Liberia: Staff Report for the 2005 Article IV Consultation

This 2005 Article IV Consultation highlights that Liberia’s real GDP rebounded in 2004, following a steep decline in the second half of 2003 on account of the hostilities and the imposition of the United Nations ban on timber exports. Prices, particularly of food items, have stabilized as supply constraints eased, and the exchange rate has returned to pre-conflict levels. Official reserves increased modestly from low levels. For 2005, the economic recovery is expected to strengthen, underpinned by continued consolidation of the security situation and reconstruction activities.


This 2005 Article IV Consultation highlights that Liberia’s real GDP rebounded in 2004, following a steep decline in the second half of 2003 on account of the hostilities and the imposition of the United Nations ban on timber exports. Prices, particularly of food items, have stabilized as supply constraints eased, and the exchange rate has returned to pre-conflict levels. Official reserves increased modestly from low levels. For 2005, the economic recovery is expected to strengthen, underpinned by continued consolidation of the security situation and reconstruction activities.

I. Introduction

1. The Article IV consultation discussions focused on Liberia’s medium-term economic outlook and policies that would enable the country to move from the current precarious postconflict situation to sustained and high-quality growth; recent economic developments and the outlook for 2005; and a review of economic policies being implemented and planned for the remainder of the National Transitional Government of Liberia’s (NTGL) term (end-2005).

2. Liberia’s relations with the Fund had been deteriorating until the NTGL took office (October 2003).1 During the 2002 Article IV consultations and review of Liberia’s overdue financial obligations to the Fund (March 2003), the Executive Board stressed a number of factors that highlighted the deterioration of policies and the lack of response to Fund advice, which, in the event, led to the suspension of Liberia’s voting and related rights in the Fund. Specifically, Directors expressed concern about weak revenue performance, the lack of fiscal transparency and accountability, and poor expenditure controls, which had resulted in large arrears and a lack of social services. Substantial governance issues needed to be addressed, and Directors called for full financial audits of maritime, timber and petroleum operations. Critical structural reforms, particularly in the petroleum and rice sectors, were also required.

3. Since the NTGL took office, cooperation with the Fund on policies and payments has strengthened, but the momentum of reforms has recently slackened.2 During the October 2004 review of Liberia’s overdue obligations, Directors commended the authorities for the successful implementation of the basic economic program for the first half of 2004 and steps taken to strengthen the budget process, governance, and the operating framework for the CBL. However, they stressed that the recent slippages in the budget and the financial management of the CBL represented a setback to the authorities’ reform agenda.3 Directors urged the authorities to undertake corrective measures and to ensure the full and timely implementation of understandings reached with the staff. Directors expressed willingness to consider the initiation of de-escalating the Fund’s remedial measures against Liberia once steps to reverse recent policy slippages were implemented, and understandings on an SMP for 2005 were reached.

II. Background and Recent Economic Developments

A. Background

4. Political and economic developments in 2003-04 were marked by an intensification of internal hostilities, followed by the introduction of a power-sharing transitional government and the resumption of external assistance. Fighting that extended to Monrovia in mid-2003 led to widespread destruction and looting, including of government facilities. About one-third of the population is still estimated to be internally displaced.

5. 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 deployed 15,000 peacekeepers, with a view to reestablishing security throughout the country. About 105,000 combatants were demobilized by end-October 2004, but only about 25,000 weapons were collected.

6. UN economic sanctions, also covering timber exports since mid-2003, were extended for one year at end-2004. Proceeds from timber exports had been found to finance the internal conflict. Despite the end of hostilities, the UN Security Council decided to keep the sanctions in place, owing to little progress in conducting an independent concessions review; establishing transparency in revenue collection; and exercising effective oversight over the sector.

7. Donor disbursements have been slow, partly reflecting low confidence in Liberian institutions. Although a large part of the US$520 million pledged in early 2004 has been set aside (including into escrow accounts), actual disbursements are believed to be significantly lower.4

8. Poverty, already pervasive prior to the last round of hostilities, remains extensive, 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 a day.5 In 2002, about one-third of the population suffered from tuberculosis, and about one-fourth of infants died before reaching the age of 5. External partners have begun to analyze the causes of Liberia’s deep-seated poverty and associated internal conflicts (Box 1).

Liberia—A Postconflict Social Assessment1

A deep-rooted crisis of rural communities and institutions lies at the heart of Liberia’s intermittent civil wars and hampers effective reintegration of ex-combatants and the attainment of sustainable peace. For decades, rural communities have been dominated by powerful patrons who offer protection and grant rights (including access to land) on a personal basis. Large numbers of young men have been forced to work for these patrons to gain access to land and gather the financial resources traditionally required to marry (dowries). In response, increasing numbers joined warring factions, and, since demobilization, are reluctant to return to their communities.

The government needs to work with external partners to address the causes of this crisis. A reform of marriage law (2003) has already prohibited practices such as dowries and compulsory labor by wives. Further fundamental steps are needed to provide access to land to demobilized combatants and to extend the rule of law. Immediate steps include the provision of land grants, promotion of small-scale farming, and vocational training.

Community-driven development is designed to help transform Liberia’s rural communities. However, such activities need to avoid reestablishing vested interests. Therefore, the effective involvement of marginalized groups, and extension of justice and rights, will be essential. The community-based approach will need to be closely coordinated with reforms at the national level.

1 “Community Cohesion in Liberia—A Post-War Rapid Social Assessment”, World Bank, January 2005.

B. Recent Economic Developments

9. Economic developments in 2003-04 closely mirrored political events. Real GDP in 2003 is estimated to have dropped by 31 percent, reflecting a steep decline in the second half of the year on account of the hostilities and the imposition of the UN ban on timber exports (Table 1). Activity rebounded in 2004, driven by external support, reconstruction, and a strong recovery in rubber production.6 Overall, economic activity in 2004 is estimated to have returned to about 70 percent of the prewar level.

Table 1.

Liberia: Selected Economic and Financial Indicators, 2001-09 1/

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

The projections for years 2005-09 are based on the slower-growth scenario.

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

Liberia: Recent Economic Developments, 2001-05

article image
Sources: Liberian authorities and IMF staff estimates.

Postconflict Recovery of Real GDP in 2004 by Sector


Citation: IMF Staff Country Reports 2005, 166; 10.5089/9781451822861.002.A001

Sources: Liberian authorities; and IMF staff estimates.1/ Including production of charcoal and wood for domestic use.

10. Price and exchange rate volatility subsided with the end of hostilities. Prices, particularly of food items, have stabilized as supply constraints have eased; the exchange rate has returned to preconflict levels, reflecting a return of private capital, donor inflows, and an increase in the demand for local currency. Official reserves have increased modestly from low levels.


Exchange Rate and CPI (food)

Citation: IMF Staff Country Reports 2005, 166; 10.5089/9781451822861.002.A001

Source: Liberian authorities.

11. External developments were characterized by a widening of the trade deficit that was largely financed by external assistance (Table 2). Exports collapsed in 2003 but stabilized in 2004, largely on account of rubber. Imports driven by externally funded humanitarian aid and strong remittances increased significantly.

Table 2.

Liberia: Balance of Payments, 2000-09

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

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

12. Fiscal revenue collapsed during the internal conflict but has recovered markedly since the NTGL took office, reflecting steps to boost revenue but also the early centralization of revenue collections at the Ministry of Finance and of government accounts at the CBL (Table 3). Following implementation of a balanced cash-based budget through about mid-2004, a domestically funded fiscal deficit, equivalent to about 1 percent of GDP, emerged in the latter part of the year. While that deficit was quickly rolled back, there was a large buildup of arrears through end-2004 (see below). Until the NTGL took office, spending was mainly geared toward military outlays, resulting in the accumulation of sizable wage arrears. Expenditure has since shifted to rehabilitating government offices, and to paying regular public sector wages, and, more recently, to restarting some education and health services.

Table 3.

Liberia: Summary of Central Government Operations, 2001-09 1/

article image
Sources: Liberian authorities; and IMF 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$4.7million..

13. For 2005, the economic recovery is expected to strengthen, underpinned by continued donor activities and the UN peacekeeping mission. Real GDP is projected to expand by 8.5 percent led by agriculture (mainly rubber), domestic manufacturing, and services. With higher imports and increased production, domestic prices are expected to moderate further. The trade deficit is projected to narrow on a further moderate increase of exports and decline of donor-funded imports for humanitarian assistance.

III. Discussion of Economic Policies

14. The discussions took place against the background of an improving, albeit fragile, security situation and economic recovery. The main challenge to sustained peace is the large number of demobilized fighters who have not yet been integrated.

15. The NTGL’s reform course has slowed, reflecting uneven support by the former warring factions. Civil society has become increasingly disgruntled by the slow progress in reestablishing basic infrastructure and services, and by perceptions of inadequate responses to fiscal transparency and governance issues.

A. Medium-Term Outlook and Policies

16. Aware of Liberia’s daunting reconstruction challenges, the authorities stressed the need for deep reforms to achieve sustainable growth. They noted that Liberia’s abundant natural resources and vibrant (though at present largely informal) private sector were key sources of growth that need to be used to create job opportunities and overcome pervasive poverty.

17. The staff suggested that, as in other postconflict countries, the recovery could take place in two phases: the first driven by international support for humanitarian assistance and reestablishment of the most basic services and infrastructure, and the second where external support shifts to broader-based recovery efforts (possibly also in the form of direct budgetary assistance) and measures to reactivate the private sector as the engine of growth.

18. The authorities concurred that early reestablishment of confidence in Liberia’s key economic institutions would be crucial to securing sustained external support and attracting private investment. Therefore, these institutions—including the budget, revenue-generating agencies, the CBL, and the financial system-need to be rebuilt as a matter of priority. Such action should be complemented by the strengthening of the judicial system and the introduction of modern legislation regulating commercial transactions to establish a framework for private sector activity.

19. The staff indicated that the main fiscal challenges are to strengthen revenue collections and improve expenditure controls so as to channel growing resources to poverty-reducing activities. In light of significant external and domestic financing constraints, the authorities agreed that the budget would have to remain balanced for some time.

20. Regarding the financial sector, the authorities concurred that the main tasks ahead were to strengthen the CBL and the banking system. Moreover, additional instruments will be needed to make monetary policy more effective.

21. The authorities pointed at Liberia’s large external debt overhang as a key obstacle to medium-term sustainability. The staff replied that the establishment of a strong track record of reforms and prudent policies would be key to resolving the debt burden.

22. To illustrate the positive effects of early and decisive reforms, the staff presented two medium-term scenarios.7 The optimistic scenario assumes prudent macroeconomic and strong reform policies, which would help lay an early basis for significant private investment and sustainable growth and could lead to an average growth rate of about 10 percent, resulting in an increase of GDP per capita from US$116 in 2004 to US$170 in 2009. A slower-growth scenario is premised on a slower pace of reform and lower donor support. Annual real GDP would grow by about 4 percent, insufficient to create significant new employment opportunities and raise living standards. The staff noted that this scenario would likely materialize if the current uneven pace of reforms persisted.

Liberia: Medium-Term Scenario, 2004-09

(In percent of GDP, unless otherwise indicated)

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

In this scenario, UN sanctions on timber are expected to be lifted at end-2005.

In this scenario, UN sanctions on timber are expected to be lifted at end-2006.

B. Governance Issues

23. The authorities stressed that strengthening economic governance was indispensable for medium-term recovery, in light of pervasive mismanagement under previous governments which had also undermined the conduct of fiscal and central bank operations. Agreeing with this position, the staff stressed the need for short-term actions to strengthen financial management (see below) and address concrete governance issues that have become subject to public debate.

24. A committee has recently been established to follow up on corruption allegations against members of the transitional government and civil servants. Members include legal experts and representatives of political parties and civil society. The staff welcomed this initiative and encouraged the authorities to make the committee fully operational as soon as feasible.

25. The authorities indicated that two cases of serious concern regarding transparency and accountability were being investigated. These are the modalities of large sales of iron ore and the alleged disappearance during 2004 of a large number of blank import and export permits.8 In addition, an audit of travel expenses was at a final stage. The authorities envisaged that reports on all three cases could become available soon. The staff advised them to publish their results, including decisions on any corrective actions.

26. The authorities reiterated their desire to design a detailed agenda for strengthening governance based on audits of the CBL and the main revenue-generating agencies. However, they regretted partly security-related delays in finalizing these audits, which were conducted with support from the European Union (EU). The staff expressed its willingness to assist in preparing an action plan of corrective measures, in conjunction with other external partners, once the audits become available.

27. The authorities are working with external partners toward fulfilling the conditions for a lifting of UN sanctions on timber exports. The independent review of concessions has started and is expected to be finalized in time for the next sanctions review (June 2005); studies on how to improve the sector’s financial systems were conducted; and human resource needs are being assessed to reestablish effective oversight of the sector.

28. There was consensus that a simplification of the structure of forestry taxation could help to enhance transparency. The staff presented a proposal for a streamlined system based on ease of administration in the short term by focusing collections on two instruments, an area rental fee and taxes on timber exports (Box 2).9 Over the medium term, the export tax should be replaced with a tax on production. The authorities accepted this proposal and are working with the staff and the World Bank to implement it.

29. Reforms in the petroleum sector continue, with external assistance. The World Bank is providing technical support to complete all steps to move to competitive bidding for petroleum product imports.

C. Fiscal Issues

30. In light of the crucial importance of reestablishing a functioning and transparent budget process, the discussions focused on the recent weakening of financial management and recommendations to strengthen fiscal policies in the short term. Additional steps are needed to achieve the budgeted revenue targets. Although the cash deficit that emerged around mid-2004 was eliminated, sizable arrears accumulated through end-2004, requiring a substantial strengthening of expenditure controls to ensure that a balanced cash-based budget can be implemented during 2004/05, as intended.

31. On the revenue side, the authorities reported that they were addressing the problems that had led to shortfalls in some areas. They were dealing with delays in implementing the amended contract with an external agent for preshipment inspections (BIVAC), which caused shortfalls in customs collections. A petroleum importer’s practice to offset petroleum taxes due against the repayment of a loan granted to the previous government has been discontinued. Income tax collections have been stronger than expected as a result of enforced withholding.

Simplifying Liberia’s Timber Tax Structure

Enhanced accountability and transparency of timber revenue is one key condition for the lifting of UN sanctions. While the establishment of a modern financial system to channel these resources will partly satisfy this demand, a simplification of the tax structure could also enhance transparency.

Liberia’s timber tax structure has become excessively complex and lends itself to misappropriations of public funds. Initially, Liberia relied almost exclusively on stumpage fees. Subsequently, the system grew to include an area tax, a variety of production-based fees, export taxes, and other fees and charges. Some were earmarked for certain purposes, such as reforestation, but the related activities were not funded by the respective taxes. As the basis for these taxes varies widely (per log, volume, tree species, at the export stage, based on the concession area), only a sophisticated system with well-developed controls (that currently does not exist) would be able to ensure their accurate assessment and collection.

Given the lack of effective controls, and in line with the experience of other Sub-Saharan countries, the authorities have accepted a proposal to radically simplify the current tax structure. In the short term, the taxes will be reduced to two, an area tax and an export tax on the f.o.b. value of timber. Both taxes have the advantage of easy administration—the area tax would be collected based on the area of each concession, which is a known factor. Preshipment inspections of timber exports are already included in the government’s contract with the external agent BIVAC, thereby minimizing the short-term needs to rely on local tax agents.

Looking forward, the authorities should replace export taxes by production taxes once they have the capacity to collect them. Also, they should introduce, as soon as feasible, a system to ensure competitive allocation of new concessions.

32. The staff urged the authorities to take all remaining steps to make the arrangement with BIVAC fully operational. It noted that preshipment inspections on a large part of imports, including rice and petroleum products, had not yet started. Overall, the staff pointed to favorable economic developments, including the surge in demand for petroleum products, which should boost the revenue base and allow the budgetary revenue target to be met or exceeded. The authorities concurred with this view.

33. The staff expressed concern about certain measures taken or under consideration that threaten to undermine the revenue base. These include generous import duty exemptions for a large international investment project (the concession of which is under review); temporary exemptions of duties on cement imports; and proposed changes to the investment code that contemplate wide-ranging exemptions for new international investment projects.

34. The authorities argued that such exemptions were needed to signal the return of stability to prospective investors. They cited supply difficulties as the reason for the temporary suspension of taxes on cement imports.

35. The staff explained that international experience had shown that foreign investment was influenced more by long-term considerations of a country’s stability and social peace, as well as availability and reliability of infrastructure and a skilled and healthy labor force. For these conditions to take hold again, the authorities must mobilize higher budgetary revenue and channel it efficiently to basic infrastructure, health and education expenses. Therefore, the staff urged the authorities to eliminate existing tax concessions and not to introduce new ones.

36. On the expenditure side, the staff found that the cash-management committee, set up to avoid the recurrence of a cash deficit, was not operating as intended. Significant expenditures were still made without the committee’s prior authorization, and transactions in local currency were not monitored. The authorities agreed to redouble efforts in this area.

37. In view of the emergence of about US$12 million in arrears by end-2004, the staff expressed serious concerns about the effectiveness of commitment controls. It asked the authorities to ascertain how the regularization of arrears would affect the implementation of the approved budget in the remainder of the fiscal year. Furthermore, the staff urged the authorities to put simple commitment control mechanisms in place and to make full use of earlier technical assistance recommendations. The authorities agreed with the need to strengthen controls in this area.

D. Monetary and Exchange Rate Issues

38. The Liberian economy remains highly dollarized, limiting the scope for monetary and exchange rate policies. Also, there are only a few instruments for monetary operations; reserve requirements were only recently complemented by foreign exchange auctions, also to ensure a transparent allocation of foreign exchange. The CBL succeeded in accommodating the increased demand for local currency while avoiding pressures on the exchange rate and accumulating modest foreign reserves. The staff agreed with the CBL that it should continue to accommodate the expected rebound in demand for local currency, in line with the economy’s recovery, while paying attention to exchange rate movements as an indicator of supply and demand conditions for local currency.

39. The CBL has developed a monetary policy framework, anticipating that sustained strong demand for local currency would gradually broaden the scope for monetary policies. Such policies would be geared toward price and exchange rate stability. In the short term, the CBL plans to set up a liquidity-monitoring system and introduce a credit facility for banks to cushion short term liquidity shortfalls. In line with market developments, in the medium term, the CBL plans to establish a liquidity forecasting system, introduce repurchase agreements, and develop an interbank foreign exchange market. In the long term, it will attempt to develop money and securities markets.

40. The staff welcomed the CBL’s efforts to clarify its policy goals and set the agenda for future work. It advised the CBL to closely link the implementation of its framework to economic conditions and to improvements in the health of the banking sector. Specifically, the staff cautioned against a premature use of central bank lines of credit and stressed that the issuance of securities should not be used to finance new fiscal deficits.

41. The potential costs and benefits of full dollarization were also discussed. Some members of the Liberian delegation noted that full dollarization could help reestablish fiscal discipline and attract foreign investors. Others favored dollarization as an effective way to ensure stable prices and wages. The CBL was concerned that dollarization would preclude more active monetary policies. The staff advised against moving to full dollarization in view of Liberia’s vulnerability to external shocks and the high cost of dollarization for the financial system (Box 3).10 Investors are unlikely to consider an internationally accepted currency as an important argument for investing in Liberia, compared with, for example political and social stability, a healthy and productive workforce, and a functioning infrastructure.

42. The CBL was generally satisfied with the foreign exchange auctions that had been introduced in mid-2004. However, the CBL noted that a need to allocate sizable amounts of foreign currency to the auctions made it difficult to raise international reserves. The authorities accepted the staff’s suggestions to reduce the amounts being offered in such auctions to facilitate a buildup of reserves. More generally, the staff advised that the purchase amounts for the CBL (equivalent to an injection of liquidity in local currency) should be determined by the increase in demand for Liberian dollars. It also noted that the auction does not give rise to an exchange restriction or multiple currency practice, given that banks and exchange houses buy and sell foreign exchange among themselves, and that the auction establishes a single rate, which is also used by the government for its transactions.

43. The banking system remains fragile and undercapitalized. However, banks’ liquidity position has remained strong. The CBL has recently adopted a restructuring and resolution policy, and an examination team has already begun assessing the financial conditions of one of the three operating banks. In addition, the CBL ordered all banks to suspend new lending to delinquent borrowers. In welcoming these steps, the staff encouraged the authorities to make full use of the flexibility granted by the new regulations to finalize the restructuring exercise swiftly.

Liberia—A Case For Dollarization?

Dollarization represents a trade-off between potential gains and losses. Supporters argue that the imposition of such a rigid framework on policy decisions would ensure fiscal discipline and reduce policy and exchange rate risks. Interest rates, as a result, would decline, and investment, exports, and GDP would all rise. This does not come, however, without a price. Dollarization makes the provision of liquidity costly (because of the loss of seigniorage); exposes the system to high output volatility in response to real shocks (because of the loss of monetary and exchange rate policy); and limits credit expansion by banks (because of the loss of the lender of last resort). In the case of Liberia, while the costs of dollarization are tangible, the potential gains are not to be taken for granted.

The loss of seigniorage is costly for the Liberian economy. The initial cost of replacing the stock of domestic currency is estimated at about US$36 million (equivalent to 8 percent of GDP). In addition, Liberia would have to give up real goods and services to accommodate future increases in money demand. For example, to support a modest annual rate of growth of 3-4 percent, an annual current account surplus of about US$7 million would be required to provide liquidity to the system.

The Liberian economy depends on a few commodity exports, making it highly vulnerable to external shocks. From about 1950 to the mid-1970s, the country benefited from favorable world demand and prices for iron ore and rubber, resulting in fiscal and current account surpluses that made it easy to maintain full dollarization (as introduced after World War II). However, the oil crises and global recession of the 1970s and 1980s quickly eroded these surpluses and, following a period of increasing recourse to foreign financing, led to the introduction of a local currency alongside the U.S. dollar.

Banks in a dollarized economy need stronger liquidity and equity positions. First, higher output volatility creates higher client default risk. Second, the lack of a lender of last resort forces banks to hold sizable liquid assets and equity. If Liberia were to adopt full dollarization, banks should first be strengthened significantly, well above the 8 percent risk-adjusted capital ratio proposed by the Basel Committee. In any case, the lack of a lender of last resort would limit credit expansion and increase lending rates, which would reduce the contribution of financial intermediation to Liberia’s recovery.

Empirical evidence suggests that the choice of an exchange rate regime is not important for fiscal discipline. Fiscal deficits are largely associated with macroeconomic fundamentals and governments’ implementation capacity. As noted, Liberia’s full dollarization in the past did not prevent the government from funding fiscal deficits through external loans and sizable arrears.

44. The CBL recently licensed two new banks. In its view, more stringent capital requirements and due diligence regarding the owners and managers of the new institutions provided sufficient assurances as to their soundness. They also stressed that some new institutions may be needed because of the fragility of the current banking system. The staff cautioned against licensing additional new banks in the current difficult economic environment and urged the CBL to continuously carry out due diligence on the recently licensed banks.

45. Regarding the CBL’s financial situation, the staff welcomed the recently concluded retrenchment program that led to a significant reduction of staff, with associated long-term cost savings. Staff was reduced from about 200 to 130. In light of the envisaged reduction in spending and an expected pickup in revenue, the CBL expected to eliminate its cash deficit later in 2005 or in early 2006.

Liberia. CBL Budget (Cash Basis)

(In thousands of U.S. dollars)

article image
Sources: CBL; and IMF staff estimates.

Extraordinary items include the cost for banknote importation, retirement benefits as a result of staff reduction, and replacement of damaged motor vehicles.

E. Donor Issues and Technical Assistance

46. The staff shared the authorities’ concerns about the slow pace of disbursements, but noted that donors cited a low level of trust in Liberian financial management practices as a main cause for delays (Box 4). As a remedial step, the staff encouraged the authorities to address governance issues immediately and to improve transparency in overall financial management.

47. On technical assistance, the authorities had defined priorities for the core areas of economic management and stated that technical assistance provided by the Fund and other external partners was, overall, well coordinated. The United States provides assistance in budget preparation, banking supervision, and forestry management. The EU intends to focus technical assistance on economic governance, based on its above-mentioned audits. The Fund and the World Bank are closely coordinated in their work on expenditure management. The Fund has taken the lead in tax and customs administration and financial sector issues, while the World Bank focuses on procurement, forestry and public enterprise reform, and community-driven development.

F. Public Debt

48. The authorities have made substantial progress in taking stock of domestic and external public debt. They have contacted creditors to obtain loan agreements and statements on their external debt obligations as such information was largely lost during the conflict. Based on preliminary data at end-2004, the stock of public debt amounted to US$4.1 billion (841 percent of GDP), with US$3.8 billion owed to external creditors, and the remaining US$0.4 billion to domestic creditors (including suppliers, commercial banks, the CBL, and civil servants). Some of the debt included in the inventory has not yet been verified and cross-claims have not been cleared.

Donor Assistance to Liberia

The postconflict donor assistance for Liberia is characterized by the following features:

  • Actual disbursements (US$189 million in 2004) are low, in comparison to the pledged amount of US$520 million.

  • Relative to GDP, external assistance is one of the largest of recent postconflict countries.

  • There is, however, less assistance for budgetary operations than in other postconflict countries.


Donor Assistance to GDP in Recent Postconflict countries

(In percent)

Citation: IMF Staff Country Reports 2005, 166; 10.5089/9781451822861.002.A001

Sources: WEO; data provided by the Liberian authorities; IMF staff estimates.

49. Liberia’s external debt (as a ratio of exports of goods and services) is estimated at an unsustainable 2,722 percent at end-2004, well above the threshold of 150 percent under the HIPC Initiative. The staff indicated that the HIPC Initiative had been extended to end-2006 and that an assessment of indebtedness using end-December 2004 data would be one criterion of eligibility. It urged the authorities to expedite their stock-taking of external debt.

50. The authorities have been working on a domestic arrears settlement strategy, with external technical advice. Under the strategy, payments for small claims would be prioritized and a substantial reduction of the face value of the remaining claims would be sought. The staff agreed on the need to prioritize payments for small claims, but advised that the strategy should contribute to achieving overall sustainability. The authorities concurred with the staff that no payment would be made until the strategy is finalized.

G. Trade Regime and Competitiveness

51. The lack of reliable economic data precludes an analysis of Liberia’s external competitiveness. This said, the largely destroyed infrastructure and lack of basic services are widely believed to hamper commercial and export activities.

52. Liberia has a relatively open trade regime, and rates for import and export taxes currently in effect are modest.11 Tax and custom revenues from trade transactions are expected to be phased out in line with a broadening of the domestic revenue base. The authorities indicated their willingness to harmonize Liberia’s trade regime with ECOWAS’s once basic economic conditions have improved.

H. Relations with the Fund

53. Since the NTGL took office in October 2003, overall cooperation with the Fund on policies and payments has strengthened. However, the emergence of financial management and governance issues requires the authorities to redouble their efforts to return to a solid reform path.

54. Against this background, the authorities agreed that the conditions for entering into a staff-monitored program (SMP) were not yet in place. However, the staff expressed its willingness to assist the authorities in strengthening weak areas, with a view to establishing the track record that could lead to an SMP.

55. The adequacy of token payments to the Fund was also reviewed. The staff noted the recovery of official reserves and the potential to further strengthen budgetary revenue collections, and encouraged the authorities to increase their monthly token payments. The authorities indicated that they would consider an increase in the context of the 2005/06 budget.

I. Data Issues

56. Despite some progress, serious data deficiencies continue to hamper the assessment of the economic impact of policies and donor activities, as well as surveillance. The authorities acknowledged the need to prepare national income statistics and to improve on the outdated basket used to measure the consumer price index. They have approached donors to conduct surveys of household income and expenditure, as well as living standards. The staff welcomed improvements in the quality of monetary statistics (also reflecting Fund technical assistance), but regretted that the reliability of fiscal information had deteriorated, attributable in part to the existence of different sources of expenditure data and lack of reconciliation of revenue and expenditure information with associated financing flows. The authorities recognized the need to strengthen the reliability of key fiscal data.

IV. Staff Appraisal

57. Improved security has created the basis for some economic recovery. The local economy is benefiting from donor-related and reconstruction activities; prices and the exchange rate have stabilized.

58. There are, however, significant risks that could disrupt the consolidation of peace and economic revival. A large number of demobilized ex-combatants needs to be reintegrated into economic life. Moreover, the lack of cohesion within the power-sharing government continues to hinder the implementation of sound policies and reforms. In this regard, slow progress in rehabilitating basic infrastructure and services is disappointing.

59. Liberia faces daunting medium-term challenges to rebuild its economy and reduce pervasive poverty. Decisive reforms need to begin as soon as possible to put the country firmly on the road to recovery. Such reforms should focus on the rebuilding of the budget process and other key economic institution, and a gradual broadening of the scope for monetary policy. Throughout, priority should be given to strengthening governance, also with a view to maintaining external financial and technical support.

60. Against this background, the recent slackening of the NTGL’s pace of reform implementation is of concern, and serious governance issues have emerged. These include the circumstances surrounding sales of iron ore and the alleged disappearance of a large number of import and export permits. The staff urges the authorities to act swiftly to clarify these issues and to publish their findings and intended actions so as to provide assurances of their commitment to full accountability. The NTGL should also act decisively in fulfilling the requirements for a lifting of UN sanctions. External partners have stepped up their efforts to devise a coordinated action plan to this end.

61. The recent weakening of financial management is regrettable, following initial success in implementing a prudent balanced budget. While the swift rollback of a domestically financed deficit is welcome, the emergence of large arrears is a considerable concern. The authorities need to redouble efforts to strengthen expenditure controls, including through the full use of technical assistance recommendations. Similarly, they have scope to bolster revenue collections through full implementation of long-standing recommendations, particularly in the areas of customs.

62. The staff welcomes the steps undertaken to strengthen the CBL’s financial position and to develop a framework for monetary operations and bank restructuring. The authorities should use caution in granting new licenses for banks, taking into account the current economic uncertainties and the fragility of the banking system.

63. There is a need to build on first encouraging steps to reconstruct a core statistical database, also to allow effective surveillance. The authorities are advised to seek further technical assistance from external partners in this area.

64. The authorities’ intentions to strengthen the identified areas require concrete action plans. Such plans are also needed before they can obtain enhanced support from the Fund in terms of policy advice and technical assistance in the period leading to a new government (end-2005), and to build a track record that could lead to a staff-monitored program and start of de-escalating the Fund’s remedial measures against Liberia.

65. It is proposed to hold the next Article IV consultation on the standard 12-month cycle.

Table 4.

Liberia: Monetary Survey, 2002-09

(In millions of Liberian dollars, unless otherwise indicated)

article image
Sources: Liberian authorities; and IMF staff estimates.

Derived from commercial banks’ balance sheets denominated in Liberian dollars.

Liberian dollar currency outside banks and commercial banks reserves denominated in Liberian dollars held at central bank.

One bank has been excluded from the deposit since May 2003.

Excluding U.S. dollars in circulation.

Table 5.

Liberia: External Public Debt, 2000-04 1/

(In millions of U.S. dollars)

article image
Sources: Liberian authorities and IMF staff estimates.

Data has been revised to reflect recent information on multilateral debt and to include estimates of interest arrears and late interest charges due to commercial creditors.