Liberia: Report on Post-Conflict Economic Situation and Prospects for January-June 2004

Intermittent civil wars have largely destroyed Liberia's physical and economic structures and the government's capacity to devise and implement policies. Executive Directors expressed concern about the weak revenue performance, lack of progress on fiscal transparency, and accountability. They emphasized the need to accelerate structural reforms, welcomed the National Transitional Government of Liberia’s resumption of regular token monthly payments to the IMF, and suggested that continued cooperation with the IMF and implementation of sound policies will facilitate the development of a Staff-Monitored Program.

Abstract

Intermittent civil wars have largely destroyed Liberia's physical and economic structures and the government's capacity to devise and implement policies. Executive Directors expressed concern about the weak revenue performance, lack of progress on fiscal transparency, and accountability. They emphasized the need to accelerate structural reforms, welcomed the National Transitional Government of Liberia’s resumption of regular token monthly payments to the IMF, and suggested that continued cooperation with the IMF and implementation of sound policies will facilitate the development of a Staff-Monitored Program.

I. Introduction

1. An IMF mission met with the new Liberian authorities in Monrovia and Accra during December 1–13, 2003, at the request of Mr. Gyude Bryant, chairman of the National Transitional Government of Liberia (NTGL) that took office in October 2003.1 Mr. Bryant had requested the Fund’s assistance to (i) help assess the current economic situation; (ii) assist in preparing a budget and basic economic program for the first half of 2004; and (iii) conduct an assessment of technical assistance needs. The mission also evaluated progress in implementing a first set of measures to strengthen revenue collection and the budget process, and to address key governance issues. The mission met with the Chairman of the NTGL, the Minister of Finance, the Governor of the CBL, and senior officials from the main revenue-generating agencies, the Forest Development Authority (FDA), Bureau of Maritime Affairs (BMA), and Liberia Petroleum and Refining Corporation (LPRC), as well as senior officials from other ministries.

2. Liberia’s relations with the Fund deteriorated steadily prior to the NTGL’s taking office. Liberia has been in continuous arrears to the Fund since 1984 and has been ineligible to use the Fund’s general resources for the past 16 years. A declaration of noncooperation was issued in 1986, and the Executive Board decided to suspend the country’s voting and related rights in March 2003 owing to a protracted lack of cooperation, including as regards payments to the Fund.2 As of end-January 2004, Liberia’s arrears to the Fund amounted to SDR 503 million, or 706 percent of quota.3 Liberia’s forthcoming obligations—consisting only of charges and interest on principal and net SDR charges—are estimated to amount to about SDR 5.2 million annually.4 Chairman Bryant has expressed his commitment to normalize relations with the Fund.

3. During the 2002 Article IV consultation and review of Liberia’s overdue financial obligations to the Fund in March 2003, the Executive Board stressed a number of factors that highlighted the deterioration in policies and the lack of response to Fund advice. Directors expressed concern about the weak revenue performance, the lack of progress on fiscal transparency and accountability, and poor expenditure controls, which had resulted in mounting wage and other arrears and a collapse of social services. Substantial governance issues needed to be addressed and critical structural reforms, particularly in the petroleum and rice sectors, had not been undertaken. Directors also noted the inadequate level and irregularity of Liberia’s monthly payments to the Fund, and the lack of steps to normalize relations with other external creditors.

II. Recent political and economic developments

4. Intermittent civil wars have largely destroyed Liberia’s physical and economic structures, as well as the government’s capacity to devise and implement policies. The internal conflict between 1989 and 1997 was followed by a period of some recovery, but internal hostilities resumed in 2000 and intensified in late 2002. As a result, about one-third of the population is estimated to be internally displaced, and the fighting that extended to Monrovia in mid-2003 led to widespread destruction and looting, including of government facilities. Government functions largely collapsed, owing to the displacement of most civil servants.

5. Poverty, already pervasive prior to the last round of hostilities, must have deepened further. The last survey of household expenditure, conducted by the United Nations Development Program (UNDP) in August 2000, indicated that 76 percent of the population was living on less than US$1 per day.5 In 1999, Liberia ranked 174 out of 175 countries on the UNDP’s aggregate human development index.6

6. Following the signature of a peace agreement and the departure of President Taylor in August 2003, Mr. Gyude Bryant took power in mid-October as head of a two-year transitional government.7 The NTGL is expected to prepare the country for elections in October 2005, and to begin to rebuild governmental capacity. Government posts have been assigned to the previously warring parties based on a power-sharing formula.

7. In September 2003, the UN Security Council established the United Nations Mission in Liberia (UNMIL) with a broad mandate. The UNMIL’s primary objective is the reestablishment of security throughout Liberia through the deployment of 15,000 peacekeepers. The UNMIL is also expected to support the demobilization and reintegration of about 35,000 former combatants; assist humanitarian aid activities; and help with the formation of a new army and police force. As of end-January 2004, 9,000 peacekeepers had arrived, and 12,000 former soldiers had been disarmed.

8. The intense hostilities during 2003 further worsened an already dire economic situation. Real GDP is estimated to have contracted by about 30 percent in 2003 (Table 1). Most of the decline took place in the second half of the year, owing to the intensification of the internal conflict and the UN ban on timber exports, in effect since July. The displacement of the rural population led to the disruption of agricultural activities, and commerce also slowed sharply. Prices were subject to large swings, owing to temporary conflict-related supply shortages and a volatile exchange rate; the 12-month rate of inflation stood at 14 percent in August 2003.8

Table 1.

Liberia: Selected Economic and Financial Indicators, 1999-2004

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Sources: Liberian authorities; and Fund staff estimates and projections.

For 2004, growth rates compared to second half of 2003.

For 2004, growth compared to first half of 2003.

In 2001 and 2002, monetary and reserves numbers areas of September.

Defined as Liberian currency outside banks plus demand, time, and savings deposits in Liberian and U.S. dollars; end-June 2004 compared with end-December 2003.

9. The fiscal position in the first nine months of 2003 showed a collapse of revenue and an expansion of conflict-related spending that crowded out virtually all non-security-related outlays. Monthly revenue collections fell to about 60 percent of their level in 2002, related to the growing disruptions of economic activities and the ban on timber exports (Table 2). Expenditure was increasingly geared to military outlays. The recorded deficit of US$1.6 million (equivalent to 0.4 percent of GDP) was financed through forced borrowing from the CBL and other (unidentified) sources.

Table 2.

Liberia: Summary of Central Government Operations, 1999-June 2004 1/

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Sources: Liberian authorities; and Fund staff estimates and projections.

Calendar year; the fiscal year covers the period July-June.

Includes military outlays.

Excludes accumulation of sizable arrears on domestic and external debt interest, suppliers’ credits, and wages.

Until October 2003, there was no reliable information on the composition of financing.

10. Monetary and external developments mirrored the deceleration of economic activity. Broad money declined by 20 percent from December 2002 to September 2003 on a drop in Liberian dollar deposits that reportedly reflected a move toward U.S. dollar cash holdings (Table 3). By contrast, deposits in U.S. dollars were broadly stable, related to strong remittances and higher donor activity. International reserves dwindled to negligible levels, and the exchange rate was volatile. Commercial banks closed temporarily as hostilities approached the Monrovia area, and one bank has remained closed since May 2003. The banks’ financial position, already fragile before the 2003 hostilities, has weakened further due to increasing nonperforming loans.9 Exports fell sharply, but imports declined by less, sustained by larger remittances and some donor-financed humanitarian aid inflows. Due to the lack of external financing and international reserves, further arrears were incurred on official debt-service obligations.

Table 3.

Liberia: Monetary Survey, June 2002 - June 2004

(In millions of Liberian dollars, unless otherwise noted)

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Sources: Liberian authorities; and Fund staff estimates.

Derived from commercial banks’ balance sheets (Liberian dollar denominated).

Liberian dollar currency outside banks and commercial banks reserves (Liberian dollar denominated) held at central bank.

One bank has been excluded from the deposit May.

Defined as Liberian currency outside banks plus demand, time, and savings deposits in Liberian and U.S. dollars.

For June, September and December 2003, compared to December 2002. For June 2004, compared to December 2003.

III. Report on Discussions

11. The discussions took place against the background of economic stagnation in most of the country owing to a still fragile security situation. While activity in the Monrovia area was picking up, resulting from the establishment of a broadly safe environment and increasing donor activities, all other areas of Liberia were still suffering from a lack of UN presence and sporadic fighting. As a consequence, internally displaced persons had not yet begun to move back to the countryside, and the year-end planting season was largely lost.

12. The authorities were aware of the need to quickly establish a program to rebuild government facilities and address deeply rooted governance issues. Most government institutions were only beginning to recover from widespread looting that had also severely constrained the capacity to provide even basic economic information. Notwithstanding these adverse conditions, a first set of measures to rebuild an orderly budget process, increase revenue collections, and improve key governance aspects was already being implemented. While this early action reflected the authorities’ commitment to move resolutely in these areas, they recognized that further steps were urgently needed. Building on the first set of actions and the scarce economic data available, the mission worked with the authorities to design a basic economic program for the first six months of 2004.

13. Extensive external assistance is required in the short term to address urgent humanitarian and reconstruction needs and rebuild capacity for economic management. The open discussions with the mission and the resumption of regular monthly payments to the Fund reflect the authorities’ desire and willingness to quickly improve relations with the Fund, also with a view to preparing for the resumption of the Fund’s technical assistance in key areas. Efforts are also under way to obtain financial and technical assistance from bilateral donors and the World Bank.

A. Implementation of Early Measures

14. The NTGL has made progress in implementing a first set of measures, announced in October 2003, to strengthen revenue collections and resume an orderly budget process. The centralization of revenue collections at the Ministry of Finance ended the practice of government institutions levying and retaining taxes and fees for unbudgeted purposes. As a consequence, average revenue collection rose to US$5 million per month in October 2003–January 2004, compared with average monthly collection of just US$1.3 million in the third quarter of 2003. All government accounts have also been centralized at the CBL (Box 1).

15. A “mini-budget” for the period from October 2003 to January 2004 was approved by parliament. Revenue, which was conservatively projected to reach about US$12 million, was largely based on collections from the maritime register and from imports, while expenditure focused on the resumption of current civil service pay and the rehabilitation of government premises. The mini-budget also contained a contribution to the demobilization process.

16. The authorities also included sizable but uncertain external support in their budget, contrary to the staff’s advice. After consulting with the relevant donors, the staff had indicated that the envisaged external budget support was not secured, and that it would be preferable to prepare contingent spending plans in case such grants were forthcoming. While higher-than-projected revenue offset the shortfall of external support on this occasion, the staff advised strongly against including doubtful financing items in future budget exercises. The authorities concurred with this recommendation.

Measures Taken by the NTGL to Strengthen Economic Management

Reflecting discussions by the Executive Board at its February 2002 meeting on Liberia, the Managing Director wrote to the Minister of Finance of Liberia, informing him of the Executive Board’s decision to initiate procedures to suspend Liberia’s voting and related rights in the Fund. The Managing Director also urged the authorities to implement a series of measures to improve budgetary oversight and transparency. The NTGL has moved quickly to implement all measures mentioned in the Managing Director’s letter:

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17. In the area of governance, the NTGL has also taken a number of steps to address pressing issues. Until the NTGL took office, imports of rice and petroleum products were handled through monopolies. Retail prices, as fixed by government, substantially exceeded import costs and taxes. Reportedly, the accruing significant rents were largely used to fund the internal conflict. The NTGL has removed the import monopoly for both product groups, and revised retail prices to reflect import cost, trade margins, and taxes. It has also reinstated the general sales tax that had been suspended for both goods. As a consequence, retail prices have dropped significantly while tax collections increased. For petroleum products, a formula has been introduced to adjust retail prices each quarter, in line with international price movements, but further steps are needed to create a fully competitive environment (see para. 27). The NTGL has also suspended the use of all tax credits and drawbacks for imports, while the Ministry of Finance conducts a review of these instruments. To eliminate “ghost workers,” all civil servants are now obliged to pick up their paychecks in person, supplying proper documentation.

B. Economic Program and Prospects for the First Half of 2004

18. Economic prospects for the first half of 2004 depend crucially on the establishment of security outside Monrovia and the pace of donor activities. The speed of deployment of UN peacekeepers throughout the country will define the rate at which internally displaced persons and disarmed combatants return to their homes and resume productive activities, especially in agriculture. No resumption of timber activities is expected during the first six months of 2004 as the UN Security Council decided recently to extend the ban on exports for another year, owing to lack of progress in meeting the requirements for lifting the sanction, particularly with regard to the establishment of a transparent accounting system for timber-related revenue (Box 2). By contrast, increasing donor presence and a possible beginning of reconstruction could provide a significant economic stimulus for certain sectors, especially in the Monrovia area.

Timber Sector and Sanctions

Timber production and export has been a major industry in Liberia. In 2002, the sector accounted for 18 percent of real GDP, generated 18 percent of total tax revenue, and created 60 percent of the export earnings. Forest exploitation was undertaken by about 30 logging companies, employing about 5,000 to 8,000 workers.

Share of Timber Sector in Major Economic Aggregates, 2002–03

(In percent)

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In May 2003, the UN Security Council decided to impose a ban on the export of timber products, effective July 2003. The decision was based on information that proceeds from timber exports were used largely to finance the internal conflict.

The ban was recently extended through December 2004. The Security Council stated that a transparent accounting system needs to be in place, and the NTGL in control of the logging areas, before the sanction could be lifted (the logging areas are currently controlled by one rebel group). A review of timber concessions and development of a sustainable logging plan should also be conducted.

19. Based on this outlook, real GDP is envisaged to recover modestly in the first half of 2004. It is projected to grow by 16 percent, compared with the second half of 2003, mainly on the strength of manufacturing and services (related to donor activities) while agriculture is likely to remain subdued. However, annualized GDP per capita in the first half of 2004, projected at US$130, would still remain significantly below its 2002 levels.

20. The “core budget” for February–June 2004 will limit expenditure to expected domestic revenue, as external budget support is uncertain at this stage. The authorities, in conjunction with the mission, developed cautious revenue projections for the first half of 2004, based on the growth scenario discussed above.10 On the expenditure side, payments of current salaries will remain a priority, as will outlays for refurbishing government buildings. In light of the experience with the previous mini-budget, the authorities agreed with the staff that contingent spending plans should be drawn up in case revenue collections were higher than expected, or external budgetary support was forthcoming. The staff also suggested the preparation of a supplementary budget following the donor conference on reconstruction, planned for early February 2004.

21. Monetary developments will be dominated by the expected flow of external assistance and the envisaged issuance of currency to accommodate a rebound in the demand for Liberian dollars. The staff stressed the need to rebuild international reserves from their extremely low level, while ensuring that the exchange rate and prices regain stability. As the demand for Liberian dollars is expected to recover in line with the reactivation of the economy, and with the resumption of civil service pay, a buildup of international reserves to about US$6 million (about ½ month of imports) could be achieved by mid-2004. However, because of the uncertainty as to the extent of the increase in demand for local currency, the authorities agreed to monitor exchange rate and price developments closely as they moved forward with the issuance of Liberian dollars. U.S. dollar-denominated deposits are also projected to increase modestly through that period, owing to the expected increase in donor assistance and continued strong remittances.

22. External developments are expected to reflect an increase in donor activities. The external accounts will be dominated by increasing foreign assistance, strong remittances, and associated imports, while exports are likely to stagnate at low levels, owing mainly to the continued sanctions on timber exports.

C. Fiscal Policy Measures

23. Based on discussions with the staff, the authorities intend to implement a number of measures to further strengthen revenue collections in the first half of 2004. These include the expansion of coverage of the general sales tax (GST) to services for which collections are relatively easy (such as restaurant and cell phone services), the extension of preshipment inspections to all imports, and the universal use of a taxpayer identification number (TIN) to facilitate cross-checking of tax payments. The authorities also intend to broaden the mandate of the Large Taxpayer Unit to include taxes on sales and imports, as well as excise taxes. To prepare for a further strengthening of the revenue effort, the authorities envisage requesting technical assistance for a comprehensive review of current tax exemptions, and will consider options to delegate the management of customs and ports temporarily to foreign private agents.

24. A number of steps are also envisaged to improve the budget process and controls. To strengthen cash management, the government bank accounts at the CBL will be consolidated into a single treasury account, and regular meetings will be held to analyze commitments and cash outlays.11 The Ministry of Finance will conduct regular reconciliations between revenue, expenditures, and movements in government bank accounts, and produce regular budget reports. The authorities also intend to request technical assistance to (i) improve the expenditure management process including through installation of a robust computerized system; (ii) establish an external audit function, and (iii) bring the procurement process in line with international standards.

D. Governance Issues

25. The authorities worked with the staff on a set of measures to address a number of governance issues whose resolution will be critical for economic recovery and the rebuilding of trust in the functioning of government These include (i) fulfillment of the conditions required for a lifting of the UN ban on timber exports; (ii) financial and systems audits of the major revenue-generating government agencies and the CBL; (iii) steps to fully liberalize petroleum product imports; and (iv) regularization of government’s domestic debt and arrears.

26. With regard to the establishment of conditions that could lead to a lifting of the UN ban on timber exports, the staff recommended giving priority to the creation of a transparent accounting system for timber-related revenue. As the buildup of such a system could take time, the authorities were encouraged to consider the temporary implementation of alternative mechanisms while the envisaged accounting system was being put into place. One possibility would be a trust fund, managed by an international agent with experience in this area (such as the World Bank) and fully integrated into the budget, to ensure that all revenue due is received and that expenditure is directed to social and humanitarian purposes. Such a trust fund could also be used to channel external financial assistance in an accountable fashion, as is for example done in Afghanistan (Appendix VI). The authorities expressed their strong interest in such an arrangement.

27. The authorities intend to hire international consultants for systems and financial audits of the three major revenue-generating agencies (BMA, FDA, LPRC), with financial support from the EU.12 The staff welcomed this initiative and provided comments on the draft terms of reference for the envisaged audits. The staff agreed with the authorities that the audits should adopt an essentially forward-looking perspective to improve overall efficiency in discharging the agencies’ functions. They should also determine the agencies’ current financial positions, particularly their financial liabilities and payments arrears. In addition, the staff recommended publication of the audit reports. The authorities expected to conclude the audits during the first half of 2004, with a view to beginning the implementation of recommendations on strengthening administrative and financial systems and operations by the start of the 2004/05 fiscal year (July 2004).

28. In the area of petroleum products, further steps are under consideration to create an adequate framework for fully competitive private imports. LPRC has prepared standard contracts for future imports, as well as a set of requirements that need to be satisfied by prospective importers.13 The staff encouraged the authorities to approve these documents quickly and to appoint the LPRC’s Board of Directors. However, while recognizing the need for LPRC to acquire and maintain a strategic reserve of petroleum products for emergency situations, the staff cautioned against LPRC’s plans to become an active importer—this would run counter to their supervisory and regulatory function in the petroleum sector. The staff also encouraged the authorities to move to a system of competitive bidding for import contracts.

29. The staff endorsed the authorities’ plans to carry out a comprehensive verification of domestic debts and arrears and to develop a transparent and equitable strategy for their settlement. Over the years, the government has accumulated sizable liabilities to suppliers, commercial banks, and the CBL, and civil servants have not been paid for almost two years. The staff urged that such a strategy be developed expeditiously as the early settlement of some payments arrears could help boost economic activity and rebuild confidence. Owing to the possibly large size of domestic obligations, a solution to the issue is likely to involve a substantial reduction in the face value of the claims on government.

E. Monetary and Banking Issues

30. The authorities intend to maintain the current dual currency system for the time being (Box 3). They noted that, while a transition to a system with one national currency as the sole legal tender may be beneficial in the long term, the removal of the U.S. dollar as legal tender would undermine confidence in the short term; also, such action would not be viable in light of the high degree of dollarization, which further increased in 2003. The alternative—to move to the U.S. dollar as the sole legal tender—was also not considered viable, as the U.S. dollar amounts required to redeem Liberian dollars in circulation were not available.

31. In light of the expected rebound in demand for Liberian dollars, the staff urged the authorities to move to market-based and transparent instruments of monetary policy. At present, the CBL’s only instrument to influence liquidity is reserve requirements, and the modalities used so far to allocate foreign exchange through banks lack transparency.14 Also, the CBL discourages interbank transactions, and there are ceilings on lending rates. The staff recommended exploring options to develop money and interbank markets, including for foreign exchange, over the medium term. In the short term, it urged the authorities to move quickly to adopt transparent mechanisms for foreign exchange transactions, such as auctions. The authorities indicated their interest in moving to a more diversified set of monetary instruments but stressed the need for technical assistance in these areas. Regarding foreign exchange auctions, they argued that such auctions had at times been subject to fraudulent practices. The staff responded that other countries had successfully addressed such problems through the appropriate design of the auctions.

Liberia’s Dual Currency System

Liberia has a dual currency system under which both the U.S. dollar and Liberian dollar are legal tender. However, in practice they are used for different purposes. In addition, the Liberian economy is highly dollarized. This gives rise to a number of issues:

  • Currency use. The Liberian dollar is used for small-scale cash transactions and, to a limited extent, as the currency for bank deposits. It is thus the main currency used by the poorer and rural segments of the population. The U.S. dollar is widely used for trade and financial transactions and for larger cash payments; it is the currency of choice for the wealthier and urban population and local donor representatives. Changes in the exchange rate, and associated changes in prices measured in local currency, are therefore likely to have different effects on different social strata. For example, a depreciation of the Liberian dollar could have a large negative impact on real incomes of the poor while the wealthier segments of the population would be largely unaffected.

  • Demand for Liberian dollars. In addition to the demand from lower-income groups, the government is in large part driving the demand for local currency through its payment of the wage bill in Liberian dollars. The exchange rate therefore reacts to seasonalities in the payment of public wages and changes in the volume of transactions in rural areas. Resumption of regular civil service pay and the reactivation of agricultural activities are expected to lead to an increase in the demand for Liberian dollars.

  • Adequate level of international reserves. Large but unknown quantities of U.S. dollars in cash are circulating in the private sector. It is, therefore, difficult to assess the level of international reserves that should be considered adequate. In any event, the level should be lower than in a system where only the local currency is legal tender.

  • Impact of monetary policies. The current high degree of dollarization renders monetary policies largely ineffective. Macroeconomic stabilization is, therefore, expected to be achieved mainly through fiscal policies.

32. The CBL is facing financial difficulties, as it has not been able to realize regular investment income from international reserves for some time and it continues to be undercapitalized. The CBL also holds substantial but largely unserviced claims on the government from lending over the past decades. In addition, the CBL’s operating costs appear high. As a consequence, the CBL has had to rely on its scarce liquid assets to fund part of its operations. The CBL has taken some steps to reduce costs, and the Ministry of Finance has resumed some limited payments on the government’s liabilities to the CBL. However, the staff pointed out that these measures were still insufficient to eliminate the CBL’s operating deficit and urged the authorities to consider further steps to strengthen the institution’s financial situation. In any event, tapping the CBL’s limited liquid assets to fund its operations should be a strictly temporary measure.

33. Looking forward, the CBL needs to be more adequately capitalized, following a thorough audit of its financial position, including a count of cash in vault and unissued currency. The staff took note of a voluntary audit that was being conducted for the period January-August 2003, and that might help establish some of the data required for an assessment of the CBL’s capitalization needs. However, the mission urged the CBL to agree to a comprehensive external audit so as to shed light on its true financial situation and provide a basis for strengthening its accountability and developing further cost-cutting plans.

34. A medium-term strategy is needed for the recovery of the banking sector. While the quality of the banks’ loan portfolio has deteriorated owing to an increase of nonperforming loans, their income position has remained broadly stable on account of the fees levied on buoyant remittances and other international transactions. The CBL’s supervision department is monitoring the situation closely and has agreed to work with the staff on a medium-term strategy for the sector. However, a rapid economic recovery will be a key condition for strengthening the banks’ position.

F. External Debt Issues

35. Liberia’s stock of external debt amounted to US$2.9 billion (650 percent of GDP) at the end of 2003, about half of which is owed to multilateral institutions. External debt increased by US$74 million during the year, owing to a further accumulation of arrears and the depreciation of the U.S. dollar (Table 5). Nearly all of Liberia’s external debt is in arrears, amounting to US$2.6 billion at end-2003.

Table 4.

Liberia: Balance of Payments, 1999-2004

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Liberian authorities; and Fund staff estimates.
Table 5.

Liberia: External Public Debt, Debt Service, and Arrears, 1999-2003

(In millions of US dollars, end of period)

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Sources: Liberian authorities, and Fund staff estimates.

36. The NTGL is fully aware that Liberia’s large external debt overhang is an impediment to long-term economic viability. While much of the authorities’ attention is currently focused on immediate humanitarian and reconstruction needs, the staff noted that a resolution of the external debt situation would likely be a complex and lengthy process, and therefore urged them to start exploring potential options for its settlement, in conjunction with creditors.

G. Relations with the Fund and Possible Staff-Monitored Program (SMP)

37. The mission recognized the steps taken by the NTGL and its further intentions to improve relations with the Fund. In a departure from the past, discussions on the policies were held in a largely collaborative manner. The staff welcomed the authorities’ resumption of monthly token payments of US$50,000 to the Fund that began in January 2004. It indicated that these payments represented an effort in light of a difficult financial and budgetary situation, but that they did not exceed the country’s current capacity to pay. As was also explained, a sustained track record of regular payments and implementation of sound policies, and prospects for its continuation, could lead to a formal determination by the Fund’s Executive Board that Liberia had credibly begun its cooperation with the Fund. This determination would mark the starting point for the de-escalation process of the current remedial measures, with the expectation that Liberia’s cooperation on policies and payments to the Fund would strengthen progressively during that process. Establishment of a sustained track record would also be critical for the eventual resolution of Liberia’s arrears to the Fund.

38. The authorities expressed their interest in moving toward an SMP. The staff explained that an SMP would be needed to support the establishment of the track record mentioned above, and could also help build confidence in the NTGL’s policies. However, an SMP would only be advisable once certain capacity constraints in economic management and in the provision of key economic information are overcome. The authorities agreed that further collaboration in providing key data, in implementing the economic program through mid-2004, and in preparing the 2004/05 budget and economic program would provide adequate opportunities to test their preparedness for an SMP.

IV. Assessment of Technical Assistance Needs

39. Parallel missions from FAD, MFD, and STA conducted an assessment of technical assistance needs. The missions found that, despite the largely devastated physical infrastructure, some institutional capacity remained in a few key areas, in part reflecting the implementation of recommendations of previous technical assistance by the Fund and other external partners. The formulation and implementation of a sound macroeconomic framework, however, would still require substantial and continued technical assistance in various areas (Appendices I, II, and III). In the fiscal area, it is critical to strengthen tax and customs administration and the budget process; in the monetary area, technical assistance should focus on central bank operations; and Liberia’s capacity to produce statistics on national accounts and prices needs to be rebuilt.

40. In view of the authorities’ demonstrated intent to strengthen policies and the urgency of their institution-building needs, the staff recommends that targeted technical assistance from the Fund be resumed.15 If this proposal is approved, the Fund’s role in providing technical assistance would be closely coordinated with other interested donors and the World Bank.

V. Donor Activities

41. The NTGL has, in collaboration with external partners, developed a time-bound plan—called the Results-Focused Transitional Framework (RFTF)—to guide reconstruction efforts through end-2005 (Box 4) The UN and World Bank assessed financial needs for the implementation of the RFTF at about US$500 million. In addition, the UN has estimated requirements for humanitarian assistance at about US$135 million for 2004.

42. Donors have pledged USS440 million for reconstruction and US$85 million for humanitarian assistance in an international conference in early February.16 The largest pledges were made by the United States and European Union (about US$200 million each), while other significant commitments were made by the United Kingdom, Germany, Norway, and Ireland.17 Other donors envisaged contributions to the UNMIL budget.18 The World Bank announced the disbursement of about US$50 million in grants during 2004–05.

43. At the conference, external partners supported the RFTF as the basis for their financial and technical support. They stressed that the establishment of security is a key pre-condition for the framework’s implementation, and also advised to give appropriate attention to humanitarian assistance while reconstruction plans are being implemented. Donors mentioned the need to continuously update the RFTF as external partners begin to specify their support, and welcomed the NTGL’s plan to establish a monitoring unit to facilitate this task. The next consultation with external partners is expected in about six months.

The Results-Focused Transitional Framework (RFTF)

With the help of external partners, the NTGL has drawn up a set of priority results to be achieved through end-2005. The expected outcomes in nine areas are contained in a time-bound action plan. The plan also proposes mechanisms for the management, monitoring and evaluation of envisaged actions.

The main expected results in the nine areas are:

  • Establishment of security through the deployment of some 15,000 UN troops and restructuring and retraining of the armed forces.

  • Disarmament, demobilization and reintegration of ex-combatants.

  • Provision of transport, household items, and food assistance to returnees and internally displaced persons.

  • Strengthening of governance, democratic development and the rule of law.

  • Preparations for free, fair and transparent elections.

  • Provision of basic social services (health, education, nutrition, water and sanitation).

  • Restoration of productive capacity, especially in agriculture.

  • Rehabilitation of key public infrastructure (power, transport and communications).

  • Strengthening of economic management capacity in areas including financial management and audit, budget and statistics, public sector procurement, financial system, public enterprises, and natural resource management.

VI. Staff Appraisal

44. The transitional government has inherited a largely devastated economy, dysfunctional government institutions, and deeply rooted governance issues. Concerted efforts of the international community are needed to rebuild the economy and government functions. Taking into account the limited time and capacity available to the NTGL, it is important that the authorities focus on a carefully prioritized set of concrete actions to achieve significant change in identified priority areas. Broad-based domestic support for this strategy will be a precondition for its sustainability.

45. Prospects for economic recovery in the near future depend on the solid reestablishment of security and the pace of humanitarian and reconstruction assistance. The cautious macroeconomic framework for the first half of 2004, envisaging a cash-based budget and some modest recovery of deposits and international reserves, aims at establishing a more stable macroeconomic environment while a moderate economic recovery may take place.

46. The authorities have demonstrated their resolve to quickly begin to address difficult issues. The swift adoption and implementation of measures to strengthen revenue collection, return to an orderly budget process, and tackle a number of key governance issues have already led to tangible results. However, continued progress in these areas will be essential.

47. Envisaged measures to further boost revenue are appropriate as they aim at improving collections where feasible in the short run. Swift extension of sales taxes to a number of services will be particularly important to this end. To further strengthen budget processes and controls, it will be crucial to implement a robust computerized financial management system. Swift conclusion of audits of the main revenue-generating agencies and the CBL should lay the groundwork for a more detailed and appropriately focused agenda to improve governance. Petroleum product imports need to become fully market-based, including through a move to competitive bidding on contracts.

48. Liberia’s financial sector needs to be substantially strengthened to be able to play its role in economic recovery. Options to improve the overall position of commercial banks should be explored as a priority. The CBL should take swift action to strengthen the efficiency of its operations and its accountability framework. Measures to diversify monetary operations also need to be considered. In the short term, the staff urges the monetary authorities to move to transparent and market-based foreign exchange transactions, such as auctions.

49. Donor activities should become increasingly connected to government processes, and be fully recorded in the budget data. External partners need to work with government to establish mechanisms that allow donor funds and certain sensitive revenue flows to be managed and monitored in a transparent and fully accountable fashion. Such mechanisms, if properly designed, can contribute significantly to capacity building and ensure a growing degree of ownership over time.

50. Broad-based technical assistance is essential to rebuild capacity in many areas of economic management. The authorities should work with the staff and other interested external partners to establish a coherent and fully coordinated strategy in this area.

51. The authorities have taken significant steps to improve relations with the Fund. A continued strengthening of cooperation in implementing sound and increasingly strong policies will be a key condition for normalizing relations with the Fund and other creditors over time. In this regard, maintaining an open and continuous dialogue with the staff will be crucial.

APPENDIX I: Liberia: Summary of Fiscal TA Needs Assessment

A. Background and Overview

Years of war and conflict have left the government’s physical infrastructure in a complete state of disrepair:

  • Electricity is not available except via generators.

  • There are no telephone communications except cellular.

  • Buildings lack doors and windows but at least are minimally usable.

  • As a result of looting, desks, chairs, copy machines and other basic office equipment are not widely available.

  • Basic office supplies (paper, pencils, etc.) are scarce.

  • Important historical records were destroyed.

Despite this, there are some positive signs that give hope for reform:

  • Through donor support, computers have been selectively placed to help provide strategic data reports.

  • The staff is knowledgeable, and many have a good understanding of basic processes and would benefit from a capacity-building program.

  • Some foreign-trained Liberians have returned to assume key positions.

  • Several previous recommendations provided by the IMF and other international organizations have been implemented.

Systems and procedures designed to provide integrity are in place in some areas of fiscal management. Some of these are the direct result of past technical assistance and were implemented without much international support. The basic procedures are good, but they tend to be repetitive and burdensome, sometimes with an unclear purpose, and often missing the big picture. There is basic checking of information but no real auditing. Reports tend to be narrow – separate revenue and expenditure reports but not a full fiscal report that also includes financing. The more overriding concern, however, is the pervasive view that there are widespread governance problems.

The recommended approach will have to be multifaceted:

  • Strategic placement of experts to help with certain areas (e.g. budget preparation)

  • Apply an integrated project approach to technical assistance (TA), in which there will be several experts and systems that involve computerization and other equipment.

  • All aspects of fiscal management should be the responsibility of the Ministry of Finance.

  • Perform financial audits in areas with credible alleged governance problems.

  • Management contracts are required in areas where there is a perception of financial irregularity.

  • Establish a trust fund (complete with auditing) that could serve as a financing source for government expenditures, but with the goal of using government procedures (after some modifications); the fund established in Afghanistan could serve as a model.

  • Training should concentrate on familiarizing the staff with best practices in revenue and expenditure management and policy. Computer training would also be necessary as information technology (IT) is introduced.

  • When conditions permit, evaluate how various processes can be extended beyond Monrovia.

B. Revenue Administration

Current situation

In spite of the severe economic and political conditions prevailing in Liberia since the last IMF revenue mission in 2000, significant progress has been made in implementing many reforms (the new tax code, general sales tax, large taxpayers’ unit, harmonized system, and single administrative document). Furthermore, the staff has demonstrated a solid understanding of its responsibilities. However, basic tools and training are virtually nonexistent. Procedures in revenue administration, while sound, are generally antiquated, with excessive rework, duplication, and manual cross-checking at virtually all steps of transaction processing and revenue accounting. The view is pervasive among clients and the international community that corruption is widespread in customs and to a lesser extent in the Direct and Indirect Tax Departments.

Short-term needs

The following short-term actions should be taken by the National Transitional Government of Liberia (NTGL) (over the next three months):

  • Amend the contract with the Bureau of Inspection Valuation Assessment and Control (BIVAC) to provide for BIVAC supervision of the ship/aircraft unloading and manifest control process in Monrovia and performance of the exit gate function. BIVAC should report its findings in monthly reports, which should be made widely available within the government and to selected international and bilateral institutions.

  • Revoke by administrative order the current practice of exempting companies from preshipment inspection (PSI) or voluntary participation, so that BIVAC’s additional responsibilities can be financed through an expanded base of importers subject to PSI, rather than through an increase in the fee rate.

  • Share BIVAC contract negotiations between the Ministry of Finance and the Ministry of Industry and Commerce in the short term; transfer BIVAC contract negotiations and overall responsibility to the Ministry of Finance in the long term, as the primary purpose of the contract is revenue protection.

  • Seek external financing to conduct an external audit of all manifests received since October 14, 2003, in order to ensure that all goods are accounted for and all revenues owing are collected.

  • Reduce the redundancy of having eight agencies perform goods examination for imports, in accordance with internationally accepted best practice.

  • Seek technical assistance to assess the fiscal impact of all revenue exemptions and recommend steps to reduce tax expenditures and the discretionary powers granted by the legislature. The Ministry of Finance should fulfill its reporting obligations under the tax code regarding tax expenditures and specifically report on action taken to reduce and better control tax expenditures.

  • The large taxpayers’ unit should report to the Deputy Minister of Revenue, and its mandate should be expanded to include customs, excise, and general sales tax (GST).

  • Consider revoking the suspension of the GST on restaurant services, and consider accelerating the application of the GST on new services – which was already planned as phase 2 of tax reform (e.g., courier services, accountants, lawyers, car rentals, video rentals, cell phone services, and others). The extension of the GST to new services would require a proposal to the legislature in the next budget exercise.

  • Implement the previous IMF recommendation to make the taxpayer identification number (TIN) mandatory for all import permits, customs, GST and tax documents, and revoke the practice of charging a fee for it.

  • Implement an appeals process for disputes regarding tax matters, as in the tax code.

  • Evaluate various options over the medium term for management of customs (and the port) utilizing a steering committee with representatives from the Ministry of Finance, other government stakeholders, and donor(s) as appropriate.

C. Public Expenditure Management

Current situation

Despite severe constraints, the authorities have been able to maintain a public expenditure management (PEM) system that has a number of good features. In particular, they are able to produce timely end-of-month cash and commitment expenditure reports and revenue reports, and are able to achieve a degree of reconciliation of their accounts with the Central Bank of Liberia (CBL). Overall, the mission noted that, although the staff had an understanding of the critical PEM issues, implementation weaknesses would need to be corrected. The current system has an excessive number of steps, many of which are redundant and serve no apparent purpose, the fiscal reports are not complete, budget execution is too concentrated in the Ministry of Finance, and monitoring is inadequate to enable management to take corrective measures, cash planning is minimal, and the staff has not received recent training in PEM. Furthermore, the budget preparation process is extremely fragmented. With some procedural changes and with a technical assistance program – including the provision of equipment – the ministry could run a PEM system with the appropriate degree of transparency and control. However, this would have to be supplemented by additional auditing – most likely, with significant international oversight – with a view to addressing alleged governance issues.

Short-term needs

The short-term actions (next three to six months) that could be taken by the NTGL include the following:

  • Generate comprehensive monthly fiscal reports, with explanatory notes, to ensure in-year monitoring (formats were provided to authorities). These could be overseen by a fiscal analysis unit within the Ministry of Finance, reporting directly to the Minister of Finance.

  • Incorporate in the annual budget appropriation law—including for the upcoming budget for the last half of fiscal year 2003/04—certain features, including provisions to ensure a cash budget, and identify revenue policy changes and their revenue implications. When transmitting the draft budget to parliament, the ministry should indicate the financial impact of each policy measure, and spell out that parliament will have to reduce expenditures accordingly for any revenue policy change that it fails to adopt.

  • Introduce more effective cash planning; operationalize the proposed Cash Management Committee.

  • Ensure full bank reconciliation of both revenues and expenditures, and reconciliation of daily and monthly reports with month-end bank balances.

  • Conduct a weekly analysis of commitments, taking account of their time profile; restrict validity of checks to six months.

  • Ensure that government of Liberia accounts in commercial banks are (and remain) closed and consolidate all government of Liberia accounts into a single treasury account.

  • Ensure that the practice of existing direct debits on the government of Liberia accounts is stopped. Enter into a formal agreement between the government of Liberia and the CBL on the role of the CBL as a fiscal agent of government.

  • Seek technical assistance in the expenditure management process as a way to streamline the processes and ensure more transparency and better control. This may entail limited computerization and transfer of some responsibility to international advisors.

  • Establish an externally managed and audited trust fund to provide a source of budget financing as an encouragement to donors to work through the NTGL PEM system.

  • Seek technical assistance to establish both external audit responsibility and a reformed procurement process consistent with international best practices.

  • Modify procedures to increase the degree of delegated authority in budget execution (this will likely depend upon the degree of computerization).

  • Establish a system to obtain donor data on a regular basis, even if not channeled through the budget, to ensure comprehensiveness and transparency of budget coverage.

  • Include all extrabudgetary funds in the budget to make it more comprehensive.

  • Over the medium term, work toward merging the primary responsibility for all aspects of budget preparation and execution under the Ministry of Finance, to coordinate fiscal management.

APPENDIX II: Liberia: Early Findings and Initial Priority Technical Assistance Recommended in the Monetary and Financial Systems by the IMF Mission in December 2003

A. Early Findings

In summary, the IMF mission found that substantial and urgent support is needed from donors and technical assistance providers to prevent the further erosion of the confidence in the currency and the financial system of Liberia, which could dramatically affect the ability of the new authorities to handle an already complex and difficult economic situation.

State of the financial sector

With regard to the financial sector, the mission found the following:

  • The fragile situation of Liberia’s monetary and financial systems is threatening the upswing in economic activity expected during 2004. An undercapitalized banking system is not a good source of finance for economic growth, and potential liquidity problems, despite the present good liquidity ratios, make the financial system vulnerable. It is critical that the Central Bank of Liberia (CBL) maintain confidence and operate credibly, both to address potential liquidity concerns and satisfy donor concerns for payment surety.

  • The CBL and the three banks legally operating in the country are recording weak earnings, two are troubled, and the system is thin on liquidity.

  • Problems in the real economy, as well as an uncertain stock of Liberian banknotes in the market and a very limited reserve of unissued banknotes in the vaults of the CBL, are leading to a complex liquidity situation for the national currency.

  • The economic consequences of Liberia’s cash economy and rudimentary payment system have not been made better by the security situation.

Central bank and banking operations

In this area, the mission found the following:

  • The CBL has good facilities and infrastructure.

  • The absence of a developed financial market infrastructure limits monetary operations, and the monetary framework and instruments used are not market oriented. Limits on interest rates distort credit and savings market pricing.

  • Mounting cash-handling problems in an already heavily cash-based economy threaten to deepen the financial blockage, spreading to and putting at risk the larger economy.

  • The CBL and the banks appear to have relatively well-designed, computerized accounting systems. Financial data are normally available, but accounting rules and standards require some updating to reflect international best practices.

  • The bank supervision function has generally competent staff but would benefit from exposure to more modern examination techniques.

Financial legislation
  • New key financial sector laws were enacted in the late 1990s and are generally of a high standard. Based on international experience over the last five years, a thorough assessment is required to review the CBL’s governance and accountability.

  • Financial sector by-laws, regulations, instruction, rules, etc., have not been continuously modernized.

B. Initial Priority Technical Assistance

Financial legislation

Actions recommended include the following:

  • Review CBL Act to identify (i) any issues of governance and accountability while preserving necessary central bank independence; (ii) distribution of profits; (iii) nature of lending to the government of Liberia; and (iv) rights and obligations on statistics and information.

  • Review Financial Institutions Act to (i) allow interbank deposits and lending; and (ii) clarify rights and obligations on statistics and information.

  • Draft Payment Law and regulations for payment transactions and settlement systems.

  • Draft law/procedures for anti-money laundering/combating the financing of terrorism (AML/CFT).

Central bank modernization

The following actions were recommended in this area:

  • Review CBL governance and administration.

  • Review the CBL role as government fiduciary and the agency agreement with contracts for provision of CBL/Ministry of Finance services.

  • Develop liquidity forecasting capacity and design short-term debt instruments to establish a money market and facilitate monetary operations.

  • In order for the government of Liberia to obtain required stocks of Liberian currency, ensure that the CBL initiate a transparent, fair, and accountable system (such as auctions) on behalf of the government to exchange U.S. dollars for Liberian dollars.

  • Review the regulatory framework’s compliance with Basel Core Principles and strengthen supervision of commercial banks and foreign exchange bureaus.

Financial sector reforms

The mission recommended that the following reforms be implemented:

  • Provide a market-based vision for banking sector restructuring and competition.

  • Design a framework and advise on resolution of insolvent and troubled banks.

  • Strengthen the Liberian Bankers’ Association.

  • Review licensing and regulation of foreign exchange bureaus.

Currency and payment

The mission made the following recommendations:

  • Evaluate CBL’s cash currency operations.

  • Plan nationwide payment, clearing, and settlement systems.

  • Set up oversight of payment system.

  • Design appropriate payment system.

Accounting and financial disclosure

Technical assistance recommended in this area includes the following:

  • Enhance CBL accountability and credibility by conducting an independent external audit to include validation and valuation of assets (including but not limited to a full-scope cash count of vault cash and uncirculated currency) and the core functions of the central bank.

  • Update accounting standards used by the CBL and banks.

  • Advise on the use of International Financial Reporting Standards (IFRS) and the reporting framework required under these standards for the CBL and the banks.

  • Revise the chart of accounts for the CBL and for the banking sector.

Outline of a Technical Assistance (TA) Implementation Plan

Indicated in the table below are TA assignments that the IMF would be prepared to address in the monetary and financial systems areas either alone or in collaboration with other donors or TA providers.

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APPENDIX III: Liberia: Needs Assessment for Technical Assistance in Statistics and Recommendations by the IMF Mission in December 2003

Introduction

The mission assessed technical assistance needs in statistics covered by the IMF’s technical assistance program (national accounts, prices, government finance, monetary, and balance of payments statistics). In doing so, it updated the findings and recommendations of the “Report on the IMF Multisector Statistics Mission to Liberia, May 1998.”1 The earlier report distinguished between actions that could be taken by the Ministry of Finance (MOF), Central Bank of Liberia (CBL), and Ministry of Planning and Economic Affairs (MPEA), taking into account their existing resource capacity, and actions that required significant donor involvement. To provide some insight into the present institutional capacity of these agencies to produce statistics, the following reviews progress made in implementing the IMF’s recommendations on the statistical work plans of these agencies and experience in recent donor-funded projects in the statistical area. This is followed by a review of the prerequisites for donor support in restoring Liberia’s pre-conflict capability for producing statistics, and a listing of the work programs of the main data-producing agencies for which donor assistance is needed.

Present institutional capacity

Following the 1998 mission, the IMF provided technical assistance in the form of visits by experts in monetary and balance of payments statistics (both to the CBL). As a result, the CBL has a well-established monthly reporting system by commercial banks and a monetary statistics database that broadly meets the operational needs of the authorities and the IMF. However, there are emerging problems of classification in data reported by commercial banks, and there is a need to require banks to report in a standard format in accordance with international accounting and statistical standards; this need should be addressed through further technical assistance. The balance of payments statistics project was less successful, although progress was made in establishing a reporting system for foreign currency remittances. It was evident that, outside the monetary sector, the CBL does not have the capacity to undertake regular statistical surveys needed for balance of payments compilation and has suffered from a reluctance by some government agencies to coordinate their data collection activities with the CBL, or share available data with the CBL. The mission judged that the CBL did have the capacity to produce a summary balance of payments statement and would benefit from further technical assistance, for which purpose resources in the CBL were broadly adequate to provide necessary support. However, to support this work, there is a need to revise existing central bank legislation to give the CBL legal authority to mandate the reporting of statistics needed for balance of payments compilation, and the CBL needs to build its capacity to conduct statistical surveys.2

The 1998 mission made a number of recommendations in government finance statistics (GFS) that it considered could be implemented by the MOF with existing institutional capacity and without further technical assistance. The MOF has subsequently implemented the 1986 Government Finance Statistics Manual (GFSM86) classifications for budgetary receipts and payments on a cash basis for all the institutional units of budgetary central government; these classifications are used to report monthly aggregates consistent with GFSM86 fiscal groupings. Appropriate exchange rates are now used to express summary statements on budgetary activities in Liberian dollars. For budgetary central government, the MOF has also instituted procedures for reconciling its own records of receipts and payments with financial statements provided by the CBL, and it has made efforts to update and reconcile outstanding debt amounts with creditor sources, with the result that it has established a database on external and domestic debt in which creditor and debtor sources have been largely reconciled. Also, the analytic presentation of budgetary central government broadly corresponds to GFSM86 except for the treatment of lending minus repayments, grants-in-kind, arrears, and interest.

Other recommendations in the area of GFS were contingent on a significant expansion in MOF capacity and on donor resources. These recommendations remain relevant and include an expansion of the MOF’s fiscal database to cover data for (i) the consolidated central government account, according to GFSM86 definitions (this should include central government units with individual budgets, such as the Forest Development Authority, the National Port Authority, and the National Social Security and Welfare Corporation)3 and should also include the development budget currently managed by the MPEA; (ii) all public enterprises, according to the requirements of GFSM86; and (iii) expenditures in Liberia by foreign donors that are not funded through central government accounts (included as a memorandum item in GFSM86 and of particular importance for Liberia). An attempt should also be made to establish a migration path to the 2001 Government Finance Statistics Manual (GFSM01), which would allow the MOF to convert, over time, its fiscal database from cash to accruals accounting (including, for example, wage and tax arrears and also including contingent liabilities). With the increasing role of the local government in priority expenditure, there is an emerging need to compile and monitor data for the whole of the general government.

The program listed above would benefit from the development of a Computerized Integrated Financial Management System, establishment of a comprehensive budget classification system for the full scope of GFS, and establishment of a separate high-level and visible statistical compilation unit with trained staff reporting to the Minister or Deputy Minister for Expenditure and Debt Management. The statistical compilation unit should advise on the scope of the fiscal database to be maintained, including the use of the GFS framework, which would help both release synergies and address some of the deficiencies resulting from the present diffuse arrangements for statistical compilation. Subject to an expansion in MOF capacity and donor support, the program would require technical assistance in setting up a database consistent with GFSM01.

The 1998 mission concluded that the MPEA had virtually no capacity to resume data collection and compilation of national accounts statistics, but it did make recommendations in external trade and consumer price statistics that it considered could be implemented by the MPEA with existing institutional capacity and without further technical assistance:

  • In consumer price statistics, the resumption of the old Monrovia consumer price index was recommended. Because the weights, selection of outlets, and selection of pricing items were outdated, it was recommended that steps be taken to deal with items that had disappeared from the market, and that a modified Laspeyres formula be adopted to address series where substitution had taken place. In the event, these steps were not taken, although the Monrovia consumer price index was reintroduced. As a result, the index may be seriously flawed. Because of the lack of computer resources in the MPEA, the index is now compiled on the CBL’s computers. Plans to compile a new national consumer price index are contingent on the completion of a national Household Income and Expenditure Survey (HIES).

  • In external trade statistics, the compilation of external trade statistics based on data collected by Bureau of Inspection Valuation Assessment and Control (BIVAC) International was recommended with appropriate coverage adjustments, and with the preparation of methodology and computer programs in support of the compilation of indices of foreign trade volume and unit values. In the event, this was not done due to lack of capacity in the MPEA.

  • In national accounts statistics, the resumption of the annual national accounts questionnaire for industrial enterprises was recommended as a step toward compiling GDP at current market prices. In the event, this was possible only with financial support from the United Nations Development Program (UNDP) and only for 2002, and even then the outcome was disappointing, owing to nonresponse. The MPEA remains unable to compile reliable estimates of GDP at current and constant market prices.

Substantial donor support will be needed to reestablish MPEA’s capacity to compile national accounts statistics in the longer term. Such a work program should include (i) establishment of a national business register, (ii) resumption of an annual Establishment Survey and an Annual National Accounts Questionnaire for manufacturing, mining, utilities, and agriculture, and (iii) completion of an HIES. This work program should be undertaken in parallel with the compilation of detailed central government accounts (by the MOF), the compilation of statistics on agriculture production (by the Ministry of Agriculture (MOA), the compilation of foreign trade volume and unit value indices and producer and consumer price indices (all by the MPEA), and the compilation of short-term indicators on production, employment, and earnings (by the Ministry of Commerce and Industry and the Ministry of Labor (MCI)).

In its present degraded state, the MPEA is not capable of performing the critical role that would be required of it in supporting such a work program, especially given its likely involvement in conducting a population census in 2004. Also, the two main donor-funded statistical projects of recent years, the 1999/2000 United Nations Population Fund Demographic and Health Survey (for which the MPEA was the host agency) and the 2001 FAO Agricultural Production Survey (for which the MOA was the host agency), both fully extended the available resources of the host agencies, including resources shifted from their other activities. The 2002 UNDP national accounts project appears to have suffered from the failure of the MPEA to successfully complete the national enterprise register or the national accounts questionnaire.

Because the capability of the MPEA appears to have been degraded more than other data-producing agencies, and given the importance of the MPEA’s mandate to compile statistics, it is recommended that the Department of Statistics of the MPEA be reconstituted as an autonomous National Statistics Office, with a clear mandate and adequate resources to implement it. Such a step could help to rebuild public perceptions of the integrity of this key data-producing agency. Failure to take appropriate action could seriously weaken efforts by donors to fund statistical projects.

Prerequisites for donor support

The attached table provides a list of projects in statistics that, with donor support, would allow to reestablish its pre-conflict statistical capacity. The priority/sequencing indicated takes account of the extent to which some projects are dependent on others. Thus, the National Accounts Compilation Project could not begin until the Annual Establishment Survey and the Annual National Accounts Questionnaire have been reestablished and could not be completed until the HIES has been conducted and the national consumer price index compiled (and further refined with the national producer price index). All of these projects could be delayed if the population census has to be held back until after refugees have returned.

The design of donor-funded projects is likely to reflect the capacity of the host agency to implement a particular project and, by implication, a larger or smaller role for the donor. For example, some projects in the subject areas listed in the table would not be implemented if the host agency did not have the capacity to support the project, such as adequate manpower and computer and office resources dedicated to the project. Prior agreement is needed between the authorities and the donors as to the statistical responsibilities of each of the data-producing agencies that is to be supported. This review should address issues of duplication in present arrangements. An example is the project to develop foreign trade volume and unit value indices, which is listed under the MPEA. The project envisages the use of the BIVAC database as source data, and would require close consultation among the MPEA, BIVAC, and the MCI. The MPEA is listed as the host agency because of its prior competence in compiling volume and unit value indices. The compilation of such indices using trade data collected by the MPEA from the Customs Department would have to wait until after the contract with BIVAC to collect and compile trade statistics had been terminated.

IMF’s technical assistance program

The IMF’s competencies in providing technical assistance in statistics are listed in the table. As IMF technical assistance usually comprises short, peripatetic, or longer-term assignments by experts, for its success such technical assistance requires that the host agency has adequate manpower, and computer, and office resources to support the project, and that there be adequate legal and institutional support. In a large project such as the national accounts compilation project, IMF involvement, if requested, would probably be part of a coordinated effort involving other donors.

IMF technical assistance in statistics to its member countries is also closely linked to their involvement in the IMF’s data dissemination standards. As Liberia is participating in the IMF’s General Data Dissemination System (GDDS), it has assigned a GDDS Coordinator, Mr. Edward Liberty, Minister of Statistics, to facilitate Liberia’s participation. The IMF’s technical assistance in statistics to Liberia is likely to be guided by efforts made to implement the GDDS. These require the development of published metadata that describe the scope and coverage of current national statistics in the areas covered by the GDDS, draw attention to the main deficiencies in these data, and summarize current plans for improvement by the data-producing agencies. To facilitate implementation of the data dissemination objectives of these agencies, the table includes projects to develop websites by the key agencies (the MOF, CBL, MPEA, and MCI).

Donor-Assisted Projects in Statistics by Host Agency

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APPENDIX IV: Liberia: Relations with the Fund

(As of January 31, 2004)

I. Membership Status: Joined 03/28/1962; Article XIV.

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Obligations to Fund 1 (SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange rate arrangement

The currency of Liberia is the Liberian dollar. The U.S. dollar is also legal tender. The current exchange rate arrangement is an independent float. The exchange rate of the Liberian dollar is market determined, and all foreign exchange dealers, including banks, are permitted to buy and sell currencies, including the U.S. dollar. Liberia’s exchange rate at end-December 2003 was L$50 = US$1. A Certificate of Deposit (CD), whose conditions on issuance in late 2002 had given rise to a multiple currency practice, was redeemed at end-2003.

VIII. Article IV Consultation

The 2002 Article IV consultation discussions were held in Monrovia during December 2002. The staff report (EBS/03/20; 2/20/03) was discussed by the Executive Board on March 5, 2003.

IX. Technical Assistance

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X. Resident Representative

There is currently no resident representative in Liberia.

APPENDIX V: Liberia: Relations with the World Bank Group

(As of January 22, 2004)

The World Bank suspended disbursements to Liberia in December 1986 as a result of mounting arrears. Liberia’s loans were placed in nonaccrual status as of June 1, 1987. To that date, disbursements had totaled million US$141.3 million from 22 loans and US$91.5 million from 17 IDA credits; only US$43.6 million owing on these disbursements has been repaid.

By January 22, 2004, Liberia’s arrears to the World Bank had mounted to US$414.7 million, reflecting further interest charges. Liberia had an unmet obligation of US$2.2 million to the World Bank, as of June 30, 2003, to fulfill the Maintenance of Value (MOV) clause in the Bank’s Articles of Agreement.

Since the Liberian Peace Agreement was signed in June 2003, the World Bank has participated in multidonor assessment missions and is co-hosting the International Conference for Reconstruction in Liberia in February 2004, preparing a reengagement strategy, and exploring possible use of post-conflict/LICUS grants in the areas of social assessment and support to economic management.

World Bank Group Statement of Loans/Credits/Grants for Liberia Summary in U.S. Dollars at December 31, 2003

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Source: World Bank, Integrated Controller’s System.Contact person at World Bank: Nichola Dyer 202-473-8742.

APPENDIX VI: The Afghanistan Reconstruction Trust Fund

Background

The Afghanistan Reconstruction Trust Fund (ARTF), set up in May 2002 to provide donor assistance in a coordinated, transparent, and accountable fashion, has emerged as one of the main instruments for financing the country’s budget and is set to evolve into a major source of technical assistance and investment support for Afghanistan. The ARTF is managed by the World Bank and currently receives funding from 21 donors.

Characteristics of the ARTF

1. Coverage. Within the framework of the government budget, the ARTF provides pooled foreign financing for: salaries and other recurrent costs; investment activities and programs, including quick-impact recovery projects; and costs associated with the return of expatriate experts and training programs for local officials.

2. Governance. The ARTF promotes good governance through the following requirements:

  • Support for a government-owned program, discussed and agreed with donors and reflected in a transparent budget.

  • Close integration of the ARTF into the government budget and development program.

  • Close partnership of the key agencies.

  • Donor involvement in reviewing performance and providing strategic guidance to the ARTF.

  • Separation between the policy/allocational aspects of ARTF operations and the fiduciary/administrative responsibility.

  • Full transparency and openness in ARTF processes, external management and audit.

3. Contributions. All donor contributions to the ARTF are grants, and no earmarked contributions are accepted.

4. Administration. The ARTF is administered as follows:

  • World Bank is the administrator of the ARTF. The ARTF is supervised by a management committee comprising the Asian Development Bank (ADB), Islamic Development Bank (IsDB), United Nations Development Program (UNDP), and World Bank.

  • The administrator has the authority to deny ARTF funding to any activity where doubts about the effectiveness or purpose of requested funding exist.

  • The administrator regularly monitors the procurement of goods and services and the disbursement of funds.

The administrator is charged with ensuring maximum efficiency and effectiveness in administering funds while promoting sound financial management and accountability. Administrative charges of 2-3 percent of contributions are being applied

1

The staff team comprised Messrs. Schwidrowski (head), Thomas, Senatla, and Ponce Brito (Research Assistant), Ms. Arantes (Administrative Assistant) (all AFR), and Mr. Honda (FIN). The mission worked closely with parallel missions from the Fiscal Affairs Department (FAD), Monetary and Financial Systems Department (MFD), and Statistics Department (STA) that assessed technical assistance needs in their respective areas. A World Bank team visited Monrovia at about the same time, to contribute to an evaluation of reconstruction needs led by UN agencies.

2

The review of Liberia’s overdue obligations to the Fund that was scheduled to take place by September 5, 2003 was postponed as no new economic information had become available. On that occasion, the Executive Board called for the next review to be concluded by March 5, 2004.

3

Liberia’s quota under the Eighth General Review of Quotas is SDR 71.3 million. Liberia cannot consent to its new quota of SDR 129.2 million under the Eleventh General Review of Quotas, as long as it remains in arrears to the Fund.

4

All Fund credit outstanding to Liberia is in arrears. The Fund does not apply special charges on the General Resources Account (GRA) interest obligations overdue for more than six months.

5

UNDP, “Poverty Profile of Liberia” (Monrovia: January 2001).

6

UNDP, “Human Development Report,” 2001.

7

An interim government headed by Mr. Taylor’s Vice-President Moses Blah was in place between August and October 2003.

8

The index may be seriously flawed in view of its outdated weights and selection of items (which date from 1964).

9

Non-performing loans increased from 8 percent of loans in September 2002 to 18 percent of loans in September 2003.

10

The projections also reflect some seasonal decline in collections of maritime and customs revenue, compared to the last quarter of 2003.

11

The dual currency system will require two treasury accounts, one in U. S. dollars and the other in Liberian dollars.

12

The audit of the CBL is discussed in para. 32.

13

The requirements include minimum standards of financial solidity and product quality.

14

Allegedly, no foreign exchange transactions took place in 2003. However, the CBL has not provided the staff with an explanation of what led to the decline of international reserves from US$1.8 million at end-2002 to US$0.3 million by September 2003. The CBL has also not provided details on the allocation mechanism being used so far.

15

A formal decision is proposed in the companion paper “Liberia—Overdue Financial Obligations to the Fund”.

16

The Conference took place in New York on February 5-6, 2004. It was co-hosted by the UN, United States administration, and the World Bank. Key speakers included Messrs. Kofi Annan and Colin Powell.

17

Further pledges are likely as a number of donors were unable to make multi-annual commitments at this stage.

18

UNMIL’s budget is US$565 million through June 2004.

1

The report was presented to the authorities and is not a public document. However, it can be made available by the IMF to others with the permission of the authorities.

2

As an example, the CBL should collect data on the balance of payments transactions of foreign owned logging companies. The design of the questionnaire should take into account the likelihood that the local offices of these companies maintain limited accounts on their operations, possibly confined to local expenditures, and may be unable or reluctant to report investment income. A balance of payments expert could help address these issues of questionnaire design, but this would have little impact if the CBL lacked a mandate to require statistical reporting. The Forestry Development Authority would be required only to provide a register of logging companies.

3

In the present mission, it was concluded that the National Port Authority should be treated as a public enterprise in the GFS classification and the Bureau of Maritime Affairs should be treated as a unit of central government.

1

Software for the management of external debt databases is provided by the United Kingdom (the Commonwealth Secretariat) and by the UN Conference on Trade and Development.

1/

The projection of charges and interest assumes that overdue principal at the report date (if any) will remain outstanding, but forthcoming obligations will be settled on time. The estimates of amounts of charges and their due dates are estimates and subject to change.

Liberia: Report on Post-Conflict Economic Situation and Prospects for January-June 2004
Author: International Monetary Fund