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.

Abstract

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.

III. Simplifying Liberia’s Timber Tax Structure—A Contribution to Enhance Revenue Transparency18

A. Introduction

49. Liberia is well-endowed with valuable forest resources, and the sector has made an important contribution to GDP over the past few decades. However, the diversion of revenue from the sector to fund Liberia’s civil war through 2003 led the UN Security Council to impose a ban of timber exports since mid-2003. Taking into account the sector’s revenue potential, but also concerns of sustainable logging, the Security Council has imposed a number of pre-conditions for the lifting of its sanctions. One important condition is the establishment of a transparent system of revenue collection.

50. To establish transparency of the sector’s financial flows, a number of actions are under way, with external assistance. As a contribution to this end, this paper discusses a radical simplification of Liberia’s current timber tax structure. The paper proceeds as follows: After a description of the evolution of Liberia’s timber sector and of its tax structure, it provides an overview of the theory of timber taxation. The concluding section presents a proposal to simplify the sector’s current tax system to two instruments, an area tax and an export tax.

B. Evolution of Liberia’s Timber Sector

51. Liberia’s forest resources are significant. About half of the country’s area are covered by high forests, compared to less than 10 percent of arable land. Liberia’s forests are equivalent to about 45 percent of the remaining Upper Guinea Forest, which spans ten West African countries from Guinea to Cameroon. They contain a number of valuable species—such as African mahogany—that are in high demand on world markets.

52. Timber activity began in the late 1960s, driven by low stumpage fees and the establishment of basic road infrastructure that opened access to forest areas. Through the mid-1970s, it was the fastest-growing sector of the economy, increasing its contribution to GDP from less than 5 percent to about 20 percent. Logging activity was largely carried out by foreign concessionaries. During the second half of 1970s, world demand for timber products dropped in response to global recessions, and the number of concessions declined from 49 in 1974 to less than 30 by 1980, also owing to the depletion of easily accessible logging areas.

53. During the first half of the 1980s, the timber sector remained stagnant due to weak global demand in key markets but also related to Liberia’s political instability. The sector recovered somewhat until the late 1980s, but the outbreak of civil strife led to a cessation of the sector’s formal activities until peace was restored in 1997. Thereafter, logging activity recovered very rapidly, also driven by the demand for charcoal and firewood, reflecting the breakdown of the country’s regular electricity supply.

54. The surge in logging activity soon raised concerns about its sustainability. In addition, international non-governmental organizations began to point at possible links between Liberia’s timber sector and support to the civil war in Sierra Leone. A comparison between export data reported by the Liberian authorities and from importing countries indicates that an important share of exports may have taken place at the margin of official channels.

Liberia: Timber Exports, 1997-2002

(In thousands of U.S. Dollars, f.o.b. basis)

article image
Source: United Nations COMTRADE database (commodity 4403, rough/squared wood).

U.N. Secretary General’s report to the Security Council (S/2003/793, August 5, 2003).

55. Reflecting these developments, the UN Security Council began to pay increasing attention to the possible link between Liberia’s timber activities and the civil war in Sierra Leone and the re-emergence of internal hostilities in Liberia. Following the imposition of sanctions related to the connection between trading in diamonds and the civil war in Sierra Leone in 2001, the Security Council’s panel of experts highlighted in its reports the existence of extra budgetary transactions associated with timber activities and the involvement of timber companies in violating UN sanctions.19

56. To address these issues, the UN Security Council requested in 2002 that the government should take steps, including the establishment of a transparent audit regime, to ensure that revenue from timber and other activities be used for legitimate social, humanitarian, and development purposes. It was expected that independent audits sponsored by the European Union (EU) would provide the necessary assurances, but the external auditor hired by the EU withdrew from the audit in late 2002. Subsequently, the government of Liberia hired a local auditor to undertake a systems audit. However, the UN Security Council determined in May 2003 that such an audit did not provide the required assurances and, in light of the intensifying internal conflict, decided to impose a ban on exports of all timber products, which went into effect in July 2003.

57. Despite the National Transitional Government of Liberia taking office in October 2003, the Security Council decided against lifting the sanctions, citing the lack of the NTGL’s control over the logging areas, the continued lack of transparency of the revenue flow, and the need to establish effective oversight over the sector’s activities.20 Sanctions were again extended for 12 month at end-2004.

C. Liberia’s Timber Revenue System

58. Over time, there has been a proliferation of taxes, charges and fees on forestry activity, particularly driven by the introduction of new taxes for specific purposes during the 1980s (see Attachment I for all current taxes, fees, and changes in timber activity). There are four different charges levied on the volume of trees (not specified by species) at the felling stage, two schedules of export taxes, differentiated by 28 species and, in the case of processed wood, additionally by three stages of processing. In addition, 8 administrative fees are levied on forestry activity and 6 on port services. Finally, there is an area tax. In sum, a tree can easily be subject to about 20 taxes, fees, and charges, based to varying degrees on volume, the species and the degree of processing, and administrative actions required.

59. In addition, concessions envisage further financial commitments by the timber companies such as the construction of schools, clinics, or roads. Furthermore, it became practice that timber companies undertook certain tasks that were originally the responsibility of government, such as road construction, and were granted tax credits for those activities.

60. It is doubtful whether the existing revenue system is effective in achieving any clear objective. Also, the presumed earmarking of certain revenue for specific purposes has been ineffective, given the revenue-sharing agreement between the Forestry Development Authority (FDA) and Ministry of Finance that does not refer to such earmarking at all, and the lack of any signs that the FDA had directed collected revenue to the intended purposes. However, the multiplicity of processes to assess these different charges has created a lack of transparency and significant opportunities for misappropriation of revenue.

61. These concerns are compounded by the weakening of the FDA over time. Founded in 1976 to establish effective oversight over the sector and collect revenue, its functions were severely curtailed when a law was passed in 2000 to transfer the administration of contracts concerning so-called “strategic commodities” (including timber) to Liberia’s president, and when the FDA’s Board of Directors was suspended for administrative reasons. Furthermore, the hostilities in 2003 completely destroyed the FDA’s facilities, car park, and files. Therefore, the FDA will require substantial technical and financial support to rebuild its structure before it will be able to resume any role in the oversight of the forestry sector. A decision on the institutional arrangements for collecting revenue and granting concessions will also need to be made—the FDA’s supervisory role over the sector stands in conflict with its function as tax collector and administrator of concessions.

D. Principles of Forestry Taxation

62. In general terms, taxes on the forestry sector are geared toward the twin objectives of revenue maximization and sustainability of logging levels. Two features distinguish the taxation of forestry from regular taxes: First, government plays a dual role as sovereign tax authority but also as the owner of the natural resource (forests); second, tax instruments in the forestry sector aim at determining a price for the right to extract, compared to the goal of traditional taxes to raise a given amount of revenue while minimizing economic distortions, achieve equity, and keep administrative costs low.

63. The literature recognizes that in the ideal world of perfect markets and information, auctions would be the best instrument to determine the price for extraction rights.21 However, a number of factors—including lack of information on the forest resources under consideration, uncertainties as to the stability of property rights over time, and lack of access to credit—have limited the use of auctions so far, particularly in low-income countries. Therefore, a number of tax instruments are customarily in use at the pre-harvest, harvest, and post-harvest stage (Box 6). Each of these instruments has its own advantages and disadvantages vis-à-vis the mentioned objectives of revenue maximization, administrative ease, and sustainability. For example:22

  • The widely used stumpage fees are based on the amount of timber harvested. However, using only the quantity of timber may lead to selective extraction of the most valuable tree species, leading to sustainability concerns. Therefore, more sophisticated stumpage fees, differentiating between species and reflecting current market prices, would be preferable—at the disadvantage of requiring a complex and costly oversight mechanism.

  • Similarly, area fees have advantages and disadvantages: On the positive side, they are easy to administer as the area of a concession is known. They also encourage the intensive use of the forest, with high recovery rates from all valuable species—which may be positive from an efficiency viewpoint but at times questionable regarding sustainability considerations. On the negative side, flat fees per area are unable to differentiate between the value of forest resources across regions.

  • Profit taxes on timber companies could provide a solution as they would tax net returns and leave decisions on the volume and intensity of logging to the profit-maximizing entrepreneur. In practice, however, such taxes are difficult to enforce, taking into account the global characteristics of many timber firms and the potential for transfer pricing practices. Such concerns are compounded if tax administration in a given timber-producing country is weak.

  • Export taxes are generally not favored as an instrument as logging for domestic uses would not be captured, and because they create an anti-export bias. However, the export stage is a moment where taxes can be levied easily.

Flow of Timber Through the Forest Sector and Application of Taxes

uA03bx06fig01
Source: Schwidrowski and Thomas (2005)

E. Simplifying Liberia’s Timber Tax Structure

64. The above discussion has shown the trade-off between the simplicity of certain timber tax instruments and their ability to achieve the goals of revenue collection and sustainability. This said, simple instruments are still capable of generating revenue and take into account longer-term considerations, while more complex tools may not achieve their desired outcomes of transparent administration of taxes, particularly when the timber sector is weak.

65. Given the current lack of effective controls over Liberia’s forestry sector, the use of a few simple tax instruments is required. Ease of administration is a paramount consideration, taking into account the degradation of the FDA and general tax administration. The number of taxes and fees also needs to be reduced from its current high level.

66. The authorities have therefore decided to accept a proposal to radically simplify the current tax structure. In the short term, 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, but offer additional benefits in Liberia’s current situation:

  • The area tax is also capable of reducing the practice of underusage of concession areas; an increase of the current rate would help achieve more efficient logging levels.

  • The export tax will be levied by the international pre-shipment agent BIVAC, thereby minimizing the short-term need to rely on local tax agents. BIVAC has up-to-date access to world market prices per timber species, which will permit taxation of the accurate value of exported timber.

67. Looking forward, the authorities intend to replace export taxes by production taxes. This will require rebuilding the local capacity to collect taxes, and the establishment of effective controls to ensure that accurate valuations are being carried out at the harvest stage. In addition, considerations are under way to introduce a system to ensure competitive allocation of new concessions, possibly through the use of auctions, as soon as possible.

ATTACHMENT I

Liberia–Volume-Based and Area-Based Charges on Forestry Activities

article image
Source: Doe (2004).

Liberia - Fees and Charges by Tree Species

(In US$ per m3)

article image
Source: Doe (2004).

STT = sawn through and through.

SEU = squared edged four sides (undressed in the rough).

SED = squared edged dressed four sides.

Liberia - Administrative Fees and Port Charges on Forestry Activities

article image
Source: Doe (2004).

The performance bond is paid prior to operation by the concessionaire is and refundable upon satisfactory performance. The amount of the Performance Bond was set in the Act creating the FDA on December 20, 1976.

The marking and grading fees are charged for the inspection and grading of exports and are collected by BIVAC, a subsidiary of a foreign inspection company.

References

  • Doe, James W., 2004, “The Forest Revenue System and Government Expenditure on Forestry in Liberia,FAO Working Paper: FSFM/WP/13 (Rome, Italy: Forestry Policy and Planning Division, Food and Agriculture Organization).

    • Search Google Scholar
    • Export Citation
  • Gillis, M., 1990, “Forest Concession Management and Revenue Policies,” in N.P. Sharma, ed., Managing the World’s Forest: Looking for Balance Between Conservation and Development (Dubuque: Kendall/Hunt Publishing Co.).

    • Search Google Scholar
    • Export Citation
  • Schwidrowski, A., and S. Thomas,Forestry Taxation in Africa: the Case of Liberia,IMF draft Working Paper (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation

Table 1.

Liberia: Sectoral Gross Domestic Product, 2000-04

article image
Sources: Liberian authorities; and IMF staff estimates.
Table 2.

Liberia: Sectoral Origin of GDP At 1992 Constant Prices, 2000-04

article image
Sources: Liberian authorities; and IMF staff estimates.
Table 3.

Liberia: Sectoral Origin of GDP At Current Prices, 2000-04

article image
Sources: Liberian authorities; and IMF staff estimates.
Table 4.

Liberia: Consumer Price Index, 1999–2004

article image
Source: Department of Statistics, Ministry of Planning and Economic Affairs.

Annual average

Table 5.

Liberia: Central Government Revenue, 2000-04

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

Fund staff estimates.

Table 6.

Liberia: Central Government Expenditure, 2000-04

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

Includes expenditure related to national security.

Table 7.

Liberia: Monetary Survey, 2002-04

article image
Sources: CBL; 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.

Including the deposits of publie entities (other than the central government) at the CBL.

Excluding U.S. dollars in circulation.

Table 8.

Liberia: Analytical Balance Sheet of the Central Bank of Liberia, 2002-04

article image
Source: CBL
Table 9.

Liberia. Analytical Balance Sheet of Commercial Banks, 2002-04

article image
Source: CBL.
Table 10.

Liberia: Balance of Payments, 2000-04

article image
Sources: Liberian authorities; and IMF staff estimates.
Table 11.

Liberia: Major Exports, 2000-04

article image
Sources: Liberian authorities; and IMF staff estimates.
Table 12.

Liberia: Merchandise Trade - Imports, 2000-04

article image
Sources: Liberian authorities; and IMF staff estimates.
Table 13.

Liberia: External Public Debt, 2000-041/

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

Data include estimates of interest arrears and late interest charges due to commercial creditors.