Liberia: Report on Post-Conflict Economic Conditions and Economic Program for 2004/05

This report reviews Liberia’s Post-Conflict Economic Conditions and Economic Program for 2004–05. The economy of Liberia is recovering, following a sharp contraction in the second half of 2003, as a result of increasing donor support and the revival of associated manufacturing and services activities. Despite political and capacity constraints, the economic program through June 2004 was implemented successfully. The monetary program for 2004–05 aims at a broadly stable exchange rate, while accommodating a further rebound in the demand for local currency.


This report reviews Liberia’s Post-Conflict Economic Conditions and Economic Program for 2004–05. The economy of Liberia is recovering, following a sharp contraction in the second half of 2003, as a result of increasing donor support and the revival of associated manufacturing and services activities. Despite political and capacity constraints, the economic program through June 2004 was implemented successfully. The monetary program for 2004–05 aims at a broadly stable exchange rate, while accommodating a further rebound in the demand for local currency.

I. Introduction

1. A mission held discussions with the Liberian authorities in Monrovia and Accra during May 5-19, 2004. 1 The main areas covered were (i) the current economic situation; (ii) the implementation of the basic economic program through June 2004 (as agreed with the staff in December 2003); and (iii) the macroeconomic and budget framework for the fiscal year 2004/05 (July-June) and structural measures through end-2004. The mission also discussed a focused agenda of key outcomes aimed at putting the country firmly on a sustainable road to recovery by end-2005 (the end of the National Transitional Government of Liberia’s (NTGL) mandate).

2. Liberia has been in continuous arrears to the Fund since 1984.2 A declaration of noncooperation was issued in 1986, and the country’s voting and related rights were suspended in March 2003 due to a protracted lack of cooperation. At end-August 2004, Liberia’s arrears to the Fund amounted to SDR 507 million, or 711 percent of quota. Liberia’s forthcoming obligations are estimated to amount to about SDR 7 million annually.

3. Since the transitional government took office in October 2003, cooperation with the Fund on policy implementation and payments has significantly strengthened. 3 In response, the Executive Board decided to allow a resumption of the Fund’s technical assistance (March 2004). Directors commended the NTGL for the swift implementation of initial measures to strengthen revenue collection, improve budgetary management, and tackle key governance issues. They observed that broad-based technical assistance from the Fund and other external partners would be needed to rebuild capacity in economic management, and urged the authorities to work with the staff and other interested parties toward a coherent and fully coordinated strategy in this area.

4. Directors stressed that a continued track record of cooperation and policy implementation would be required to pave the way for a gradual removal of the Fund’s remedial measures. To this end, they urged the authorities to maintain a close policy dialogue with the staff. Directors expressed their willingness to apply the Fund’s policy on de-escalating remedial measures flexibly if further progress was made. Some Directors favored an early staff-monitored program (SMP), while others cautioned against moving too quickly into an SMP as long as key economic data remain unavailable.

II. Recent Political and Economic Developments

5. Following the August 2003 peace agreement, Mr. Gyude Bryant took power in October as head of a two-year transitional government. The NTGL’s mandate is to prepare the country for elections in October 2005 and to rebuild some capacity for economic management. Government positions were assigned to the warring factions based on a power-sharing formula. The United Nations Mission in Liberia (UNMIL) has now fully deployed its 15,000 peacekeepers, with a view to reestablishing security throughout the country.4 Around 65,000 combatants were demobilized by mid-2004, but only 19,000 weapons had been collected.

6. Poverty, already pervasive prior to the last round of hostilities, must have deepened further, particularly as rural activities have not yet fully resumed. The most recent household survey, 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 About 300,000 internally displaced persons (equivalent to about 10 percent of Liberia’s estimated population) are still living in camps, and an unknown number of refugees have yet to return from neighboring countries.

7. Real GDP may have rebounded by as much as 23 percent in the first half of 2004, compared to the second half of 2003 (Table 1), owing mainly to a recovery of construction, services, and commerce, largely associated with donor activities and the cessation of hostilities.7 Prices, particularly those of food items, have decelerated markedly—the 12-month rate of Monrovia’s consumer price index declined from 14 percent in August 2003 to 3 percent in March 2004, and the 12-month change of food prices decelerated from 41 percent to 12 percent during the same period, as supply constraints eased.

Table 1.

Liberia: Selected Economic and Financial Indicators, 2001-June 2005

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

For 2004 and 2005, figures are six-monthly growth rates over the previous six months.

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

The fiscal deficit during Jan.-June 2004 was financed through a cash surplus from end-2003.


Liberia: Real GDP, in 1992 Prices

Citation: IMF Staff Country Reports 2004, 408; 10.5089/9781451822854.002.A001

Liberia: Selected Macroeconomic Indicators

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8. A cash-based budget through mid-2004 was implemented without recourse to domestic financing, and monetary trends were characterized by a strong increase of local currency and a rebound of deposits (Tables 2 and 3). The rebound in the demand for Liberian dollars reflected the incipient reactivation of small-scale commercial and some rural activities.8 The exchange rate has been stable since end-December 2003, and international reserves have increased modestly. The banking sector’s health, although still fragile, has improved somewhat, with strong income from remittances and a slight decrease of nonperforming loans.9

Table 2.

Liberia: Summary of Central Government Operations, 2000-June 2005 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.

At end 2003, government had a net cash deposit of US$4.5million. There was a deficit of US$1.5 million during Jan-Sept 2003, financed through a loan from the CBL.

Table 3.

Liberia: Monetary Survey, 2002-June 2005

(In millions of Liberian dollars, end of period; unless otherwise indicated)

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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 since May 2003.

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

Liberia: Recent Fiscal Developments

(In millions of U.S. Dollars)

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

9. External developments since December 2003 have reflected the upsurge in donor activities and the continued stagnation of exports. Imports through June 2004 increased to an estimated US$170 million, compared with US$125 million in 2003, with about two thirds representing donor-financed imports (mainly humanitarian assistance). By contrast, exports stagnated at a low level, owing mainly to the continued ban on timber activity. Nondonor imports were largely financed by strong remittances.

III. Report on Discussions

10. The discussions took place against the backdrop of an improving security situation and a revival in economic activity; however, capacity constraints and less than full support by the former warring factions for Chairman Bryant’s reform course were a concern. While the demobilization process was proceeding well, it was unclear how quickly ex-combatants would be effectively reintegrated into civilian life. The low number of collected arms also raised questions about the stability of peace.

11. The authorities underscored their resolve to implement reforms and sound policies, notwithstanding the uncertain outlook and continued capacity constraints. They emphasized the limited time span available to the NTGL to make irreversible progress, and urged external partners to support their efforts as quickly as needed.

12. Against this background, recent slippages in financial management, as described below, are a source of concern. The staff has been engaged in discussions with the authorities to agree on measures to bring the envisaged reform back on course.

A. Implementation of the Basic Economic Program January-June 2004

13. The basic economic program through June 2004 was successfully implemented.10 The program’s key elements were a cash-based budget and further measures to boost revenue, advance toward an orderly budget process, and progress on governance issues, including at the CBL.

14. As agreed, the authorities executed a cash-based budget without recourse to domestic financing. Revenue collections were significantly higher than envisaged, reflecting the recovering economy and steps taken to bolster revenue, including the rollback of the suspension of the General Sales Tax (GST) on restaurant services, and the broadening of the large Taxpayers Units’ mandate to include collections from customs, excise, and GST (Box 1).

15. Outlays focused on current salaries and rehabilitation of government offices. Some unexpected priority spending related to preparatory work for the 2005 elections and larger-than-envisaged travel expenses led to delays in executing budgeted outlays, but the resulting backlog of spending commitments was quickly resolved. The small cash surplus at end-2003 financed the deficit incurred during this period.

16. The authorities took further steps to strengthen expenditure controls and improve the budget process. A cash management committee was set up to prioritize spending on a weekly basis, but still needs to become fully operational (see also below). Following the closure of accounts in commercial banks, government accounts at the CBL have been consolidated into three accounts to facilitate cash management; and regular monthly revenue and expenditure reports have been prepared for internal purposes (and shared with the staff).11

17. On the monetary side, the authorities succeeded in accommodating the increased demand for local currency while avoiding pressures on prices and the exchange rate. Reserves increased modestly from end-2003 to mid-2004.

Measures to Strengthen Economic Management

The NTGL has taken further measures to strengthen economic management and address pressing governance issues in the first half of 2004, and has committed to additional steps through end-2004.

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B. Macroeconomic and Budget Framework for Fiscal-Year 2004/05

18. The economic and budget framework for the fiscal-year 2004/05 is based on a continued recovery of the economy reflecting the expected pick-up in donor activities and a revival of agriculture. Real GDP growth is projected to increase strongly by about 21 percent in the second half of 2004 over the first half of 2004, and to expand further, albeit at a slower pace, in the first half of 2005 (Table 1).

19. The macroeconomic framework for 2004/05 is geared toward creating a stable environment and a further modest buildup of international reserves. A balanced budget will continue to avoid pressures on the domestic financial system. The expected increase in demand for local currency will gradually widen the scope for monetary policy in the as-yet highly dollarized economy.

20. The budget for 2004/05 will continue to be cash-based, with no recourse to domestic financing. The authorities are targeting an increase of revenue collections of 50 percent (compared to FY 2003/04), on continuing economic recovery and revenue-boosting measures (see below).12 They have developed contingent spending plans that will be activated in the event that foreign grants or financing to the budget is forthcoming, or that revenue collections exceed projections.

21. Monetary aggregates are expected to continue to be driven by the flow of external assistance and issuance of currency to accommodate further strong demand for Liberian dollars. Broad money is projected to grow by about 40 percent in the 12 months to June 2005, and official reserves are expected to increase by about US$11 million during the same period. U.S. dollar denominated deposits are also projected to rise during that period, reflecting the envisaged increase in donor assistance and continued strong remittances.

C. Fiscal Policy Issues

22. The authorities have made efforts to return to an orderly budget preparation process, but further action is required without delay in light of recent slippages. They resumed the communication of spending ceilings to line ministries and agencies and requested detailed spending plans. However, as capacity is still limited, such plans were finalized only with delays, and the budget was submitted to the legislature only in mid-August 2004. Detailed cash plans were developed, with Fund technical assistance, so as to facilitate a smooth budget execution. However, the recurrent approval of spending authorizations on an emergency basis during July and August has led to sizable cash deficits that were financed through credit from the CBL and possibly local commercial banks. Part of this emergency spending was included in a supplementary budget that was not discussed with the staff.13 In addition, the emergency outlays have complicated the execution of the budget as per agreed cash plans. The staff urges the authorities to return to a balanced budget, in line with agreed plans, and work quickly toward the closure of credit lines.

23. On revenue, concrete steps are envisaged to boost collections from customs, in line with the Fund’s earlier recommendations. Preshipment inspections have already been extended to all dutiable imports, and an external agent will soon begin to check imported goods at Liberian ports, to ensure that all taxes have been paid. The authorities also intend to begin taxing foreign vessels that fish in Liberian waters. They are ready to undertake further actions to enhance revenue once further recommendations by additional technical assistance missions are agreed.14

24. on the expenditure side, the 2004/05 budget envisages stepped-up social spending and outlays to begin rebuilding internal security and the justice system. Transfers to entities outside the central government will be significantly stepped-up for disease control and prevention. Capital outlays focus on the purchase of generators and office and communications equipment so as to make key government institutions functional. The budget also earmarks funds for clearance of domestic arrears, which is expected to begin following the formulation of an appropriate strategy (see below).

25. The authorities recognized the difficulties in assessing the size of the wage bill. While the exercise to purge “ghost workers” from the wage bill continued, they noted that many civil servants are now returning to their posts as security is being established throughout the country. With regard to new hirings, they intend to return to earlier practices of applying proficiency tests to applicants. The staff observed that the demobilization of the previous Liberian armed forces should enable the government to keep the size of the overall wage bill at or below budgeted levels, and strongly recommended to reconcile information from the ongoing demobilization exercise with the payroll managed by the Ministry of Defense. The authorities agreed to these recommendations and are considering the implementation of tight controls so as to ensure that payments for wages and possibly severance pay are made for these purposes only.

26. With regard to donor activities, the mission encouraged the authorities and local donor representatives to include projects that are financed and implemented by external partners in the budget on an information basis. This would provide the legislative body and the general public with a more complete and comprehensive view on the support planned by external partners. Such information is also useful for macroeconomic assessments and projections. Progress reports on donor activities should also become part of the envisaged regular budget execution reports (see below). In the event, this was not possible as donors did not provide the requested information on time.

D. Governance Issues

27. The authorities expressed their desire to develop a comprehensive agenda for strengthening governance, in close cooperation with external partners. They expect that the results from ongoing EU-sponsored audits of the main revenue-generating agencies and the CBL will provide a solid basis for reforms. In light of delays in initiating this work, the staff supported the authorities’ call to conclude these audits as soon as possible.

28. The World Bank is providing technical assistance to fully liberalize petroleum product imports. A transparent bidding process is envisaged to commence in the last quarter of 2004, following the establishment of minimum requirements for importers in terms of financial soundness and product quality.

29. The authorities have made some progress, with the assistance of external partners, to create conditions that could lead to a lifting of UN sanctions on timber exports by end-2004. The U.S. administration and the World Bank have put together a time-bound plan of actions to this end, focusing on priority measures through the end of the year. These include: (i) conclusion of an external review of timber concessions; (ii) establishment of transparency in associated revenue flows; and (iii) restoration of effective oversight over the sector’s activities.15 The authorities recognize that further work will be needed beyond end-2004 to develop a comprehensive strategy for sustainable logging activities.

30. on domestic arrears, the authorities have embarked on a stock-taking exercise, with external assistance. They concurred with the staff’s advice to make no payments until all amounts are verified, and a strategy for their settlement is defined. In particular, they agreed to make no further payments on wage arrears until an audit of the payroll is concluded.16 They also took note of the recommendation that the treatment of domestic and external obligations should be appropriately balanced.

E. Monetary and Banking Issues

31. The high degree of dollarization continues to limit the scope of monetary policy. However, the authorities concurred with the staff’s views that the expected strong increase in demand for local currency would allow monetary policy to become more active over time. To prepare for this, the authorities will need to develop instruments of monetary policy, with assistance from the Fund and other external partners.

32. In the short run, the authorities will need to monitor carefully monetary developments and to accommodate the expected rebound in demand for local currency, in line with the economy’s recovery. In light of the uncertain economic outlook, and envisaged neutral fiscal policy stance, the staff recommended that the CBL pay attention to exchange rate movements as an indicator for imbalances between the supply and demand for local currency. Thus, money supply should be cautiously expanded to maintain the exchange rate—which has already returned to preconflict levels—broadly stable. In the event of a deteriorating political or security situation, the authorities concurred with staff’s advice to abstain from any foreign exchange interventions, so as to protect the limited foreign reserves.

33. Foreign exchange auctions have started in July 2004 as a first step toward developing a set of monetary policy instruments (Box 2). The staff encouraged the authorities to broaden participation as soon as feasible from the three operating commercial banks and some large companies to the 22 licensed exchange houses as soon as feasible. It also advised that the auctions should only be conducted on behalf of government so as to protect the CBL’s own scarce foreign currency balances.17 However, the CBL has also conducted auctions using its own foreign assets. The staff urges the authorities to return to the agreed practice to sell U.S. dollars only on behalf of the Ministry of Finance.

34. Ceilings on interest rates, which had discouraged lending by commercial banks and hampered competition in the sector, have been lifted. The liberalization allows commercial banks to determine lending rates in accordance with the perceived credit risk of individual clients and the conditions in the market.18

35. The new management of the CBL has not yet adopted comprehensive cost-cutting measures. While expenses have been curtailed in some areas, these savings have been more than offset by increases in other areas, mainly through the introduction and extension of benefits to CBL staff.19 The staff urges the authorities to consider a suspension of such benefits—the auctioning of foreign assets and the opening of credit lines for government has further weakened the CBL’s already fragile financial position.

Foreign Exchange Auction

In the past, the CBL allocated foreign currency to commercial banks using modalities that were neither transparent nor market based. Based on Fund technical assistance, the CBL has introduced regular foreign exchange auctions to allocate foreign currency on behalf of government in the market (July 2004).

Participants: At present, commercial banks and large companies participate in the auction. It is envisaged that the 22 licensed foreign exchange bureaus will be invited to join the auctions, at a later stage. Each participant presents sealed bids showing the customer, requested amount of foreign exchange and offered exchange rate. Banks can also bid for their own account.

Pricing and allocation: Currency is allocated at the price of the marginal or lowest successful bidder. Allocation of currency is from the highest bid downward to a point where the offered sum is exhausted or the lowest bid filled (which could leave an unallocated residual). The amount of foreign currency to be sold will be preannounced.

Frequency: The auctions normally take place on a weekly basis.

Oversight: A committee, including representatives from civil society and the business community, oversees the auction process.

36. The mission found that a large part of official reserves had been removed from the CBL’s balance sheet, and a corresponding downward adjustment made to currency in circulation. The mission observed that such accounting practices were inconsistent with international standards, as mandated by the Central Bank of Liberia Act, distorted key monetary aggregates, and significantly reduced the transparency of the CBL’s transactions and data.20 The staff was also informed that other deliberate steps had been taken under the former governor’s mandate, which led to an underrepresentation of monetary growth in the data provided to the Fund.

37. The CBL’s new management began immediately adopting measures aimed at restoring confidence in its information system. While noting that the EU-sponsored comprehensive audit would be required to reestablish full trust in all relevant information, the staff agreed that such interim measures would be sufficient to reaffirm the revised data on the CBL’s current balance sheet, as needed for a continued dialogue on monetary policies. To this end, the following actions were taken:

  • The CBL took immediate steps to secure and verify its liquid assets, including a detailed cash count, and verified its transaction over the past 12 months.

  • Statistical information, including on net reserves and currency in circulation, was also immediately corrected to reflect monetary trends accurately.21

  • An external audit team (fielded by the U.S. authorities) conducted a peer review of the CBL’s internal audit procedures and of its local external auditor’s recent work. While the audit team noted that both internal and external audit practices had considerable weaknesses, its own observations, together with the high level of controls at the CBL and its limited scope of operations, led it to the conclusion that the CBL’s current financial statements are not materially misstated.

  • The Fund provided technical assistance to strengthen internal governance further and the compilation of monetary statistics.

38. In light of the financial sector’s fragility, the CBL acknowledged the need to monitor closely developments in the banking sector, and to develop restructuring plans. It has started to produce monthly financial soundness indicators, and will prepare a general strategy for restructuring the troubled banks, with technical assistance from the Fund. Reserve requirements have also been unified, and interbank activities have been liberalized, but banks are still largely unable to conduct such operations as certain prudential regulations are not met.

F. Agenda to Ensure Sustainability of Reforms

39. The authorities agreed on a well-defined list of priority outcomes to put the country on a firm road to recovery by the end of the NTGL’s mandate (end-2005). Specifically, they aim at establishing a functioning budgetary process; fully accountable revenue-generating agencies; and a transparent and market-based framework for the operations of the CBL and the banking system.

40. The staff will work with the authorities and external partners to develop detailed reform plans for the budget process and the revenue-generating agencies through end-2005, building on the measures already defined for the remainder of 2004. To this end, further technical assistance and the conclusion of the EU-sponsored external audits will be required.

41. Regarding the framework for the CBL and banking operations, the monetary authorities have endorsed an 18-month plan of technical assistance by the Fund. The plan focuses on monetary and foreign exchange operations; the payments system; banking supervision; and bank restructuring (Box 3).

G. External Debt Issues

42. Liberia’s stock of external debt amounted to US$2.7 billion (610 percent of GDP) at the end of 2003, about half of which is owed to multilateral institutions. External debt increased by US$33 million during the year, owing to a further accumulation of arrears and the depreciation of the U.S. dollar (Table 5).22

Table 4.

Liberia: Balance of Payments, 2001-June 2005

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

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

Liberia: External Public Debt, 2000-03 1/

(In millions of U.S. dollars)

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Source: Liberian authorities.


43. The authorities have already begun to compile data on outstanding external obligations, and to reconcile them with creditor records. They have also requested external assistance so as to build capacity for debt sustainability analysis.

H. Next Steps

44. Recent slippages in the fiscal and monetary areas need to be reversed, and cooperation on policies further strengthened, before the staff could support the authorities’ wish to begin the de-escalation of the Fund’s remedial measures against Liberia. While the NTGL has made progress within its limited capacity to strengthen cooperation with the Fund, the emergence of fiscal cash deficits, and related recourse to domestic financing, is incompatible with the agreed economic framework for 2004/05. In addition, the passage of a supplementary budget without consulting the staff is not in line with the required strengthening of cooperation. Finally, the delay in the introduction of cost-cutting measures at the CBL compounds concerns about its financial health arising from the use of its own foreign assets for auctions and the opening of credit lines to finance the cash deficit.

45. The staff is working with the authorities on measures to roll back the recent slippages. In collaboration with major donors, the goal is to design a time-bound action plan to return to a balanced budget; restore an orderly and transparent budget execution process; and strengthen the CBL’s financial position. Concrete actions to enhance monitoring of understandings that have already been reached with the staff are also being considered. The staff expects to report on progress toward reaching such agreements in a supplement, ahead of the scheduled discussion at the Executive Board.

Technical Assistance Program for Establishing a Transparent and Market-Based Framework for the operations of the CBL and Banking System

The establishment of a transparent and market-based framework for the operations of the CBL and financial system is one of the focal points of the NTGL’s agenda to achieve irreversible change by the end of its mandate. The monetary authorities have agreed with MFD on a comprehensive technical assistance program to this end. The following summary provides an overview of the program’s main objectives and envisaged key actions.

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46. This said, the staff recognizes that reforms adopted so far have already locked in changes in some areas, and notes the authorities’ commitments to work with external partners on an agenda aiming at putting the country firmly on the road to recovery by the end of the NTGL’s mandate. Monthly token payments of US$50,000 have been made since January 2004.23

47. Regarding the governance issues discovered at the CBL, the authorities showed full cooperation with the Fund in taking swift corrective measures to restore confidence. In addition, they reiterated their desire to conclude the comprehensive external audit of the CBL as soon as possible, so as to identify and address any remaining governance issues, and to further strengthen internal controls as needed.

48. The authorities also reiterated their interest in moving to an SMP as quickly as possible in order to further consolidate the reform course and cooperation with the Fund. The staff explained that an SMP would require the formulation of detailed reforms in key areas, to be implemented through end-2005. This, in turn, would require further technical assistance and the conclusion of the EU-sponsored audits over the next few months. Thus, it is possible that understandings on an SMP could be reached in late 2004 or early 2005. The authorities agreed that the level of token payments to the Fund should also be reviewed at that time, taking into account the projected further modest growth of reserves and the possible implications of a lifting of timber sanctions.

49. The staff indicated that reaching understandings on a strong SMP for 2005 could strengthen the authorities’ request to start the de-escalation of the Fund’s remedial measures, provided that the recent slippages are swiftly and effectively addressed. Such an SMP could be presented to the Board as soon as early 2005. Staff indicated that satisfactory implementation of a critical mass of key actions under the SMP could then create conditions for the Board to consider the removal of the declaration of noncooperation and subsequently to the reinstatement of Liberia’s voting rights at the Fund.

IV. The Role of Development Partners

50. Financial support by donors has so far focused on the provision of humanitarian assistance while key reconstruction needs (such as infrastructure) have received less attention. According to information collected informally by UNDP, donors have so far firmly committed US$406 million to fund identified humanitarian and reconstruction needs of US$ 660 million through end-2005. The staff shared the authorities’ concerns about the slow pace of disbursements so far.24

51. Technical assistance for strengthening economic management is being closely coordinated between the Fund and other external partners. The U.S. is providing support in budget preparation, timber sector management, and anti-money laundering measures. As noted, the EU will focus on the audits of the CBL and the revenue-generating agencies and follow-up work. The World Bank plans to implement a robust computerized financial management system, reform procurement, and prepare for a civil service reform.25 The Fund’s technical assistance will focus on tax administration, expenditure management, support to the CBL, and strengthening statistical capacity.

V. Statistical Issues and Technical Assistance

52. Macroeconomic assessment and management continue to be hampered by the scarcity of reliable data on economic activity. The availability of data on external sector developments has recently improved, as a robust system of collecting such information on a monthly basis was put in place with Fund assistance. Fiscal and monetary data are being provided to the Fund on a more timely basis. However, further technical assistance will need to be mobilized to strengthen the coverage and reliability of data in all areas.

VI. Staff Assessment

53. Despite a difficult political environment and severe capacity constraints, the authorities have made overall progress in strengthening cooperation with the Fund and in implementing reforms. Security has improved, and the economy has begun to recover. Token monthly payments, in line with payment capacity, have been made without interruption.

54. However, there are important risks that could derail the reform course. In light of the limited time available to the NTGL to create conditions for sustained progress, support for the reform agenda is required from all parts of the power-sharing government. Conditions will need to be created quickly to reintegrate ex-combatants and refugees into economic life and to consolidate the fragile peace.

55. To address these risks, external partners will need to step up their support, in close cooperation with the authorities’ agenda. The pace of already planned activities should accelerate, and support for areas that have so far received little attention should be increased. In the area of economic management, continued close coordination will be required to effectively support the government’s ambitious agenda.

56. The basic economic program for the first half of 2004 was successfully implemented, and further steps have recently been taken to improve the budget process, governance, and the operating framework for the CBL. Foreign exchange reserves have begun to recover, and prices and the exchange rate have stabilized, supporting a continued economic recovery.

57. Building on these achievements, the authorities have identified a well-targeted agenda to put the country firmly on the road to recovery by end-2005. The focus on rebuilding key economic institutions will facilitate sustaining reforms under a successor administration. Well-coordinated external support will be needed to develop a detailed roadmap to achieve the desired outcomes, including through accelerated financial and technical assistance. Based on such efforts, an SMP could become feasible later in 2004.

58. The 2004/05 budget is prudent. The revenue forecast is appropriately cautious. In light of large domestic and external arrears, no domestic borrowing should take place. On the expenditure side, the shift to spending on social sectors and the rebuilding of the security and the judicial system is welcome. Further efforts should be made to strengthen expenditure controls.

59. Against this background, however, the recent emergence of a cash deficit and recourse to domestic financing is of concern. The staff urges the authorities to redouble efforts to implement the budget according to agreed plans, without recourse to the fragile banking system. It is also imperative to strengthen the effectiveness of the newly established cash management committee so as to ensure that approved outlays are kept within available resources at all times.

60. The expected rebound in the demand for local currency will need to be accompanied by the development of a broader set of instruments for market-based monetary policies. The introduction of foreign exchange auctions and the removal of ceilings on interest rates are important first steps, and technical assistance will support further efforts in this area. However, the staff strongly recommends conducting auctions only with foreign currency that is being made available by government, so as to protect the CBL’s scarce foreign assets. The CBL should move gradually to allow interbank transactions, in tandem with strengthening supervisory capacity.

61. The staff welcomes the swift manner in which the authorities have dealt with the issue of misinformation at the CBL. Quick steps were taken to restore confidence, including through full cooperation with third parties. However, full resolution will still require the completion of the ongoing comprehensive external audit.

62. The CBL will need to redouble efforts to strengthen its financial position. Effective cost-cutting measures are urgently required, also to offset unexpected pressures from the use of foreign assets in auctions and the opening of credit lines to government.

63. On governance, it will be crucial to conclude quickly the verification of domestic arrears and develop an equitable strategy for their settlement. The staff urges the authorities to abstain from any payments until these steps are concluded. The strategy also needs to pay attention to the appropriated balance between the treatment of domestic and external arrears.

64. The staff strongly encourages the authorities to pay attention to the timely and full implementation of understandings reached, particularly with regard to the conduct of fiscal policies and operations of the CBL. Efforts need to be reinforced to monitor and coordinate actions effectively so as to put into place agreed policies and measures to strengthen economic management. The staff stands ready to work closely with the authorities in these areas. In the short term, a time-bound action plan to reverse recent slippages needs to be agreed upon and swiftly implemented.

APPENDIX I Liberia: Relations with the Fund

(As of August 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 the 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-August 2004 was L$55.3=US$1.

VIII. Article IV Consultation

The 2002 Article IV consultation discussions were held in Monrovia during December 2002. The staff report 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 II Liberia: Relations with the World Bank Group

(As of August 31, 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$42.9 million owing on these disbursements has been repaid.

By July 31, 2004, Liberia’s arrears to the World Bank had mounted to US$415.9 million, reflecting further interest charges. Liberia had an unmet obligation of US$2.2 million to the World Bank, as of June 30, 2004, 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 multi-donor assessment missions, co-hosted the International Conference for Reconstruction in Liberia in February 2004, prepared a reengagement strategy, and began implementation of US$4.0 million in grant-funded LICUS activities in the areas of social assessment, public procurement, public financial management, reactivation of the forestry sector, and donor coordination, monitoring, and evaluation. Since July 1, 2004 the Bank has a Country Officer in the field to better coordinate the Bank’s activities in Liberia.

World Bank Group Statement of Loans/Credits/Grants for Liberia Summary in U.S. Dollars at July 31, 2004

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Source: World Bank, Integrated Controller’s System.Contact person at World Bank: Michael Diliberti 202-473-8766.

APPENDIX III Liberia: Tentative Work Plan

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The mission comprised Mr. Schwidrowski (head), Mr. Thomas, Mr. Akatu, Mr. Tyaba (all AFR) and Mr. Honda (FIN). The mission worked closely with a parallel MFD mission and visiting experts from FAD and STA. It met with Chairman Bryant, Minister of Finance Kamara, former CBL Governor Saleeby (who resigned on May 11, 2004), Acting CBL Governor Greene (who was appointed on May 11), and other senior government officials.


See the companion paper for a full description of Liberia’s arrears situation and the Fund’s de-escalation policies.


The authorities resumed monthly token payments of US$50,000 in January 2004.


UNMIL’s mandate also includes assisting humanitarian aid activities, restoring the judicial system, and establishing a new army and police force.


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


UNDP, “Human Development Report,” 2001.


This assessment is based on some indirect indicators of economic activity, such as revenue collections and international trade data. Reliable statistical information on production remains unavailable.


Both the U.S. dollar and the Liberian dollar are legal tender in Liberia. The Liberian dollar is largely used for small-scale transactions associated with rural activities.


All three operating commercial banks are undercapitalized. The CBL is monitoring the situation.


The basic economic program was discussed with the staff in December 2003.


Due to the dual currency system, one account is held in U.S. dollars, and one in Liberian dollars. In addition, the authorities prefer to maintain a separate payroll account while cash planning is being strengthened, to ensure timely civil service wage payments.


No revenue from timber activities was included in the budget. Contingent spending plans are prepared in the event that UN sanctions on timber exports are lifted.


The supplementary budget included US$2.5 million, destined for the purchase of cars for members of parliament and buses for public transportation. Preliminary information indicates that domestic financing equivalent to 1.1 percent of GDP was incurred through end-August.


A technical assistance mission on tax administration, focusing on customs and the Large Taxpayer Unit, has recently visited Monrovia.


Timber activity is expected to resume only gradually in the event of a lifting of the ban, owing to seasonal factors and the need to rebuild production capacity as equipment had largely been evacuated in 2003.


So far, payments equivalent to one month of wage arrears were made. It is estimated that about two years of wage arrears were accumulated under the previous administration.


Most revenue is being collected in U.S. dollars. The government has a regular and significant demand for Liberian dollars for wage payments.


There were no ceilings on deposit rates.


The CBL is estimated to incur a deficit of US$1.4 million in 2004 without cost-cutting measures. Net reserves stood at US$0.7 million at end-June 2004.


Following the departure of the former governor of the CBL, the staff was also informed that the Fund had been provided with incorrect monetary data for some time.


Net reserves at end-2003, previously reported at US$0.3 million, were corrected to US$2.6 million. At the same time, the definition of net reserves was corrected to exclude U.S. dollar deposits by government and commercial banks at the CBL that are unavailable for policy purposes. This correction led to a net reserve level of negative US$2.1 million, indicating that the CBL had partly used these deposits for its own purposes (including funding its operations).


Nearly all of Liberia’s external debt is in arrears.


These payments account for only 6 percent of obligations falling due to the Fund. Liberia’s capacity to service its debt is very limited, with official reserves estimated at US$700,000 in June 2004.


Comprehensive data on disbursements are unavailable.


The Bank’s activities are funded by a US$4 million grant from the Low-Income Countries Under Stress (LICUS) facility. A further grant of US$25 million has been requested from the Bank’s surplus.


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 Conditions and Economic Program for 2004/05
Author: International Monetary Fund