Statement by Ismaila Usman, Executive Director for Liberia

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.

Key Points:

  • 1. Physical and Economic structures have largely been destroyed by the war;

  • 2. Administrative and technical capacities have been significantly weakened;

  • 3. About one third of the population is estimated to have been internally displaced;

  • 4. Poverty is extreme and widespread with more than three quarters of the population living on less than US$1 per day;

  • 5. Real GDP is estimated to have declined by 30% in 2003;

  • 6. Exports contracted sharply due to UN sanctions and ban on some export commodities;

  • 7. Banking sector is weak, and there is a high degree of dollarization in the economy;

  • 8. Authorities have resumed token monthly payments to the Fund;

  • 9. A medium-term economic framework tilled Results-Focused Transitional Framework (RFTF) has been drawn up to guide reconstruction efforts through 2005;

  • 10. Government accounts have been transferred to the Central Bank of Liberia (CBL) and Revenue collection has been centralized;

  • 11. At a donors conference in New York in February 2004 significant pledges were made for humanitarian and reconstruction aid;

  • 12. The budget for February-June 2004 is before the National Transitional Legislative Assembly for approval. Meanwhile, the Assembly has passed a continuing resolution authorizing spending by the National Transition Government, up to one third of last approved budget to cover essential categories of expenditure pending the main budget approval;

  • 13. The authorities request for a resumption of the Fund’s technical assistance in light of pressing capacity constraints and capacity building needs.

Introduction

The National Transitional Government of Liberia (NTGL) under Chairman Gyude Bryant, expresses its deep appreciation to the Executive Board and Management, as well as the staff of the Fund for their understanding and support in the administration’s current efforts to resume cooperation with the institution, and in the enormous challenges facing the Liberian economy.

It will be an understatement to say that the last eight months have been anything but very challenging to the new administration in Liberia, having inherited an economy that has been almost completely destroyed by the many years of internal conflict. With nearly one third of the population estimated to have been internally displaced and real GDP contracting by about 30% in 2003, there is pervasive poverty. There were also supply shortages arising from the displacement of rural population which has lead to the disruption of agricultural activities and the slowing down of commerce.

2. The new authorities are committed to reforms and restoring relations with the Fund

The new Liberian authorities, in the last few months, have been consistent in implementing policies, that have resulted in some significant progress on the economic front, as well as improvement in the country’s political and security conditions.

In particular, the authorities have demonstrated a strong commitment to resume and further strengthen cooperation with the Fund on economic policies and payment obligations, by beginning to address the many issues mentioned in the Managing Director’s letter of complaint to the Executive Board before the suspension, including some of the conditions for lifting the suspension of voting and related rights. Indeed, immediately upon assumption of office, the new administration expressed the desire to begin dialogue with the Fund staff.

Constructive dialogue followed both at home and in Washington and this has contributed immensely to the success of the New York donors conference in February 2004. The authorities have also resumed the token monthly payments of US $50,000 to the Fund, despite Liberia’s fragile balance of payments and fiscal positions, in order to re-affirm their strong commitment to implement and sustain sound policies, as well as establish a good track record.

3. Recent Developments

On the political front, the transitional government started off with cabinet posts being assigned to the previously warring parties, based on a power-sharing formula. The new government will direct the affairs of the country towards democratic elections in October 2005. To complement the new authorities’ efforts the UN Security Council established the United Nations Mission in Liberia (UNMIL) to re-establish security throughout Liberia, support the demobilization and reintegration of former combatants and help with the formation of a new army and police force.

The UN has made steady progress in the demobilization effort. About 12,000 of the 35,000 former combatants have already been disarmed. However, as a result of sporadic fighting, other areas of Liberia outside Monrovia are still suffering from lack of UN presence. As a result, many internally displaced persons had not yet begun to move back to the countryside, and the year-end planting season has been largely lost.

At the recent international donors’ conference in New York from February 5-6, donors pledged US$440 million for reconstruction and US$85 million for humanitarian assistance. Further pledges are likely as a number of donors were unable to make multi-annual commitments at the meeting, but have agreed to provide support under a common, government-led framework, while the efforts of others have already begun to stimulate economic activities in Monrovia.

On the economic front, the Liberian economy worsened further in 2003. Real GDP is estimated to have contracted by 30 percent, and the fiscal position deteriorated with the collapse of revenue to about 60 percent of its 2002 level, owing largely to the UN ban on timber exports that has been in effect since July. Timber production and export is a major industry in Liberia, accounting for about 18 percent of real GDP and tax revenue, 60 percent of export earnings, and employs about 8,000 workers. Consequently, total exports fell sharply, while imports declined much less because they were sustained by larger remittances and some donor-financed humanitarian aid flows.

However, since the inception of the current regime, substantial progress has been made in the implementation of measures to increase revenue, centralize revenue collection at the Ministry of Finance and transfer all government accounts at the Central Bank of Liberia (CBL). Also, a mini budget for the period, October 2003 to January 2004 was drawn and approved by the legislative Assembly. The budget for February-June is before the Assembly for approval. Meanwhile, however, the Assembly has passed a continuing resolution authorizing spending by the National Transitional Government up to one third of last approved budget to cover essential categories of expenditure pending approval of the main budget. The removal of import monopoly for rice and petroleum products and the revision of the retail prices, including the reinstatement of general sales tax have led to significant drop in retail prices and an increase in tax revenue.

Development in monetary aggregates and the external sector in the first nine months of 2003 mirrored deceleration of economic activities.

4. Reforms Undertaken

The new government has also implemented several of the previous recommendations of the IMF and other international organizations. Specifically, it has undertaken many far-reaching measures that will support and sustain the rebuilding of an orderly budget process, increase revenue collections, and improve governance issues towards entrenching a sustainable and viable economic management and effective reconstruction efforts. The measures that have been taken in these regards include the following:

  • b) The government has, in collaboration with external partners, developed a time-bound plan called, the Results-Focused Transitional Framework (RTFT), which will guide reconstruction efforts through 2005. The framework will be updated as donor support is realized, and there is a plan to establish a monitoring unit to facilitate this.

  • c) Despite severe constraints the authorities have been able to maintain a public expenditure management (PEM) system that has a number of good features, and are therefore able to produce timely end-of-month revenue, and cash and commitment expenditure reports.

  • d) The Finance Ministry has instituted procedures for reconciling its own records with financial statements provided by the CBL, as well as update and reconcile outstanding debts with creditors, thus, establishing a database on external and domestic debt. In this wise, rather than payment of debt and salary arrears, refurbishing government buildings and payment of current salaries will be a priority, in the expenditure for the first half of 2004.

  • e) The authorities have re-introduced the general sales tax that was suspended for rice and petroleum, and has removed tax exemptions on the two products, while abolishing the issuance of custom duty drawbacks and tax credits for imports. A formula has also been introduced to adjust retail prices every quarter, in line with international price movements.

  • f) The independent audits of the Bureau of Maritime Affairs (BMA), the Forest Development Authority (FDA) and the Liberia Petroleum and Refining Corporation (LPRC) will soon be conducted with assistance from the EU. A voluntary audit of the CBL for the period January-August 2003 has been conducted, which will greatly help in establishing some of the data required for an assessment of CBL’s capitalisation needs.

  • g) The authorities have assigned a GDDS Coordinator to facilitate Liberia’s participation in the Fund’s GDDS.

  • h) To minimise its current financial difficulties and eliminate operating deficits, the CBL has taken steps to reduce costs, while the Ministry of Finance has resumed some limited payments on the government’s liabilities to the bank.

  • i) To eliminate ghost workers, all civil servants are now obliged to present proper identification before receiving their pay cheques.

These efforts have started to impact positively on the economy.

5. Outstanding Challenges and Proposed Reforms

Enormous challenges remain in addressing capacity and governance issues, as well as the pervasive poverty in the country, the deplorable state of social and economic infrastructure, and resettling about a third of the population. There are also the daunting problems of the sizable liabilities to the CBL, commercial banks and other suppliers, which were accumulated over the years, as well as the salary arrears to civil servants that have not been paid for almost two years. Of equal significance is also the problem of Liberia’s external debt burden, which is an impediment to long-term economic viability.

Furthermore, the new administration, is still faced with weaknesses in the preparation, implementation and monitoring of the fiscal and monetary programmes, in spite of recent efforts. The inadequacy of instruments for monetary management and the general weakness in the banking system are also major concerns for the government. They realise that a rapid economic recovery will be key to strengthening the financial system. The authorities are therefore, focusing on a carefully prioritised set of concrete actions to tackle these challenges frontally.

6. Prospects for the First Half of 2004

Economic prospects have been predicated, among other factors, on the speed of deployment of UN peacekeepers throughout the country, as this will determine the rate at which displaced persons and disarmed combatants return to their homes and resume productive activities, especially in agriculture. It should be noted, however, that the UN current ban on timber exports, will constrain progress on the revival of the industry, which has been a major industry in Liberia in terms of production and export revenue.

In collaboration with staff, the authorities have drawn a cautious macroeconomic framework, that envisages a cash-based budget and some modest recovery of deposits and international reserves. Within this framework, a mini budget for February to June, 2004 has been drawn which refrains from the use of domestic financing, but projected increasing donor activities and sustained remittances. This revenue projection for the first half of the year was based on an agreed growth scenario.

On expenditure, payments of current salaries will remain a priority, as will outlays for refurbishing government buildings. For the longer run, contingent plans would be drawn up in the event that revenue collections were higher than expected, or external budgetary support is forthcoming.

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 UN sanctions on timber exports. A building up of international reserves to about US$6 million (about ½ month of imports) could be achieved by mid-2004. US dollar-denominated deposits are expected to increase modestly through that period, owing to the expected increase in donor assistance and continued strong remittances. Based on this outlook, real GDP is envisaged to recover modestly in the first half of 2004. It is projected to grow by 16.0 percent, compared with the second half of 2003, mainly on the strength of manufacturing and services (related to donor activities).

7. Need for More and Sustained International Support

While the authorities express their appreciation for the significant pledges made for reconstruction and humanitarian aid at the New York donor conference, they would appreciate increased and sustained support from donors at this critical period.

One of the veritable options for accelerating Liberia’s reconstruction, rehabilitation and growth process is through increased export earnings. However, it is projected that exports are likely to stagnate at low levels owing mainly to the continued sanctions on timber exports. The authorities, therefore, hope that the UN Security Council will lift the ban on timber exports as soon as possible, especially in light of the important progress being made in meeting the requirement of a transparent accounting system for timber-related revenue.

The country’s stock of external debt amounted to US$2.9 billion (650 per cent of GDP at the end of 2003), and has increased during the year by US$74 million, owing to a further accumulation of arrears and the depreciation of the US dollar. Nearly all of Liberia’s debt, amounting to $2.6 billion is in arrears at end-2003, due to lack of external financing and international reserves to service official debt obligations. Even the payment to the Fund of the token sum takes an effort in view of difficult financial and budgetary constraints, and in particular, now that a large proportion of the authorities’ budget is currently focused on immediate humanitarian and reconstruction needs.

Although resolution of the external debt situation would be a complex and lengthy process that would require urgent and coordinated international support, the circumstances underscore the need to address urgently this problem by exploring potential options for its resolution.

In light of inherent capacity constraints, Liberia also requires massive TA in various areas. The authorities are ready to work with and maintain an open and continuous dialogue with the staff and other external partners to establish necessary capacity support in identified areas. In this connection, the Liberian authorities are requesting for a resumption of the Fund’s technical assistance to address the urgent capacity building needs of the country.

8. Conclusion

The economic and financial conditions of the Liberian economy are precarious and require the concerted efforts of the international community to move the country forward. It is clear that prospects for economic recovery in Liberia will depend not only on the re-establishment of security throughout the country alone, but on the volume and pace of donor activities and support. The Fund’s role in this regard will be to hasten the process of establishing an economic programme with the authorities that could be monitored by the staff in order to open up debt relief opportunities that will free up much needed resources for Liberia’s economic development and poverty reduction. The Liberian authorities appreciate all the support and assistance they have received so far from the international community. A lot more, however, needs to be done, and they hope they can continue to count on the goodwill, understanding and the continuation of this support and assistance from the international community.