A. Introduction

1. Liberia experienced strong economic growth in the 1960s and 1970s as a result of active foreign investment and an export boom. Exploitation of local iron ore and rubber plantations, together with smallholder agriculture, formed the core production activities. GDP per capita reached US$500 (in 1992 prices) in 1980. Following the military coup in 1980, a substantial decline in Liberia’s external terms of trade, and deepening economic mismanagement, Liberia’s economic situation deteriorated significantly. Additional external debt was rapidly accumulated in the 1980s, despite little increase in productive investment and growing exploitation of timber, and public sector debt arrears began to accumulate, as relations broke down with multilateral and bilateral creditors. Civil disturbances and rebel incursions in the late 1980s weakened the economy further.

2. The civil war of 1989–96 resulted in a substantial destruction of infrastructure and the flight of human and financial capital. Real GDP declined to one-tenth of its prewar level. A peace agreement was signed in August 1996, paving the way for the disarmament of combatants and democratic elections in which Charles Taylor was elected President in July 1997. Economic activity rebounded strongly after the peace agreement, causing GDP to double in 1997 and to grow by 20–30 percent annually during 1998–2000. Timber and smallholder agricultural production grew rapidly, and rubber production recovered. However, the infrastructure remained in a badly damaged state, with a depleted road network, destroyed rail connections, very little electricity generation and distribution, and no running water or sanitation facilities.

B. Production

3. The strong postwar recovery slowed sharply in 2001. Based on provisional data, the annual rate of GDP growth is estimated to have fallen to about 5 percent in 2001 and around 3 percent in 2002 (Figure 1). Real GDP in 2002 was still only 47 percent of its prewar level, and nominal GDP per capita is estimated at US$169 in 2002 (Appendix Table 1).¹

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Liberia: Contributions of Major Sectors to Real GDP Growth, 1998-2002

(In percent)

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Sources: Liberian authorities; and Fund staff estimates.

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4. The stalling of the recovery in the last two years has been primarily a consequence of domestic factors. Growth and investment have been constrained by the ongoing conflicts in the north and west of the country, the effects of political and security concerns, weak economic policy implementation and market restrictions, dilapidated infrastructure, and the mismanagement of the public sector, reflecting poor governance and limited domestic and external revenue. Of particular importance has been the flight of large parts of the population (and, hence, disruption of production) from the regions affected by rebel activities, largely attributed to the Liberians United for Reconciliation and Democracy (LURD), and responses by the Liberian armed forces. External factors were also adverse in 2001, particularly the weak international rubber prices, but there was some reversal in 2002. UN sanctions on diamond exports contributed marginally to the slowdown in growth, and Liberia’s growing international political isolation deterred investment.

5. On a sectoral basis, the slowdown in growth occurred in almost all sectors, except forestry and services. Activity in the agriculture and fisheries sector and manufacturing sectors declined by 4 percent and 24 percent, respectively in 2002, primarily reflecting the intensifying conflicts in Lofa County. Production of rice, cocoa, coffee, and rubber was especially hard hit, with rice output down by 15 percent and rubber down by 12 percent. Output of cassava, however, rose by 3 percent. The mining sector experienced a substantial fall in production, partly because of UN sanctions, and output declined by about 70 percent in two consecutive years.

6. The forestry and services sectors showed a recovery in growth in 2002. While the forestry sector was affected in the north and west of the country by the conflict- with several concessions destroyed and others unsafe to operate—increasingly intensive logging activities in the southeast more than offset reduced production in the war-affected areas. As a result, net output in the timber sector is estimated to have grown by 20 percent in 2002. Services also experienced a higher growth, reflecting the recent boom in mobile phone services.

C. Prices and Employment

7. After a period of relative price stability, in which inflation kept to about 3–5 percent per annum, consumer prices rose sharply from the middle of 2001, increasing by 13 percent between May and August of that year and again by about 1 percent per month through 2002. (Appendix Table 5). The recorded 12-month rate of consumer price inflation reached a peak of 24 percent in March 2002, before decelerating through most of the remainder of the year. Food and medical and transportation services were particularly volatile. The burst of price increases was mainly associated with the sharp fall in the Liberian dollar in terms of the U.S. dollar of 20 percent between March and July 2001 (with critical prices, such as of rice and petroleum, subject to a regulated price ceiling expressed in U.S. dollars). Further depreciation of the Liberian dollar of about 24 percent in terms of the U.S. dollar between December 2001 and September 2002 contributed to additional price pressure, moderated by the temporary recovery of the Liberian dollar in the last quarter of 2002.

8. In the two years to end-December 2002, consumer prices rose in total by 33 percent, while the Liberian dollar depreciated by 34 percent in terms of the U.S. dollar. The 12-month rate of consumer price inflation was recorded as 11 percent in December 2002.

9. Total employment, as measured by the Ministry of Labor, reached 630,000 at end-2001, of which 507,000 people were in the informal sector (see table below). Apart from the estimated rise in informal sector employment, only government and the transport sectors recorded increases between 2000 and 2001.

Liberia: Employment by Industry

Source: Ministry of Labor, Annual Report 2001.

Liberia: Employment by Industry

		End-2000	End-2001
Total employment		517,290	630,161
	Agriculture and fishery	11,700	12,519
	Bussiness services	900	819
	Manufacturing	1,070	1,059
	Mining	1,020	1,005
	Transportation	1,300	1,339
	Wholesale, retail and trade	49,900	39,020
	Social community services	13,000	10,000
	Construction	400	400
	Government	48,000	57,000
	Informal sector	390,000	507,000

Source: Ministry of Labor, Annual Report 2001.

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Liberia: Employment by Industry

		End-2000	End-2001
Total employment		517,290	630,161
	Agriculture and fishery	11,700	12,519
	Bussiness services	900	819
	Manufacturing	1,070	1,059
	Mining	1,020	1,005
	Transportation	1,300	1,339
	Wholesale, retail and trade	49,900	39,020
	Social community services	13,000	10,000
	Construction	400	400
	Government	48,000	57,000
	Informal sector	390,000	507,000

Source: Ministry of Labor, Annual Report 2001.

D. Fiscal Developments

Expenditure

13. Between 1998 and 2000, central government expenditure increased from US$58.2 million to US$83.6 million, in line with government revenues, which rose from US$59.5 million to US$85.3 million (Appendix Tables 6 and 7). With domestic recovery stalling and a deteriorating security situation, public expenditure subsequently stagnated, totaling US$80.1 million in 2002. At the same time, there were significant shifts in the composition of public expenditure: the share of current expenditure fell from 64 percent in 1998 to 57 percent in 2000, and then to 32 percent in 2002. Correspondingly, the share of capital expenditure, which includes many undocumented and apparently poorly scrutinized items, including expenditure related to national security, increased from 43 percent of total expenditure in 2000 (including 8 percent financed by external grants) to 68 percent in 2002, none of which was financed by external grants.

14. Total cash expenditure reached US$82.5 million in FY 2000/01 before declining to US$78.6 million in FY 2001/02 (see table below). This was accompanied by significant shifts in the composition of spending. While current spending declined by about one-half (from US$50.2 million to US$24.8 million), capital expenditure increased by about two-thirds, from US$32.3 million to US$53.8 million. Wages and salaries fell from US$20.9 million in 2000/01 to US$12.6 million in 2001/02, as wages were not fully adjusted for the depreciation of the Liberian dollar and the government had some limited success in eliminating “ghost” workers from the payroll.

15. This concentration on capital and security spending is set to continue in FY 2002/03. Reflecting an assumption that annual revenue will be sustained at the level of US$70 million, total spending is projected in the budget for 2002/03 at US$70 million, of which about one-half (US$34.5 million) is allocated to capital spending (including security), 21 percent (US$14.9 million) to wages and salaries, 19 percent to spending on goods and services, 9 percent to transfers and subsidies, 0.4 percent to interest and repayments on domestic debt, and 1.3 per cent to foreign debt service. However, in the first half of FY 2002/03, capital spending overshot its allocation substantially (reaching US$21.6 million), and spending on domestic debt amounted to US$3.6 million, perhaps reflecting the limited control of the government over its debt-servicing schedule because of the use of offsets against tax liabilities. Spending on wages and salaries was largely consistent with budgeted levels, at US$9.5 million, including some one-off payments in November and December. Overall, it appears likely that higher-than-budgeted capital spending will further crowd out wages and salaries for the current fiscal year.

Liberia: Economic Classification of Central Government Expenditure, FY 00/01 - FY 02/03 (In millions of US dollars)

Sources: Data provided by the Liberian authorities; and staff estimates.

^1/Includes expenditure related to national security.

Liberia: Economic Classification of Central Government Expenditure, FY 00/01 - FY 02/03 (In millions of US dollars)

			FY 00/01	FY 01/02	FY 02/03
					(Budget)
Current expenditure			50.2	24.8	35.5
	Wages and salaries		20.9	12.6	14.9
	Other goods and services		23.0	7.1	13.4
	Subsidies and grants		1.9	0.5	6.0
	Interest		4.4	4.6	1.2
		External	0.4	0.7	0.9
		Domestic	4.0	3.9	0.3
Capital expenditure 1/			32.3	53.8	34.5
	Internally financed		23.4	53.8	34.5
	Externally financed		8.9	0.0	0.0
Total			82.5	78.6	70.0

Sources: Data provided by the Liberian authorities; and staff estimates.

^1/Includes expenditure related to national security.

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Liberia: Economic Classification of Central Government Expenditure, FY 00/01 - FY 02/03 (In millions of US dollars)

			FY 00/01	FY 01/02	FY 02/03
					(Budget)
Current expenditure			50.2	24.8	35.5
	Wages and salaries		20.9	12.6	14.9
	Other goods and services		23.0	7.1	13.4
	Subsidies and grants		1.9	0.5	6.0
	Interest		4.4	4.6	1.2
		External	0.4	0.7	0.9
		Domestic	4.0	3.9	0.3
Capital expenditure 1/			32.3	53.8	34.5
	Internally financed		23.4	53.8	34.5
	Externally financed		8.9	0.0	0.0
Total			82.5	78.6	70.0

Sources: Data provided by the Liberian authorities; and staff estimates.

^1/Includes expenditure related to national security.

16. The shift in the structure of public expenditure has resulted in a substantial drop in funding for social services. For 2002, health expenditure is estimated at only US$2.7 million (little more than one U.S. dollar per capita), and education spending amounted to about US$2.0 million. While the Liberian government is not receiving any foreign aid directly, the numerous nongovernmental organizations operating in the country play an important role in the provision of social services.² Before the war, the government was managing about two-thirds of elementary education and one-half of secondary education. Following widespread destruction of schools in the war, and owing to the slow pace of reconstruction, the share of privately managed schools has increased considerably.³ The provision of public health services is hampered not only by lack of funding, but also by the lack of human resources. With 3 physicians per 100,000 inhabitants, the availability of qualified personnel is among the lowest in sub-Saharan Africa.

E. Debt

22. The stock of Liberian public sector debt amounted to approximately US$3.1 billion (550 percent of GDP) at the end of 2002. Of this, US$2.76 billion was external debt (Figure 2), one-fourth of which was owed to the IMF and one-fourth to other multilateral creditors (World Bank and African Development Bank). Domestic debt was estimated at US$0.32 billion as of September 30, 2002, most of which was outstanding to the central bank.

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Liberia: External Debt and Arrears

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Sources: Liberian authorities; and Fund staff calculations.

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23. Nearly all of Liberia’s external and domestic debt is in arrears. External arrears amounted to US$2.5 billion at end-2002 (Figure 2), and domestic arrears were estimated at over US$0.3 billion, including arrears to the Central Bank of Liberia (US$239 million), suppliers (US$52 million) and commercial banks (US$8 million). Arrears to public employees amounted to about eight months of wages and salaries at end-2002.

F. Monetary Developments

24. Deficiencies in the reporting and compilation of monetary data preclude a full assessment of monetary developments. In particular, inconsistencies between returns from the commercial banks and the CBL concerning accounts held at the CBL, and computational errors relating to currency in circulation, have prevented construction of a coherent monetary survey for 2000. For 2001 and 2002, although these problems persist, some provisional reconciliation has been possible for selected months.

25. The provisional data for 2001 and 2002 indicate a rise in reserve money of 24 percent in the 12 months to March 2002 and 10 percent in the 12 months to September 2002 (Appendix Table 8). Liberian notes and coins in circulation (which constitute over 80 percent of reserve money) grew in the same periods by 20 percent and 14 percent, respectively.

26. The Liberian dollar-denominated component of broad money M2 (the sum of cash outside the banking sector and all deposits at the commercial banks) increased by 17 percent in the 12 months to September 2002, largely owing to the rise in currency in circulation. In the same period, the exchange rate of the Liberian dollar in terms of the U.S. dollar depreciated by 29 percent. Allowing for the effects of this on the Liberian dollar value of bank deposits denominated in U.S. dollars (which account for about 80 percent of total deposits), total M2 rose by 33 percent.⁴

27. The ability of the CBL to affect monetary conditions has been severely constrained by the central government’s fiscal position and the paucity of instruments to absorb private sector liquidity, which have required the CBL to cover most of the cost of its own operations through emissions of cash. The adverse cash income position of the CBL has stemmed in part from its low underlying profitability, resulting from the lack of potential for seignorage because of widespread dollarization and from the terms on which the CBL took over central government debt from its predecessor, the National Bank of Liberia, when it was liquidated. In addition, only a small proportion of the government’s debt to the CBL is being serviced. Thus, while the CBL’s overall income has been positive, its net cash income has been negative and its liquidity has deteriorated, reflected in increased holdings of central government debt and rising currency liabilities.

28. Liquidity management by the CBL has also been complicated by the extent of dollarization in the economy in the context of the substantial volatility of the Liberian dollar. Changes in the mix of commercial banks’ deposits of Liberian and U.S. dollars could give rise to substantial pressures on U.S. dollar liquidity at the CBL, which is generally low. Currently, deposits in the domestic banking system are predominantly designated in U.S. dollars, which are subject to a minimum reserve requirement of 18 percent. Although shifts in the composition of a single bank’s portfolio can probably be accommodated through policy responses by the central bank in Liberian dollars, systemic pressures may be more problematic.

29. A major constraint on effective liquidity management by the CBL has been the absence of instruments to absorb liquidity from the private sector. In June–July 2001, CBL raised reserve requirements for commercial bank deposits in Liberian dollars in two stages from 22 percent to 50 percent and lowered reserve requirements on U.S. dollar deposits from 22 percent to 18 percent. These changes, while expressly responding to pressures on the currency, also had the effect of improving the cash position and profitability of the CBL. However, further increases in required reserves, which are not remunerated, would bring into question the incentives for the banking sector to promote continued financial intermediation.

30. In the absence of other financial instruments for money market management, the CBL issued 90-day certificates of deposit (CDs) in December 2002 to offset the effects of a disbursement by CBL to depositors of the Liberia United Bank (LUBI), which had been liquidated in April 2000. These CDs, which raised L$55 million in Liberian dollars from four nonbanking companies, will not accrue interest, but they will be repayable in U.S. dollars at a fixed rate substantially more generous than that ruling at the issue date. The CBL estimates that the implied guaranteed rate of return in U.S. dollars will be 33 percent at an annualized rate. The CBL will be exposed to exchange rate risk on the dollar liabilities. The CBL also introduced a ceiling of 18 percent on the interest rate that can be charged on loans by the commercial banks (in either Liberian dollars or U.S. dollars), with a cap of 10 percent on the margin that can be obtained above the average cost of funds.

Box 2.

Liberia: Dollarization

The Liberian economy is highly dollarized.¹ Although the Liberian dollar is now the official currency, both U.S. and Liberian dollars are legal tender, and a substantial proportion of assets and liabilities are denominated in U.S. dollars. There are, however, no reliable estimates of the stock of U.S. banknotes in circulation or its volatility.

Until the mid-1980s, U.S. dollar notes were the principal medium of exchange in Liberia. Liberian coins, up to the value of one dollar, and officially trading at par with the U.S. dollar, comprised the only national currency. However, when political upheavals and chronic budgetary and balance of payments deficits in the 1980s resulted in a sharp decline in U.S. dollar notes in circulation, the government issued large amounts of coins including five-dollar coins, supplemented in 1989 by five-dollar notes. The share of Liberian dollar coins in broad money increased from 10 percent in June 1982 to 39 percent at end-1988.

As of September 2002, U.S. dollar loans and advances accounted for 95 percent of all commercial bank loans to the private sector, and U.S. dollar deposits accounted for 79 percent of all deposits (see figure).

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Share of US Dollar Deposits ^1/

(In percent of total deposits)

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Source: Central Bank of Liberia.^1/ The U.S. dollar-denominated deposits are converted at actual exchange rates.

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Monetary policy has to take special account of the wide circulation and joint legal status of these two currencies. For instance, transmission of monetary shocks into the price level may be very quick because of the sensitivity of the exchange rate to monetary developments and the dual pricing of essential commodities. Measurement and control of the broad money supply are complicated by the lack of data on U.S. banknotes in circulation² and the direct effects of exchange rate changes on the valuation of the money stock. The central bank itself may be particularly exposed to liquidity and profitability pressures under exchange rate changes or a shift in confidence in the domestic currency.

^1/ The U.S. dollar was the principal currency of Liberia until the end of the 1989–96 civil war. The Liberian dollar was officially fixed at par with the U.S. dollar during this period, but the informal market rate declined substantially below this level. The Liberian dollar traded at a rate more depreciated than L$40 to the U.S. dollar when it was officially floated in 1998. ^2/ An estimate produced for the CBL puts the possible level of the stock at US$12.36 million around 1990, but this estimate lacks a solid empirical foundation.

G. External Sector Developments

31. Liberia’s exchange and trade regime is relatively liberal, with no general system of import controls. However, the Liberian Petroleum Refining Corporation (LPRC) has the exclusive right to import petroleum products; and agencies other than the Liberian Cement Corporation require the approval of the President to import cement. Import tariffs average 11.8 percent. Although tariffs range from 0 percent to 100 percent, the maximum rate applies only to a few items such as importation of parts from dismantled nuclear reactors; the next highest rate (50 percent) applies only to firearms and other weapons; and a rate of 45 percent applies only to a redundant category (luxury liners). A customs user fee of 5 percent was suspended in 2001, and an export tax of 5 percent on the f.o.b. value of rubber and other agricultural goods was replaced with export taxes on processed and unprocessed goods of 0 percent and 2.5 percent, respectively. Liberia currently scores 5 on the Fund’s trade restrictiveness index on a scale of 1 to 10.

32. Although recorded exports grew very rapidly in U.S. dollar terms in the years following the end of the 1989–96 civil war (an annual average growth rate in 1997–2000 of some 68 percent), the growth rate moderated considerably in 2001 and 2002 to 6.4 percent and 15.1 percent, respectively. The value of exports of goods was US$147 million in 2002, consisting predominantly of timber (US$84.9 million) and rubber (US$57.4 million) (Figure 3, and Appendix Table 10). In volume terms, exports of rubber grew quite rapidly in 2001, but export value fell because of a sharp decline in the export price. In 2002, while the volume of rubber exports declined in line with domestic production, export values increased as the price of rubber partially recovered (see table below). The value of timber exported grew in both 2001 and 2002, reflecting larger volumes (with substantial growth in 2002), but was moderated by a fall in unit price in 2002. The share of timber in total export value increased markedly between 2000 and 2002 from 51 percent to 58 percent (Figure 3). The value of other exports (mostly cocoa, coffee, and scrap metal) grew rapidly in 2001 but less so in 2002. The external terms of trade fell quite sharply in 2001 but recovered partially in 2002, owing primarily to the impact of rubber price movements, offset by timber.

Liberian Exports, 2000–02

Source: Liberian authorities.

Liberian Exports, 2000–02

		2000	2001	2002
Rubber
	Value (millions of U.S. dollars)	57.1	54.0	57.4
	Volume (metric tons)	102,412	135,305	119,745
	Unit price (U.S. dollars)	557.5	399.1	479.4
Logs
	Value (millions of U.S. dollars)	60.9	69.2	84.9
	Volume (cubic meters)	578,721	607,064	809,474
	Unit price (U.S. dollars)	105.3	114.0	104.9
Other
	Value (millions of U.S. dollars)	2.23	4.72	4.96
Total value (millions of U.S. dollars)		120.3	127.9	147.2

Source: Liberian authorities.

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Liberian Exports, 2000–02

		2000	2001	2002
Rubber
	Value (millions of U.S. dollars)	57.1	54.0	57.4
	Volume (metric tons)	102,412	135,305	119,745
	Unit price (U.S. dollars)	557.5	399.1	479.4
Logs
	Value (millions of U.S. dollars)	60.9	69.2	84.9
	Volume (cubic meters)	578,721	607,064	809,474
	Unit price (U.S. dollars)	105.3	114.0	104.9
Other
	Value (millions of U.S. dollars)	2.23	4.72	4.96
Total value (millions of U.S. dollars)		120.3	127.9	147.2

Source: Liberian authorities.

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Liberia: Major Exports, 1999–2002

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Source: Liberian authorities; and Fund staff estimates.

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33. The U.S. dollar value of recorded imports grew to US$196.9 million in 2001, but fell back quite sharply to US$172.7 million in 2002, despite significant growth in the U.S. dollar value of GDP in that year (see table below, and Appendix Table 11). Import compression in 2002 was partly related to the deterioration of the security situation in the middle months of the year, which caused a postponement of major purchases by consumers and businesses of electrical generators and other manufactured items, as well as delays in petroleum imports. The closure of some of Liberia’s borders may also have hindered the import of some manufactures and of food items other than rice. In contrast, the value of rice imports grew sharply in 2002 and may have substituted for other food items.

Liberian Imports, 2000–02

(In millions of U.S. dollars)

Source: Liberian authorities.

Liberian Imports, 2000–02

(In millions of U.S. dollars)

		2000	2001	2002
Food and animals		53.9	61.3	56.6
	Of which: rice	27.5	27.6	38.1
Beverages and tobacco		6.3	6.1	6.5
Crude materials		6.6	3.8	3.1
Minerals, fuels, etc.		40.7	42.9	34.5
	Of which: petroleum	38.7	40.8	32.8
Animal and vegetable oil		3.3	2.5	3.4
Chemicals and related		14.3	8.7	8.6
Manufactured goods		20.8	18.4	11.4
Machinery and equipment		30.0	35.4	17.5
Miscellaneous manufactures		9.3	17.6	27.7
Total		185.2	196.9	172.7

Source: Liberian authorities.

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Liberian Imports, 2000–02

(In millions of U.S. dollars)

		2000	2001	2002
Food and animals		53.9	61.3	56.6
	Of which: rice	27.5	27.6	38.1
Beverages and tobacco		6.3	6.1	6.5
Crude materials		6.6	3.8	3.1
Minerals, fuels, etc.		40.7	42.9	34.5
	Of which: petroleum	38.7	40.8	32.8
Animal and vegetable oil		3.3	2.5	3.4
Chemicals and related		14.3	8.7	8.6
Manufactured goods		20.8	18.4	11.4
Machinery and equipment		30.0	35.4	17.5
Miscellaneous manufactures		9.3	17.6	27.7
Total		185.2	196.9	172.7

Source: Liberian authorities.

34. Export and import developments contributed to a sharp improvement in the recorded trade balance of some US$43 million in 2002, with an even sharper improvement in the external current account deficit on an accrual basis, including grants of some US$82 million. On a cash basis, however (Liberia has not serviced its external debt in recent years), the current account deficit narrowed by less because of a reduction in external interest on a commitment basis of US$23 million. Current transfers are estimated to have fallen sharply in 2001 given a serious decline in donor support. With the exception of a grant from the government of Taiwan Province of China in 2001 and gifts of rice, donor support in 2001 and 2002 was disbursed only to international and local NGOs. Current transfers rose by some US$12 million in 2002 as NGO inflows recovered somewhat and maritime receipts rose significantly. Net service exports also contributed modestly to the improvement in the external current account deficit.

35. As Liberia cannot currently borrow from abroad, the current account balance, along with a deficit on the capital and financial account was financed by the accumulation of further external arrears. Including the effect of the revaluation of nondollar arrears, public external debt rose by US$34 million and US$197 million in 2001 and 2002, respectively. Foreign direct investment continued its decline of recent years as investor interest continued to be low. Errors and omissions of about US$15 million in 2002 reflect the incompleteness of data collection on the balance of payments.

A. Commercial Banks

36. Liberia currently has four active commercial banks (Box 3). In light of the past record of frequent bank failures, credibility in the banking system is limited, with low levels of bank deposits in relation to currency, and limited bank lending to the private sector.⁵ The banks hold sizable unremunerated deposits with the central bank in excess of the statutory reserve requirements on Liberian dollar deposits of 50 percent.

37. As a part of efforts to strengthen the soundness of the banking system, the government liquidated the former central bank, the National Bank of Liberia, in 1999 and created the Central Bank of Liberia (CBL). It also tightened the governance of commercial banks through the New Financial Institutions Act of 1999. This Act increased substantially the amount of required paid-in-capital. CBL now supervises all banks and conducts both on-site examinations and off-site monitoring supervision on a regular basis. A full-set examination and a focused examination for each bank are carried out every year. Both the old Act and the new Act also stipulated liquidity requirements ranging from 5 percent to 25 percent on the deposits and other liabilities of the commercial banks. These are now set at a uniform rate of 15 percent for both U.S. dollar and Liberian dollar accounts under the liquidity requirement regulation.

38. The CBL has recently issued the following regulations pertaining to commercial banks:

• In June 2001, the reserve requirements for commercial banks were increased to 44 percent for Liberian dollar-denominated deposits from the previous level of 22 percent, and in July 2001 were further increased to 50 percent. The requirements for U.S. dollar-denominated deposits were reduced in June 2001 from 22 percent to 18 percent.

• In April 2002, a statutory maximum lending rate of 18 percent and a maximum spread of 10 percent over the average cost of funding were introduced.⁶

• Since September 2001, as a part of efforts geared toward combating money laundering, CBL issued two regulations: A Regulation Concerning the Physical Movement of Foreign Currency Banknotes,⁷ and a Regulation Concerning the Transfer of Foreign Currency.⁸

Liberia: Financial Status of Active Banks, 2001-2002

Sources: Central Bank of Liberia; and Fund staff estimates.

^1/In millions of Liberian dollars.

^2/In percentage of total assets, annually adjusted basis.

^3/Fees and charges include only service charges on deposits, commission and fees, and credit-related fees.

^4/Excluding the government’s arrears. The ratio is calculated against the total loan portfolio.

^5/Risk-adjusted basis, based on the CBL’s regulation.

Liberia: Financial Status of Active Banks, 2001-2002

		Quarter Ended September 2001		Quarter Ended September 2002
		Amount 1/	Ratio 2/	Amount 1/	Ratio 2/
Net interest income		58	6.3	66	5.4
Noninterest income		203	21.9	265	21.7
	Of which: Fees and charges 3/	145	15.6	154	12.6
Operating expenses		241	26.0	328	26.9
Provisions		61	6.6	49	4.0
Net income after tax		-41	-4.4	-46	-3.8
Non performing loans outstanding 4/		121	22.2	148	20.6
Capital adequacy ratio 5/			16		15

Sources: Central Bank of Liberia; and Fund staff estimates.

^1/In millions of Liberian dollars.

^2/In percentage of total assets, annually adjusted basis.

^3/Fees and charges include only service charges on deposits, commission and fees, and credit-related fees.

^4/Excluding the government’s arrears. The ratio is calculated against the total loan portfolio.

^5/Risk-adjusted basis, based on the CBL’s regulation.

View Table

Liberia: Financial Status of Active Banks, 2001-2002

		Quarter Ended September 2001		Quarter Ended September 2002
		Amount 1/	Ratio 2/	Amount 1/	Ratio 2/
Net interest income		58	6.3	66	5.4
Noninterest income		203	21.9	265	21.7
	Of which: Fees and charges 3/	145	15.6	154	12.6
Operating expenses		241	26.0	328	26.9
Provisions		61	6.6	49	4.0
Net income after tax		-41	-4.4	-46	-3.8
Non performing loans outstanding 4/		121	22.2	148	20.6
Capital adequacy ratio 5/			16		15

Sources: Central Bank of Liberia; and Fund staff estimates.

^1/In millions of Liberian dollars.

^2/In percentage of total assets, annually adjusted basis.

^3/Fees and charges include only service charges on deposits, commission and fees, and credit-related fees.

^4/Excluding the government’s arrears. The ratio is calculated against the total loan portfolio.

^5/Risk-adjusted basis, based on the CBL’s regulation.

Box 3.

Liberia: Record of Commercial Banks

Commercial banking in Liberia has a fragile record. A total of eighteen deposit banks have been established since 1954, but only four are currently active. The remainder have all been closed, voluntarily or compulsorily, as a consequence of poor bank management or the 1989–96 civil war. The last seizure was the Liberian United Bank (LUBI) in April 2000. Of the four active banks, the International Bank (IBLL), Liberia Trading and Development Bank (TRAD), and Ecobank (ECO) are majority foreign owned. The Liberian Bank for Development and Investment (LBDI) is the only locally owned bank, with a government share of 19.4 percent. The former central bank, the National Bank of Liberia, was closed in 1999 and its functions were taken over by the new Central Bank of Liberia (CBL).

Banks in Liberia

Source: CBL staff.

Banks in Liberia

			Year
			Established	Closed
Active banks
		Liberian Bank for Development and Investment (LBDI)	1962	--
		International Bank (IBLL)	1958	--
		Liberia Trading & Development Bank (TRAD)	1954	--
		Ecobank (ECO)	2000	--
Inactive banks
	Closed banks
		Monrovia Banking Corporation (ROVIA)	1989	1998
		National Housing and Savings Bank (NHSB)	1976	1997
		Agricultural and Cooperative Development Bank (ACDB)	1978	1996
		Finance & Trust International Banking Corporation (FTIBC)	1989	1990
		Ducor Trade and Commerce Bank (DUTCH Bank)	1994	1995
		First United American Bank (FUAB)	1989	1996
		Eurobank	1988	1996
		Citibank	1955	1988
		Chase Manhattan Bank	1962	1987
	Seized banks
		First Commercial and Investment Bank (FCIB)	1989	1990
		Meridien BIAO Liberia (Meridien)	1985	1997
	Liquidated banks
		The Liberian United Bank Inc. (LUBI)	1992	2000
		Bank of Liberia	1954	1981
		BCCI	1978	1990

Source: CBL staff.

View Table

Banks in Liberia

			Year
			Established	Closed
Active banks
		Liberian Bank for Development and Investment (LBDI)	1962	--
		International Bank (IBLL)	1958	--
		Liberia Trading & Development Bank (TRAD)	1954	--
		Ecobank (ECO)	2000	--
Inactive banks
	Closed banks
		Monrovia Banking Corporation (ROVIA)	1989	1998
		National Housing and Savings Bank (NHSB)	1976	1997
		Agricultural and Cooperative Development Bank (ACDB)	1978	1996
		Finance & Trust International Banking Corporation (FTIBC)	1989	1990
		Ducor Trade and Commerce Bank (DUTCH Bank)	1994	1995
		First United American Bank (FUAB)	1989	1996
		Eurobank	1988	1996
		Citibank	1955	1988
		Chase Manhattan Bank	1962	1987
	Seized banks
		First Commercial and Investment Bank (FCIB)	1989	1990
		Meridien BIAO Liberia (Meridien)	1985	1997
	Liquidated banks
		The Liberian United Bank Inc. (LUBI)	1992	2000
		Bank of Liberia	1954	1981
		BCCI	1978	1990

Source: CBL staff.

39. The overall profitability of the banking system has been low, reflecting a rising level of overdue obligations and provisions as a consequence of the deterioration in the economic environment, an increase in the government’s interest arrears, large and unremunerated reserve requirements, and a poor average rate of return on loans, reflecting the concessional rates provided on two major loans.⁹ As a result, two banks reported net operating losses in the quarter ended September 2002 (see table above). Banks currently generate more than three-fourths of their total operating income from fees and commission-based business, such as charges on current deposit accounts and charges for funds transfer.

40. The overall quality of the banking sector’s assets is also deteriorating. Total nonperforming loans to the private sector in the categories of substandard, doubtful or “loss” increased from L$84 million, or 15.5 percent of the total loans (to private sector) at September 2001, to L$130 million, or 18.1 percent at September 2002 (see table below)¹⁰. Loans in the “loss” category increased by almost 70 percent in the year to September 2002. In addition, there were substantial and growing arrears on a large government loan.

Liberia: Quality of Loans of Active Banks to the Private Sector ^{1/ 2/}

(In thousands of Liberian dollars and US dollars, unless otherwise indicated)

^1/Based on data provided by the CBL.

^2/Total loans and advances for private corporation and individuals.

^3/The Liberian dollar value of U.S. dollar-denominated loans is calculated at an exchange rate of L$49.5 (=US$1) at September 2001 and L$69.5 (=US$1) at September 2002.

^4/Other loans especially mentioned.

Liberia: Quality of Loans of Active Banks to the Private Sector ^{1/ 2/}

(In thousands of Liberian dollars and US dollars, unless otherwise indicated)

	September 2001				September 2002
	US$	L$	Total 3/	Ratio (In percent)	US$	L$	Total 3/	Ratio (In percent)
Current	8,243	16,567	424,596	77.8	7,934	21,329	572,742	79.4
OLEM 4/	724	879	36,717	6.7	231	1,816	17,871	2.5
Substandard	231	-	11,435	2.1	171	-	11,885	1.6
Doubtful	129	7,872	14,258	2.6	285	523	20,331	2.8
Loss	1,005	8,905	58,653	10.7	1,194	15,279	98,262	13.6
Total	10,332	34,223	545,657	100.0	9,815	38,947	721,090	100.0

^1/Based on data provided by the CBL.

^2/Total loans and advances for private corporation and individuals.

^3/The Liberian dollar value of U.S. dollar-denominated loans is calculated at an exchange rate of L$49.5 (=US$1) at September 2001 and L$69.5 (=US$1) at September 2002.

^4/Other loans especially mentioned.

View Table

Liberia: Quality of Loans of Active Banks to the Private Sector ^{1/ 2/}

(In thousands of Liberian dollars and US dollars, unless otherwise indicated)

	September 2001				September 2002
	US$	L$	Total 3/	Ratio (In percent)	US$	L$	Total 3/	Ratio (In percent)
Current	8,243	16,567	424,596	77.8	7,934	21,329	572,742	79.4
OLEM 4/	724	879	36,717	6.7	231	1,816	17,871	2.5
Substandard	231	-	11,435	2.1	171	-	11,885	1.6
Doubtful	129	7,872	14,258	2.6	285	523	20,331	2.8
Loss	1,005	8,905	58,653	10.7	1,194	15,279	98,262	13.6
Total	10,332	34,223	545,657	100.0	9,815	38,947	721,090	100.0

^1/Based on data provided by the CBL.

^2/Total loans and advances for private corporation and individuals.

^3/The Liberian dollar value of U.S. dollar-denominated loans is calculated at an exchange rate of L$49.5 (=US$1) at September 2001 and L$69.5 (=US$1) at September 2002.

^4/Other loans especially mentioned.

41. The average risk-adjusted capital adequacy ratio deteriorated marginally from 16 percent at September 2001 to 15 percent at September 2002. Among the four active banks, two banks reported a relatively large decline in the ratio during the year ended September 2002, owing to accumulating net loss and the depreciation of the Liberian dollar during the period. The other two banks showed an improvement in the ratio, largely because of a decrease in investment in the capital of other financial institutions.¹¹

42. All active banks currently comply with the liquidity ratio requirements. However, there appears to be less attention paid to the solvency risk associated with the exchange rate under the current regulatory framework. Although the CBL is able to maintain vigilance over currency mismatches or open foreign exchange positions taken by the banks, there is no formal regulation or supervisory guidance, such as prudential limits, in this area except for the liquidity requirements. There also do not seem to be formal systems in place to deal with a bank in difficulty or systemic bank runs. With scarce foreign reserves and little likelihood of contingent facilities or international support, the role of the CBL as a lender of last resort is quite limited.¹² Only a proportion of the reserves that commercial banks hold at the CBL (50 percent of Liberian dollar-denominated deposits and 18 percent of U.S. dollar-denominated deposits) is currently matched by liquid assets of the CBL.¹³ No deposit insurance system is currently in place.¹⁴

43. In the absence of such safety nets, and reflecting the recent deterioration in asset quality, profitability, and the capital adequacy ratio of some banks, careful monitoring of the financial condition of the banks will need to be maintained. The profitability of banks is likely to come under greater pressure as a result of the absolute ceiling that has been set on lending rates and the designation of a maximum spread over the cost of funds. Although the U.S. dollar is legal tender in Liberia, there may also be a case for establishing some sort of regulation or supervisory guidance on prudential limits on currency mismatches or open foreign exchange positions.

B. Timber

44. Timber has played an increasingly important role in the Liberian economy since the 1989–96 civil war. Before the war, timber ranked as the fourth-largest primary product contributing to GDP (after rice, iron ore, and rubber), and the third-largest export earner (after iron ore and rubber). Timber is now the largest industry, both in terms of contribution to GDP and export earnings, in 2002, timber accounted for about 18 percent of GDP and 58 percent of exports. It was also the source of about US$13.0 million in government revenue from expenditure taxes (18 percent of total tax revenue) and US$12.5 million to the Forestry Development Authority (FDA), as well as boosting receipts from income tax and import tariffs.

45. After the civil war, timber production rose fourfold within four years, and, by 2002, round log production had exceeded prewar production levels. Although intensified conflicts in the northwest of the country curtailed output, there was a sizable expansion of logging activities in the southeast.¹⁵ Timber production is estimated to have grown by about 35 percent in 2002 (Figure 4). Foreign investment has, however, generally been restrained because of the heightened security situation and fear of possible sanctions on timber.

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Liberia: Timber Exports and Production, 1999-2002

(In Thousands of metric tons)

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Source: Forestry Development Authority; and Fund staff estimates.

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46. Most of the timber (about 80 percent) is exported as round logs or plywood. There is little domestic use of timber because of a lack of drying or commercial production facilities. The direction of exports has changed considerably in recent years, with the emphasis shifting from Europe to Asia. China’s share of total exports increased from 8 percent in 1999 to 58 percent in 2001, while that of France declined from 37 percent to 13 percent (Figure 5).

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Liberia: Share of Timber Exports by Destination, 1999 and 2001

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Source: Forestry Development Authority, Annual Report 2001.

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47. Logging activities are undertaken by 31 private companies, which have been granted concessions to exploit government owned forested land subject to detailed requirements to ensure protection of forestry resources (see table below). Oriental Timber Company (OTC) currently produces about one half of total timber output.

48. The Forestry Development Authority (FDA) was established in November 1976 as the custodian of the forest resources of Liberia, to oversee logging and other activities. It was specifically charged with: bringing about the profitable harvesting of all forest products; ensuring that the supply of such products is perpetuated; and enforcing laws and regulations for the development and conversation of forest resources. Its Board of Directors was structured to include the Ministers of Agriculture, Finance, Local Government, Planning, and Commerce, with a Managing Director (currently Mr. Demetrious Taylor) appointed by the President. No member of the Board is to hold any financial interest in a forestry concession in Liberia. The FDA had 457 staff members as of end-2001, most of whom are based in the field and in the regional offices.

Liberia: Round Log Production by Company, 2001

Source: Forestry Development Authority, Annual Report 2001.

Liberia: Round Log Production by Company, 2001

	Amount (In metric tons)	Share (In percent)
Oriental Timber Company	484,088	49.3
Natura	103,918	10.6
Maryland Wood Processing Industries	76,418	7.8
Inlan Logging Co.	45,029	4.6
Royal Timber Co.	42,120	4.3
Other 26 companies	230,719	23.5
Total	982,292	100.0

Source: Forestry Development Authority, Annual Report 2001.

View Table

Liberia: Round Log Production by Company, 2001

	Amount (In metric tons)	Share (In percent)
Oriental Timber Company	484,088	49.3
Natura	103,918	10.6
Maryland Wood Processing Industries	76,418	7.8
Inlan Logging Co.	45,029	4.6
Royal Timber Co.	42,120	4.3
Other 26 companies	230,719	23.5
Total	982,292	100.0

Source: Forestry Development Authority, Annual Report 2001.

49. The forest area of Liberia is composed predominantly of natural forests, with artificial forests (mostly rubber plantations) making up less than 1 percent of the total forest cover. Within natural forests, the categories of species present in Liberia are classified as heavy weight (52 percent by volume); light/medium weight (21 percent); core veneer (17 percent); and established (10 percent). Until recently, exploitation in Liberia had focused on the selection of only very high value species, including redwood, African walnut, and West African mahogany, which led to a low level of output per hectare. With new plywood production facilities, however, lower-valued species are increasingly being exploited.

50. Based on a minimum diameter for all tree species exploited, the felling cycle for Liberia’s national forests is 25 years. There is, however, conflicting information about the current volume of merchantable timber remaining in Liberia and, hence, the level of annual forest utilization that is sustainable. The only available data on the potential stock of merchantable timber species are based on an estimate conducted in 1979, which indicated a stock of 81.3 million metric tons.¹⁶ The Food and Agriculture Organization of the United Nations (FAO), based on satellite photographs, estimates the forest cover to have been shrinking at a rate of 2 percent per annum. However, the FDA contradicts this, reporting instead constant forest coverage for the last four years in its annual reports.¹⁷

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Liberia: Developments in Timber Production and in Real GDP, 1997-2002

(Separate Indices, 1987=100)

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Sources: Forestry Development Authority; and Fund staff estimates.

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51. The accelerated pace of production in the last few years nevertheless raises concern about both the medium-term sustainability of forestry resources, in the absence of sufficient reforestation activities and enforcement of forestry regulations, and the short-term impact on the environment and local communities of poorly controlled logging activities. Reports imply that some logging companies are clear-felling large areas instead of selecting only approved species of adequate diameter, as they are required to do under their agreements with the FDA. For their part, some logging companies claim that itinerant farmers are moving into forest areas behind the felling operations and burning and clearing large tracts of land for cultivation.

52. The FDA and the Liberian government share revenues retained from the timber industry.¹⁸ During 2001, the FDA assessed the scale of taxes and fees due from the timber industry as US$19 million, of which US$8.9 million was to be retained by the government and the rest (US$ 10.1 million) by the FDA. However, in the absence of adequate financial statements from the FDA, actual taxes and fees paid to the FDA are not known, nor how those revenues are spent (see tables below).¹⁹

Liberia: Assessed Revenue by Component, 2001

(In millions of U.S. dollars)

Source: Forestry Development Authority, Annual Report 2001.

Liberia: Assessed Revenue by Component, 2001

(In millions of U.S. dollars)

	Revenue Assessed by FDA	Of Which: Payable to the Government	Of Which: Payable to the FDA
Reforestation fee	3.6	…	3.6
Conservation fee	2.4	…	2.4
Forest research fee	0.7	…	0.7
Severance fee	1.5	1.4	0.0
Land rental	6.7	3.4	3.4
Industrialization Incentive Fund	4.2	4.1	0.1
Forest product fee	0.1	…	0.1
Total	19.0	8.9	10.1

Source: Forestry Development Authority, Annual Report 2001.

View Table

Liberia: Assessed Revenue by Component, 2001

(In millions of U.S. dollars)

	Revenue Assessed by FDA	Of Which: Payable to the Government	Of Which: Payable to the FDA
Reforestation fee	3.6	…	3.6
Conservation fee	2.4	…	2.4
Forest research fee	0.7	…	0.7
Severance fee	1.5	1.4	0.0
Land rental	6.7	3.4	3.4
Industrialization Incentive Fund	4.2	4.1	0.1
Forest product fee	0.1	…	0.1
Total	19.0	8.9	10.1

Source: Forestry Development Authority, Annual Report 2001.

Liberia: Revenue from Timber, 1998–2001

(In millions of U.S. dollars)

Sources: Forestry Development Authority; and Ministry of Finance.

Liberia: Revenue from Timber, 1998–2001

(In millions of U.S. dollars)

		1998	1999	2000	2001
Assessed revenue by the FDA		3.0	5.7	20.7	19.0
	Payable to the government	…	2.6	8.5	8.9
	Payable to the FDA	…	3.1	12.2	10.1
Actual government revenue		0.7	1.7	6.7	8.4
Estimated uncollected government revenue		…	0.9	1.8	0.5

Sources: Forestry Development Authority; and Ministry of Finance.

View Table

Liberia: Revenue from Timber, 1998–2001

(In millions of U.S. dollars)

		1998	1999	2000	2001
Assessed revenue by the FDA		3.0	5.7	20.7	19.0
	Payable to the government	…	2.6	8.5	8.9
	Payable to the FDA	…	3.1	12.2	10.1
Actual government revenue		0.7	1.7	6.7	8.4
Estimated uncollected government revenue		…	0.9	1.8	0.5

Sources: Forestry Development Authority; and Ministry of Finance.

53. There was a shortfall between the assessment of taxes and fees for the government and those actually collected of US$1.8 million in 2000 and US$0.5 million in 2001. This may in part reflect growing arrears to the government by those logging companies that had been affected by a decline in profits owing to low international timber prices or rebel activity. Most of the taxes and fees collected by the government were not paid in cash, but in the form of services in kind, such as road rehabilitation or renovation of schools. In 2001, seven logging companies reconditioned and constructed a total of 778 miles of primary roads,²⁰ and renovated some civil facilities.

54. It is widely claimed that the FDA’s assessments of revenue, and government receipts from the industry are well below what would be due under current tax provisions if proper account were taken of the world market value of the timber produced and if concessions were not given on unnecessarily favorable terms.²¹ Export volumes are claimed to be understated and prices underrecorded, in part because of the transfer pricing practices of the logging companies and connected overseas importers. Some of these claims are based on eye-witness reports, including by officials conducting the valuations. There are also a number of inconsistencies in the data reported on Liberia that would lend support to these claims, including those for production, exports, and forest cover. For example, data reported to COMTRADE on the value of exports by destination are, for the most part, substantially lower than the corresponding data reported by the importing country, adjusted to a comparable basis; meanwhile, different data on exports have been reported by the FDA in its Annual Report than those provided to the CBL.

55. This lack of consistent information, as well as the nonaccountability of the FDA for many of its activities, reinforces the serious concerns that the international community has raised about governance in the timber sector, which is now the most important export industry in Liberia and a major source of government revenue. Claims that potential government revenue has been diverted for private use, and that recent logging activities have been detrimental to the environment and the long-term sustainability of the Liberia’s forests, have not been effectively answered.

C. Rice

56. Rice is a staple food in Liberia, as in other parts of West Africa.²² Consumption has been rising as a substitute for traditional coarse grains, roots, and tubers. The availability and price of rice are now important determinants of the welfare of the poorest segments of the country’s consumers, and have become issues of major political sensitivity in Liberia since the rice riots in 1979, which contributed to the overthrow of President Tolbert. Market restrictions have been persistent features of public policy toward the rice sector over the past few decades, with ceilings on prices and the licensing of imports, as well as incentives and technical support for domestic production. While supply has been ensured during this period, prices have often been above international levels, and production has continued to lag behind demand, especially in recent years.

57. Imports of milled rice satisfied about one-third of Liberia’s rice consumption at the end of the last decade (see table below). Rice production was adversely affected by the civil war and the continuing adverse security situation, which displaced large parts of the rural population and caused a substantial loss of acreage. Farmers were also frequently not able to retain seed stocks from one season to the next, depending instead on seed distributed by NGOs, predominantly provided by CRS (Catholic Relief Services). In 2002, no rice production was recorded by the Ministry of Agriculture for Lofa County, traditionally one of the major producers, which was most severely affected by recent fighting.

Liberia: Rice Production and Imports, 1998–2002

(In thousands of metric tons)

Sources: Liberian authorities; and Fund staff estimates.

^1/FAO and Fund staff estimates.

^2/Ministry of Commerce.

Liberia: Rice Production and Imports, 1998–2002

(In thousands of metric tons)

	1998	1999	2000	2001	2002
Production 1/	203	196	204	219	187
Import volume 2/	86	79	98	103	153
Consumption	289	275	302	322	340

Sources: Liberian authorities; and Fund staff estimates.

^1/FAO and Fund staff estimates.

^2/Ministry of Commerce.

View Table

Liberia: Rice Production and Imports, 1998–2002

(In thousands of metric tons)

	1998	1999	2000	2001	2002
Production 1/	203	196	204	219	187
Import volume 2/	86	79	98	103	153
Consumption	289	275	302	322	340

Sources: Liberian authorities; and Fund staff estimates.

^1/FAO and Fund staff estimates.

^2/Ministry of Commerce.

58. Only four types of rice are imported into Liberia: butter rice from Taiwan Province of China (long grain in 50 kilogram bags); golden white rice from Pakistan (long grain 15–20 percent broken in 50 kilogram bags); parboiled rice from United States (long grain in 100 kilogram bags); and special quality Asian (long grain in 50 kilogram bags). Rice importation in Liberia is handled by a limited number of private traders, together with the Firestone Rubber Company (for its plantation workers). At present, three commercial rice importers (Bridgeway Corporation, K & K Trading Company, and Global Africa Import & Export) dominate the market, with Bridgeway and K & K Trading supplying 75 percent of total commercial rice imports in 2002. An additional 14 percent of commercial imports was supplied in 2002 by a number of small traders distributed along the southeastern part of Liberia, who imported their rice mainly overland through Cote d’Ivoire into the Nimba, Grand Gedeh, and Maryland counties.

59. There is a maximum selling price for rice, set by a committee including representatives of various ministries based on an assessment by the Ministry of Commerce, reflecting the costs of importation and distribution, as well as various fees and charges. Government fees and taxes account for about 10 percent of the retail price. The current maximum selling price, which has been unchanged for some time at US$21.00 per bag, is based on an imported price that seems some way above current international levels,²³ and also includes a large margin of 17 percent of the selling price. It has nonetheless often been the ruling market price, reflecting the lack of competition.

Liberia: Government Revenues from Rice Imports, 1999–2002

Sources: Liberian authorities; and Fund staff estimate.

Liberia: Government Revenues from Rice Imports, 1999–2002

		1999	2000	2001	2002
		(In millions of U.S. dollars)
Total revenues from rice imports		2.5	2.1	1.9	2.7
	Rice stabilization fee	1.7	1.4	1.3	1.8
	Import duty	0.8	0.7	0.6	0.9

Sources: Liberian authorities; and Fund staff estimate.

View Table

Liberia: Government Revenues from Rice Imports, 1999–2002

		1999	2000	2001	2002
		(In millions of U.S. dollars)
Total revenues from rice imports		2.5	2.1	1.9	2.7
	Rice stabilization fee	1.7	1.4	1.3	1.8
	Import duty	0.8	0.7	0.6	0.9

Sources: Liberian authorities; and Fund staff estimate.

60. Several taxes and other charges apply to the importation of rice (see table above). The most important charges are the rice stabilization fee (US$1 per 100-pound bag), import duty (US$0.50 per 100-pound bag), charges levied by the National Port Authority (US$7 per metric ton), and charges related to import permit declarations (1.5 percent of f.o.b. value). While the Revenue Code of Liberia, Phase One, extended the goods and services tax (GST) to rice, this tax has been suspended by the authorities, citing the adverse economic situation. The authorities argue that the revenue losses are partly offset by the rice stabilization fee, and that a planned Phase Two of the Revenue Code will provide a unified framework for the taxation of rice and other agricultural commodities.

61. Licenses were required for all commercial rice imports until 2000/01, with allocations of the agreed quotas based on a bidding system operated by the National Rice Committee. Although the quotas no longer apply, there has been a sustained perception that permission from the authorities is required for imports, depending in part on assessments of the financial resources of the importer. Potential importers have also been discouraged by the collapse of other new entrants to the market, an outcome that has been blamed on collusion among existing importers to prevent the newcomers from establishing distribution networks.

62. One major barrier to entry in the rice importing business is access to financial resources, especially foreign exchange credit. Local banks do not, in general, provide such finance, and letters of credit from overseas banks of over US$1 million are extremely difficult to obtain because of the high assessed country risk, particularly for local firms without established track records of overseas creditworthiness, collateral, or overseas assets. The minimum average shipment size to ensure profitability is understood to be in excess of 5,000 metric tons per delivery.

63. The explanations for the current concentration of activity in the sector, with two importers accounting for 75 percent of sales, are, therefore, complex. Formal restrictions appear to be very limited, particularly now, as the government has advised all potential importers of the openness of the market.²⁴ But there is evidence that substantial monopoly rents are being earned by the main importers, leaving little choice of rice on the market, and resulting in lower welfare for the population. There would appear to be substantial potential for reducing prices to consumers or for taxing the monopoly profits without adversely affecting prices.

D. Petroleum

Importation and distribution

66. During 1998–2002, Liberia imported between 26 million and 35 million gallons of finished petroleum products annually; gasoline and diesel accounted for more than 90 percent of total petroleum imports, with the share of kerosene (including Jet-Al) rising from 2.4 percent to 5.3 percent over the period (see table below).

Liberia: Petroleum Imports by Product, 1998–2002

Source: LPRC Annual Report; and Fund staff estimates.

Liberia: Petroleum Imports by Product, 1998–2002

		1998	1999	2000	2001	2002 Est.
Thousands of gallons
	Gasoline	12,572	11,255	10,929	12,022	10,503
	Diesel	13,094	14,921	16,157	21,773	17,703
	Kerosene (incl. Jet A-l)	632	1,377	1,615	1,397	1,570
	All Products	26,298	27,553	28,700	35,191	29,776
Share (percent)
	Gasoline	47.8	40.8	38.1	34.2	35.3
	Diesel	49.8	54.2	56.3	61.9	59.5
	Kerosene (incl. Jet A-l)	2.4	5.0	5.6	4.0	5.3
	All products	100	100	100	100	100

Source: LPRC Annual Report; and Fund staff estimates.

View Table

Liberia: Petroleum Imports by Product, 1998–2002

		1998	1999	2000	2001	2002 Est.
Thousands of gallons
	Gasoline	12,572	11,255	10,929	12,022	10,503
	Diesel	13,094	14,921	16,157	21,773	17,703
	Kerosene (incl. Jet A-l)	632	1,377	1,615	1,397	1,570
	All Products	26,298	27,553	28,700	35,191	29,776
Share (percent)
	Gasoline	47.8	40.8	38.1	34.2	35.3
	Diesel	49.8	54.2	56.3	61.9	59.5
	Kerosene (incl. Jet A-l)	2.4	5.0	5.6	4.0	5.3
	All products	100	100	100	100	100

Source: LPRC Annual Report; and Fund staff estimates.

67. The LPRC has authority over the importation, storage, and distribution of petroleum, including the specification of maximum prices at the wholesale and retail levels.²⁵ The structure of these prices determines precisely the margins that can be earned by the wholesalers and the retailers (proprietors of gas stations), but the importer’s margin varies with the import price, as there does not appear to be a set formula for determining the relationship between import prices (or equivalent world prices) and the prices that are set by LPRC for purchases by wholesalers. Although the agreement between the LPRC and West Oil allows for reviews at 60-day intervals, LPRC has not changed the maximum prices at wholesale and retail levels since September 2000. During this period, international prices have fluctuated considerably, implying substantial volatility in the gross markup available to West Oil from its sales to wholesalers and selected final users, including the public sector. In addition to import costs, West Oil is responsible for paying fees to LPRC for product storage facilities and discharging payments due for taxes and other charges (or crediting them against the government’s debt-servicing obligations).

Prices, costs and, margins

68. Petroleum products in Liberia are currently subject to the following tax provisions: import duty of US$0.25 per gallon; sales tax of US$0.35 per gallon; goods and services tax (GST) of 7 percent of the retail price (which is currently set at US$3.00 per gallon for gasoline); and an excise tax of 7 percent. However, both the GST and the excise duty have been derogated temporarily by administrative order, leaving total taxes payable of US$0.60 per gallon. West Oil also pays US$0.26 per gallon to the LPRC to cover storage fees of US$0.16 per gallon and rehabilitation fees (for the oil pipelines and equipment) of US$0.10 per gallon (see table below).

Liberia: Gasoline Price Buildup

(In U.S. dollars per gallon)

^1/Approximate figure for November 2002, including cost, insurance and freight.

Source: LPRC, West Oil; and staff estimates.

Liberia: Gasoline Price Buildup

(In U.S. dollars per gallon)

Landed price of imports 1/		1.00
Taxes		0.60
Storage and rehabilitation fees		0.26
Wholesale price		2.79
Retail price		3.00
Total margin (retail price minus import price, taxes, and storage fees)		1.14
	Wholesalers’s margin	0.06
	Retailers’ margin	0.15
	Residual margin	0.93

^1/Approximate figure for November 2002, including cost, insurance and freight.

Source: LPRC, West Oil; and staff estimates.

View Table

Liberia: Gasoline Price Buildup

(In U.S. dollars per gallon)

Landed price of imports 1/		1.00
Taxes		0.60
Storage and rehabilitation fees		0.26
Wholesale price		2.79
Retail price		3.00
Total margin (retail price minus import price, taxes, and storage fees)		1.14
	Wholesalers’s margin	0.06
	Retailers’ margin	0.15
	Residual margin	0.93

^1/Approximate figure for November 2002, including cost, insurance and freight.

Source: LPRC, West Oil; and staff estimates.

69. The cost of imported gasoline was reported by West Oil to be in the region of US$ 1.00 per gallon in November 2002, including the high insurance costs resulting from the current security situation. At a retail price of US$3.00 per gallon, this would imply a total markup between imports and sales at the gas pump of US$2.00 per gallon, of which US$0.86 is accounted for by taxes and storage costs and US$0.21 went to distributors (see table above). The residual margin (approximately US$0.93) would be available to West Oil to cover the cost of wastage (which may be as high as 10 percent of the oil going through the storage facilities because of leaks) and other administrative costs and payments. There may also have been some subsidization of concessionary sales to specified customers. The equivalent residual margin for diesel would be about US$0.83 per gallon.

70. Residual margins on sales to other final users were probably smaller than those on retail sales, reflecting the scale of sales to the public sector (which is responsible for more than one-half of the country’s consumption of petroleum products) and to a few other large or privileged customers. On the conservative assumption that these margins would be only one-half of the levels on retail sales, and assuming that only 90 percent of the gasoline and diesel imported reaches final paying consumers, the implied net income for West Oil would be about US$17 million per annum. Out of this, West Oil would need to cover the cost of leakages, which could be as high as US$3 million, and other payments.

International comparisons

71. Petroleum products attract large tax liabilities in many sub-Saharan African countries, reflecting, in part, their relatively low price elasticity and high income elasticity. However, in Liberia, petroleum taxes constitute only 20 percent of the final pump price, which is a much lower ratio than in other West African countries.

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Ratio of petroleum taxes to final pump price in selected West African Countries, 2001

(In percent of final pump price)

Citation: IMF Staff Country Reports 2003, 275; 10.5089/9781451822847.002.A001

Sources: Liberian authorities; and Fund staff estimates

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E. Cement

75. The Liberian Cement Corporation (Cemenco) has a monopoly of cement production, with responsibility for maintaining domestic supply. The company is a subsidiary of a multinational firm with cement plants in other West African countries, including Ghana, Nigeria, Sierra Leone, and Togo. It produces Portland Grey cement. Although its capacity is about 220,000 metric tons, production in 2002 was about 50,000 metric tons. Cemenco has on occasions faced severe production difficulties and has found it necessary to import significant quantities of cement to satisfy domestic demand. In 2002, Cemenco’s normal monopoly of domestic supply (maintained by the requirement for cement imports to have presidential approval) was breached by the duty-free import of about 15,000–20,000 metric tons by other companies (notably in the logging sector).

76. Cemenco has received concessions on import duties since the mid-1980s. The current arrangement with the government on tax exemptions and prices was agreed in 2000 when the National Investment Commission approved a planned investment of US$2.55 million in two new generators. Under this arrangement, Cemenco is exempt from all import duties on raw materials (excluding petroleum), capital equipment, and spare parts, although it does pay turnover tax. When the GST was introduced in July 2001, Cemenco—as the sole domestic supplier of cement— was given a specific derogation, temporarily suspending the tax liability. This was revoked by the government on February 15, 2003. Recognizing Cemenco’s monopoly position, a government committee representing the Ministries of Commerce and Finance fixes the domestic selling price of cement to distributors.

77. Currently, the price fixed by the government committee is US$5.80 per bag, or US$ 116 per metric ton. This is high by developed-country standards where, for example, the price of Portland Grey cement in 2001 averaged about US$46 per metric ton. Allowing for transport and port charges in Liberia, the equivalent landed (pretariff) price of cement imported into Liberia would probably be in the range of US$80–US$95 per metric ton. This implies a substantial margin between the price that Cemenco is permitted to charge in the protected domestic market and the potential pretariff price at which cement could be profitably imported. In addition, Cemenco receives sizable tax concessions on its inputs.

78. One justification for this high implicit subsidy to Cemenco’s production might be to maintain security of supply. However, Cemenco cannot produce cement without imported raw materials. The net effect of the current system appears, therefore, to be to maintain a higher price than would result under free importation and to reduce government tariff revenue, without any substantial benefit to the domestic economy. As cement is currently used extensively in housing repair and construction, there may also be adverse distributional consequences.