and executing projects; (2) inadequate project selection (in some cases, projects are started and then abandoned because of insufficient planning and prioritization); and (3) problems in procuring construction supplies.5
Subnational entities have virtually no taxing powers; all taxes and duties under the 2000 Liberia Revenue Code are levied and collected by the central government.6 Under the code, local authorities can, however, levy fees and charges in exchange for services provided. The legal basis for cities’ fees and charges needs clarification—uncertainty over municipal taxation is unhelpful, both to business and traders, and to the municipalities themselves.
In contrast to the centralization of taxes and levies, concessions in natural resource sectors allow for some degree of revenue decentralization, but under widely differing arrangements:
- In mining, concession agreements now regularly include an annual “social contribution” (fixed annual payments) for projects in affected communities (which, nonetheless, are not legally defined and do not necessarily match a subnational jurisdiction). A similar payment is contained in new petroleum exploration agreements.
- In agriculture, new concession agreements include provisions on “community development funds”—again, destined for affected communities—although the implementation framework has not yet been worked out.
- Forestry concessions provide the only example of formal tax-sharing arrangements. The law mandates that land rental fees be shared among the national government, all counties, and affected communities in fixed proportions. In addition, provisions exist for payments of social contributions to affected communities.
The public financial management arrangements in counties remain highly centralized and based in Monrovia. Each line ministry’s representation in the counties deals directly with its own headquarters offices. Given that most financial transactions take place in Monrovia, county-based staff have to travel frequently to the capital in pursuit of their transactions (these trips may take up to a few days, if not weeks, with the added disadvantage that staff are away from their jobs for long periods). Apart from the delivery of salaries, now paid in county headquarters, and the revenue collectorates, directly answerable to the Revenue Department in Monrovia, the Ministry of Finance plays no role in county-level financial transactions. Special county-level arrangements, outside the standard budget execution procedures, have been set up for the handling of transactions related to CDF projects. This centralized approach, while essential to reestablishing central government control in the early postconflict years, will be at odds with fiscal decentralization—and with the increased provision of services at the county level.
Against this background, IMF staff advised the following:
- The Ministry of Finance should start collecting and consolidating data on fiscal operations at the county level, to better inform the public debate on decentralization and increase transparency in government processes. To this end, the budget document should include an indicative breakdown of spending by county for all ministries operating at the county level, and county-level spending should be included in the published quarterly fiscal reports.
- Until devolution of spending is defined, there should be no new assignments of revenue, or of revenue instruments, to subnational levels of government. The government’s current program of tax reform contains no elements of, and has no implications for, fiscal decentralization—and this is appropriate in the short term.7
- Subnational governments should be allowed limited access to fees and duties, as contemplated by the Liberia Revenue Code. A degree of access would help to begin building capacity in the administration of own-revenue sources. Clarifying regulations should also be issued to address uncertainties in the legal framework.
- There is also scope to rationalize the social contribution schemes under concessions, given that these schemes represent de facto revenue assignments for communities and counties. These schemes should approximate the fixed contribution now customary in mining concessions. For example, this could be achieved without disturbing the terms of existing agricultural concessions, by arranging a swap between the central government and the affected communities.8
- Separate revenue-sharing schemes should be avoided. The scheme for distributing forestry land rentals across counties is, thus far, the only revenue-sharing scheme. There is a risk that other such schemes could be developed for other resource sectors, operating on different criteria for distribution, and with different implementation mechanisms. This forestry scheme could be viewed as the core of a future general equalization scheme to ensure equitable distribution of a portion of public resource revenues across counties.
- The focus on increased transparency of budgetary spending at the county level provides an additional opportunity for the Ministry of Finance to strengthen its presence in the counties. County treasuries could be established, which would provide treasury services to the county operations of line ministries.9 These treasury offices would help to ensure efficient use of cash resources and provide regular reporting on county financial transactions. The presence of a local treasury would reduce the need for employees of line ministries to make frequent trips to Monrovia in pursuit of transactions. County treasuries should be implemented in a phased manner, starting with the five counties in which the Central Bank of Liberia has branches. Rollout to other counties could be accomplished gradually as accessibility improves and demand increases.
Toward a Framework for Fiscal Decentralization
Fiscal decentralization is a political choice for the Liberian government. In the view of the 2009 IMF mission, creating new political and administrative structures would be costly; hence, the rationalization and streamlining of existing ones would be critical to strengthening their capacity. As county-level capacity increases, the government should experiment with a gradual allocation of expenditure responsibilities. In addition, asymmetric decentralization could be considered, initially giving more competencies to the counties and municipalities that perform better.
Devolution of spending would initially be limited, so there would be no initial need for it to be accompanied by significant devolution of taxes—with the possible exception of the property tax and small-scale fees and levies. Property tax collections in Liberia are currently well below potential; reform of the tax should accompany steps toward its decentralization. Minor fees and levies, including business license and registration fees, are also suitable for decentralization.
Although Liberia holds the promise of significant natural resource revenue over time, these revenues should not be subject to direct sharing arrangements with subnational governments. Resource revenue-sharing is difficult; the administration of royalties, taxes, and other resource revenue instruments is often complex and more efficiently performed at the national level. In addition, resource revenues are unstable: local governments cannot bear the risk of volatility or delay. Finally, the accident of geology or geography should not determine the distribution of revenues from national resources, which would lead to huge horizontal imbalances among areas of the country.
Because decentralization will commence with limited spending assignments to local governments, a transfer system should be the main basis for financing subnational operations. A transfer system should not be designed in isolation but should complement the responsibilities and own-source revenues chosen to be assigned to subnational governments. Simple criteria, such as per capita allocations, could guide the initial formulation of transfers; the current large variance in per capita spending per county would suggest that objective indicators of costs and needs should be used.
Establishing the appropriate legal framework for fiscal decentralization will likely take several years. The legislative timetable will need to be taken into account when preparing the timetable for decentralization in Liberia. Specialized public financial management regulations will also have to be drafted to meet the needs of the new local governments.
Finally, all fiscal aspects of decentralization will need to be managed by the Ministry of Finance, including budget preparation, disbursement of transfers, and collection and consolidation of financial reports, as well as fiscal oversight arrangements, ensuring adherence to public financial management rules and regulations and control of borrowing. These responsibilities will require the establishment of a specialized unit at the Ministry of Finance to handle intergovernmental fiscal relations.
Since independence in 1847, the government has been mainly composed of an elite group of descendants of the original African American settlers. Located in the capital Monrovia, the central government was in charge of all political and economic matters. A number of local agents, distributed across the territory, had the task of interacting and mediating with the local population, in turn largely self-organized according to preexisting communal rules.
The Upper House is organized according to county lines, with two senators per county (largely following the model of the United States Senate).
Deconcentration refers to internal managerial and financial assignment of responsibility in the execution of a ministry’s agents at the local level. Accountability, under deconcentration, remains in the hands of the parent ministry.
In 1833, Liberia was composed of three counties and the hinterland; over time, several new counties were created, especially in the 1990s.
Aware of these shortcomings, the president alluded to changes in the CDF procedures in her Annual Message in January 2009, although details are not known.
The Liberia Revenue Code consolidated all Liberian taxes. The government has proposed a comprehensive program of tax reform, and prepared draft legislation expected to go before the legislature in the first half of 2009. For a summary of the main taxes in Liberia, see Appendix I of the code.
The government has proposed a comprehensive program of tax reform, and prepared draft legislation that was expected to go before the legislature in the first half of 2009.
The percentage of sales contribution to a CDF could be transferred to the central government; in return, communities could receive a fixed payment from the government (as long as production continues) approximating the estimated value of the contribution, minus a discount for the assumption of price and volume risk by the government.
The notion of local treasuries is not new. They can be found in most countries that have not yet established devolved governments. Until recently, Kenya provided a long-standing example of such treasuries. Regional treasuries are also a common feature of many Francophone countries in West Africa, where they provide common financial services (budgetary control, centralized payment, and accounting) to all regional offices of line ministries, as well as local revenue collection, and report directly to the Ministry of Finance.