Liberia: Selected Issues and Statistical Appendix

This Selected Issues and Statistical Appendix paper examines recent economic developments and medium-term outlook for Liberia. This paper focuses on economic developments during 2003 and 2004 and the medium-term challenges of reconstruction. The paper explores the pros and cons of adopting full (de jure) dollarization in Liberia. It reviews the theoretical arguments for and against adopting dollarization and the associated empirical evidence. The choices of monetary and exchange rate regimes made by other post-conflict countries are presented. The paper also assesses whether Liberia, in its current post-conflict situation, could benefit from dollarization.


This Selected Issues and Statistical Appendix paper examines recent economic developments and medium-term outlook for Liberia. This paper focuses on economic developments during 2003 and 2004 and the medium-term challenges of reconstruction. The paper explores the pros and cons of adopting full (de jure) dollarization in Liberia. It reviews the theoretical arguments for and against adopting dollarization and the associated empirical evidence. The choices of monetary and exchange rate regimes made by other post-conflict countries are presented. The paper also assesses whether Liberia, in its current post-conflict situation, could benefit from dollarization.

I. Recent Economic Developments and Medium-Term Outlook

A. Background

1. Liberia’s economic progress in the 1960s and early 1970s was followed by deep and long-lasting stagnation through the mid-1990s. The Liberian economy was severely hit by the oil price hike in the mid-1970s, and deteriorated further following the military coup in 1980. The civil war of 1989–96 resulted in a substantial destruction of infrastructure and the flight of human and financial capital. Real GDP declined to one-tenth of its prewar level by 1995. A peace agreement, signed in August 1996, paved the way for disarmament and democratic elections in July 1997. Economic activity rebounded strongly, causing GDP to double in 1997 and to grow by 20–30 percent annually during 1998–2000. Timber and smallholder agricultural production grew rapidly, and rubber production recovered. However, the infrastructure remained in a badly damaged state, with a depleted road network, destroyed rail connections, very little electricity generation, and no water facilities. Growth slowed during 2001-02, when a reemergence of some civil strife disrupted farming activity.


Real GDP and GDP Per Capita 1980-2004

Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

Sources: Liberian authorities; and IMF staff estimates.

2. Internal hostilities accelerated in 2002-03. As a result, about one-third of the population is estimated to have been internally displaced. Fighting that extended to Monrovia in mid-2003 led to widespread destruction and looting of government offices, as well as loss of key economic information. Infrastructure was damaged further. The UN security council imposed a ban on timber exports in May 2003, as revenue from that sector was reportedly funding the internal conflict.

3. Following the signature of a peace agreement (August 2003), the National Transitional Government of Liberia (NTGL) took office in October 2003, based on a power-sharing arrangement between the former warring factions. In parallel, the UN established its mission in Liberia (UNMIL), gradually deploying about 14,000 peacekeepers to reestablish security throughout the country, and externally funded humanitarian assistance and reconstruction activities resumed.

4. This chapter will focus on economic developments during 2003 and 2004 and the medium-term challenges of reconstruction. In producing the text, tables, and graphs, the staff team has made use of all available information. However, owing to the events described above, data are largely estimated, and subject to revisions.

B. Production, Prices, and Exchange Rate

5. Economic developments in 2003-04 closely mirrored political events. Real GDP in 2003 is estimated to have declined by 31 percent due to the hostilities and the UN ban on timber exports. Activity recovered modestly in 2004, driven by donor-related activities and postconflict reconstruction (Box 1). With higher donor-driven imports, domestic prices moderated, and the exchange rate returned to preconflict levels. The external current account deficit increased due to the expansion of donor-related imports.


Level of Real GDP and GDP Per Capita

Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

Sources: Liberian authorities; and IMF staff estimates.

6. The recovery was driven by sectors that benefited from increased donor activities, including the large UN mission, and reconstruction (manufacturing and services). Rubber production also rebounded strongly as large plantations in the vicinity of Monrovia had largely remained undamaged. Other agricultural activities remained subdued, as security throughout the country was only gradually reestablished, preventing an early return of the large number of internally displaced persons and refugees from neighboring countries to their communities. Forestry declined further as timber exports were nil in 2004.

Strength of Postconflict Recovery

The postconflict recovery in Liberia in 2004 is relatively modest, compared with other postconflict countries. Sierra Leone experienced steady recovery after its conflict. Liberia in the mid-1990s grew by 122 percent within two years after its conflict. This strong recovery was largely attributable to the quick improvement in the security situation, which allowed the return of internally displaced persons and refugees, as well as startup of forestry and rubber production.

By contrast, Liberia showed an annual growth of only 2 percent in 2004, despite relatively large external assistance (humanitarian aid). The factors contributing to this modest growth are:

  • (1) Stagnating export activities, in part due to the UN sanction on timber exports.

  • (2) Slow recovery of agricultural activities due to delayed return of refugees to rural areas in light of modest progress in security conditions (the slow progress of security conditions also affected the recovery in Burundi).

Strength of Post-Conflict Economic Recovery

(Real GDP of the year most severely affected by the conflict=100)

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Sources: WEO and IMF staff estimates.

Contribution to Real GDP Growth by Sector

(In percent)

Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

Sources: Liberian authorities; and IMF staff estimates.

7. Price and exchange rate developments reflected the hostilities and subsequent gradual normalization of economic conditions. Prices, especially for food items, surged around mid-2003 as supply shortages intensified but abated subsequently with the inflow of humanitarian assistance. The exchange rate depreciated sharply around mid-2003, reflecting a shift into U.S. dollars, but subsequently returned to its preconflict levels, as some rural activity and payment of civil service wages resumed.1


Exchange Rate and CPI (food)

Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

Source: Central Bank of Liberia

C. External Developments

8. External developments in 2004 reflected increased donor activities (compared to the conflict period) and continued stagnation of exports. Imports, primarily humanitarian assistance and petroleum, increased to 55 percent of GDP (or $268 million) in 2004, compared to 26 percent of GDP in 2002. Exports stabilized at a low level, largely due to the UN sanction on timber exports, despite the doubling of rubber export receipts in 2004.2 Accordingly, the trade balance deteriorated sharply, despite improvement in the terms of trade over the same period.

9. The external current account deficit (excluding grants) widened from 11 percent to GDP in 2002 to 52 percent of GDP in 2004. The deficit was financed by substantial donor assistance in the form of project grants and strong remittances. As of end-December 2004, the coverage of net official reserves stood at about one week of imports of goods and services.

D. Fiscal Developments

10. Fiscal performance during 2003 was extremely poor, reflecting weak fiscal management and the effects of the internal conflict.3 Total reported revenues in 2003 declined by 40 percent, compared to 2002. A large part of revenue, particularly from the maritime registry and timber activities, was reportedly used outside the budget process. On the expenditure side, outlays appear to have been largely geared to the internal conflict, resulting in a buildup of sizable wage arrears and a standstill of social services. Except for a small loan forcibly given by the CBL, no other sources of financing were available. The last donor (Taiwan Province of China) stopped disbursements in 2002 because of the failure of the Liberian government to account for the use of funds. Foreign donors maintained minimum social services through nongovernmental organizations.

11. The NTGL took decisive initial action to restore some financial discipline and implemented a balanced cash-based budget through mid-2004. Immediately after taking office, the NTGL centralized all government accounts at the Central Bank of Liberia (CBL) and gave the sole power to collect taxes to the Ministry of Finance. Two interim budgets designed for the periods October 2003-January 2004 and February-June 2004 were based on conservative revenue projections that were consistently exceeded, reflecting early steps to broaden the revenue base. Outlays during this period were mainly geared toward the resumption of current civil service wages and basic rehabilitation of government offices (Box 2).

Revenue and Expenditure Trends, 2001-04

There were notable changes in the level and composition of revenue and expenditure, following the inauguration of the NTGL in late 2003. On the revenue side, the drop in stumpage fees, land rental, and petroleum sales tax was offset by an increase in goods and service taxes, as well as corporate and income taxes. On the expenditure side, there was a significant shift toward current expenditures from capital expenditures, most of which had reportedly been geared toward military outlays under the former government.

Share of Each Revenue and Expenditure Item

(In percent of GDP)

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Note: There is no reliable information as to the composition of financing.Sources: Liberian authorities; and IMF staff estimates.

12. The budget for 2004/05 (July-June) is based on a continued increase of revenue and a shift of spending to basic services. Revenue is projected at US$80 million (equivalent to 16 percent of GDP), largely based on collections from imports and Liberia’s maritime register. Expenditure secures continued payment of current public sector wages but also envisages some outlays for the health, education, and the justice system. The budget also allows for some payments on domestic arrears, once a stocktaking exercise and formulation of a settlement strategy are finalized.

13. Fiscal discipline, however, weakened in the early part of the budget year 2004/05 (July-June). Spending pressures from certain parts of the power-sharing government led to the emergence of cash deficits that reached about 1 percent of GDP around mid-2004. The deficit was funded by credit from the CBL. The CBL loans were fully repaid by November 2004, but the lack of effective commitment controls led to the emergence of large arrears by end-2004.

E. Monetary Developments

14. Monetary developments in 2003–04 were characterized by large swings in deposits, due to the effects of the conflict and subsequent intensified donor activities. Deposits declined by 20 percent from December 2002 to September 2003, partly reflecting a move toward cash holdings (Box 3).4 Subsequently, deposits (particularly in U.S. dollars) increased significantly, reflecting donor activities and the inflow of private capital (remittances) for reconstruction.

Flight to Cash During The Conflict

The currency-to-deposit ratio in Liberia had been high even before the conflict. In view of the deterioration in the security conditions in early 2003, the ratio escalated up to above 400 percent, reflecting a shift into cash holdings. The situation has calmed down following the end of the conflict.



(In five months backward moving average)

Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

Source: CBL.

15. In 2004, the CBL aimed at maintaining a broadly stable exchange rate within a highly dollarized environment. It decided to expand cautiously the Liberian dollar currency in circulation to accommodate the expected rebound in demand for the currency, using the exchange rate as an indicator for demand and supply. Foreign exchange auctions were introduced in July 2004 to establish a transparent allocation mechanism.5,6

16. International reserves recovered slowly from low levels in 2004, largely as a result of frequent purchases of U.S. dollars from the government.7 Net international reserves rose from negative US$2.1 million at December 2003 to US$4.2 million at end-2004. Measures to reduce the CBL’s operational outlays also contributed to this improvement.

17. The CBL has long suffered from cash shortages, largely related to substantial unserviced claims on the government, but has gradually moved toward financial soundness.8 The CBL’s cash deficit (excluding extraordinary expenditure items) was reduced from US$1.5 million in 2003 to less than US$1 million in 2004, reflecting an increase in cash income mainly associated with higher fees and commissions. A significant reduction of staff in early 2005 has contributed to a further strengthening of the CBL’s financial position.

18. The banking sector has further weakened as a consequence of the internal conflict. One bank failed to resume its operations after the end of the war, and its foreign owners subsequently agreed to liquidate the bank. The remaining three commercial banks maintain high liquidity, reflecting an increase in donor-related deposits and the low demand for loans from the private sector in the as-yet fragile environment. The consequences of the 2003 conflict and the ban on timber exports have contributed to an increase of nonperforming loans, which has put pressure on the banks’ capital positions.

CBL’s Income Statement, on Cash Basis

(In thousands of U.S. dollars)

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Sources: CBL; and IMF staff estimates.

For 2003, cash recurrent and capital expenditures are estimates based on the execution of the 2003 budget.

Extraordinary items are retirement costs, notes importation cost, and costs to replace damaged vehicles budgeted in the 2005 budget.

F. Debt

19. The stock of Liberian public sector debt amounted to US$4.1 billion (841 percent of GDP) at end-2004. US$3.8 billion was external debt, about half of which was owed to multilateral financial institutions (including the IMF, the World Bank and African Development Bank), and one-third to commercial creditors. Domestic debt was estimated at US$0.4 billion, most of which was outstanding debt to the CBL. Further work needs to be done to reconcile these figures.

20. Liberia’s external public debt situation is unsustainable (Box 4). Liberia has been in continuous arrears to its external creditors since 1984 and most of its debt is in arrears. Based on preliminary end-2004 data, the net present value of external debt as a ratio to exports was 2,722 percent, significantly above the 150 percent debt sustainability threshold ratio of the HIPC Initiative.9 Consequently, even if higher economic growth were achieved over the coming years, these ratios would not reach sustainable levels without considerable external assistance.


Share of External Debt Outstanding by Creditor


Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

Sources: Liberian authorities; and IMF staff estimates.

Level of External Debt—Comparison with Other Highly Indebted Countries

Among the countries that have not reached the decision point under the enhanced HIPC Initiative assistance, Liberia’s external debt, both in terms of exports and GDP, is prominent: the debt-to-export ratio reaches over 2,700 percent, while Burundi comes second with little over 2,200 percent; the debt-to-GDP ratio exceeded 760 percent, more than four times higher than the second highest country, Burundi.


External Debt-to-Export Ratio of HIPCs (at end-2004)1/

(In percent)

Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

1/ Predecision point HIPCs, excluding Somalia due to lack of data.Sources: WEO; and IMF staff estimates.

G. Medium-Term Outlook

21. Liberia faces daunting reconstruction challenges following two decades of intermittent civil wars. Physical infrastructure is largely destroyed, government institutions lack capacity for economic management, and the country’s once considerable human capital is significantly degraded. Reflecting these developments, real GDP per capita (in 1992 prices) has declined from US$890 in 1980 to US$116 in 2004. On the positive side, Liberia is endowed with rich natural resources, a favorable geographical position, and a vibrant, though at present largely informal, private sector.

22. Similar to other postconflict countries, the recovery could take place in two phases—the first driven by humanitarian assistance and rebuilding of the most basic services and infrastructure (with substantial international support), the second shifting external support to broader-based recovery efforts (possibly also in the form of direct budgetary assistance) and to measures to reestablish the private sector as the engine of growth. In order to secure external support and private investment, it will be crucial to reestablish early on confidence in Liberia’s key economic institutions, including the budget, revenue-generating agencies, the CBL, and the financial system.


Real GDP Per Capita—Past and Projections

(In 1992 prices, 1980-2030)

Citation: IMF Staff Country Reports 2005, 167; 10.5089/9781451822878.002.A001

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

23. Two alternative medium-term scenarios illustrate the benefits of early and decisive reforms. The “slower growth scenario” is premised on a slower pace of reform and lower donor support. A balanced budget is maintained and inflation and the exchange rate are projected to remain stable. In this scenario, private investment is low, the lifting of UN sanctions on timber is delayed, and donor assistance remains focused on humanitarian needs for some time. The recovery of exports will continue to be impeded by damaged infrastructure. The current account is expected to remain high, reflecting the high trade deficit and accrual of arrears. Agriculture and forestry lead the initial recovery, but growth eventually decelerates and averages 4 percent over the medium term. This is insufficient to create significant employment opportunities, raise living standards, or achieve the MDG’s (GDP per capita would reach only about US$140 by 2015).

24. The “optimistic scenario” assumes prudent macroeconomic and reform policies to help lay an early basis for strong and sustainable growth. These policies would trigger significant financial and technical support from donors. The early establishment of an environment conducive for private investment would attract potentially large FDI flows (including in the mineral and forestry sectors), boosting the average growth rate to around 10 percent, which would result in a per capita GDP of about US$230 by 2015 (from the current level of about US$115).10 Throughout, strengthening economic governance is key, following pervasive mismanagement under previous governments, which had also severely affected the conduct of fiscal and central bank operations. To this end, early reestablishment of confidence in Liberia’s key economic institutions is crucial to securing sustained external support and attracting private investment.

Liberia: Medium-Term Scenarios, 2004-09

(In percent of GDP, unless otherwise indicated)

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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.

25. In the fiscal area, the main tasks ahead are the rebuilding of institutions to boost revenue and reestablish a transparent budget process. On the revenue side, there is need to make the main revenue-generating agencies fully transparent and accountable, and channel their collections to the budget. The revenue structure, currently based heavily on taxing trade, needs to shift to domestic activities, including through finalizing the tax reform that had been initiated in the late 1990s. The budget process requires strengthening in all stages, including planning, execution, as well as internal and external controls. Procurement reform will need to be pursued, and a civil service census completed, ahead of possible further reforms in this area.

26. The budget will have to remain balanced for some time, reflecting domestic and external financing constraints. However, a vigorous reform effort may attract grants, also in the form of budgetary support, once the budget process is sufficiently strengthened. Grants and higher revenue should be channeled toward basic infrastructure and social services. A poverty reduction plan should be prepared soon to underpin these efforts.

27. On the monetary side, the main tasks ahead are the strengthening of the CBL and the banking system, as well as the introduction of further monetary policy instruments to enable more active policies over the medium term. Following recent first steps to reduce the CBL’s expenses, its financial health needs to be consolidated; restructuring plans for the currently operating three commercial banks need to be developed; and supervising capacity should be strengthened further. The scope for active monetary policies is expected to broaden in line with the envisaged increase in the demand for local currency. Additional instruments of monetary policy, such as credit facilities for the banking system and a securities market, should be introduced.11 Interbank markets also need to be developed. Once such steps are taken, exchange rate policies could also begin to play a more active role, including to safeguard external competitiveness in the event of adverse shocks.

28. Throughout, particular attention needs to be paid to governance, so as to regain the trust of donors and the private sector. This would include reforms aimed at reactivating the private sector as the engine of growth, including an appropriate legal framework for business activity and investment (contract, corporate, and bankruptcy laws) and a reliable judicial system.

29. Restoration of economic management would also require rehabilitation of the country’s statistical capacity. Historical records were largely destroyed during the 2003 hostilities, and key statistics had been outdated already prior to these events.


Both the U.S. dollar and the Liberian dollar are legal tender. The Liberian dollar is largely used for civil service wages and small-scale and rural transactions.


The world price of rubber, Liberia’s principal export, increased by 67 percent over the two-year period.


Information on budgetary developments prior to the inauguration of the NTGL is incomplete and unreliable.


There is no reliable estimate of the amount of U.S. dollar notes and coins circulating in Liberia.


The CBL has only a few effective policy instruments: reserve requirements and foreign exchange auctions (as opposed to direct purchase of U.S. dollar cash from the government). However, active use of the former was not envisaged, which had been originally set at 18 percent for U.S. dollar denominated deposits and 50 percent for Liberian dollar deposits. These requirements were unified in August 2004 at 22 percent for all deposits.


Foreign exchange auctions have been conducted by the CBL on behalf of the government in order to convert its U.S. dollar resources into Liberian dollars for civil servant payments in a transparent manner. The CBL’s counterparts are the commercial banks, which can bid on their behalf or on behalf of their clients. Since December 2004, foreign exchange bureaus have also been allowed to participate in the auctions, which have been typically held once a week.


Government revenue is collected to about 80 percent in U.S. dollars. Outlays payable in Liberian dollars (notably wages) require constant sales of foreign currency. Total purchases of U.S. dollars by the CBL during 2004 totaled US$8.6 million.


The claims on government accounted for about 90 percent of the CBL’s total assets.


This figure includes interest arrears and penalties. The authorities are undertaking, through their National Debt Management Task Force, a stocktaking exercise and have contacted creditors to obtain loan agreements and statements on their external debt obligations since such data, including loan agreements, were lost during the conflict. Information from multilateral creditors as at end-December 2004 is almost complete and is estimated at $1.5 billion. Data on bilateral and commercial debt is estimated, in some cases based on statements from the mid 1990s. In March 2005, the Paris Club Secretariat agreed to assist in the data collection exercise.


Despite the end of the conflict, there are a number of factors that preclude a further acceleration in the immediate postconflict phase. These are: (i) delays in full establishment of security throughout the country, (ii) the existing ban on the major export commodity (timber), (iii) emergence of land disputes, and (iv) collapse of infrastructure.


At present, the only instruments are reserve requirements and foreign exchange auctions.

Liberia: Selected Issues and Statistical Appendix
Author: International Monetary Fund