Liberia: First Review of Performance Under the Staff-Monitored Program

Economic developments are broadly in line with the original program projections for the year. The authorities have made considerable progress in implementing the IMF staff-monitored program (SMP), and the program is broadly on track. Substantial efforts to improve revenue administration raised revenue by 18 percent in February-June 2006, compared with the corresponding period in 2005. The financial position of the Central Bank of Liberia (CBL) also improved. Serious capacity constraints also affect the ability of the authorities to achieve all of the objectives.


Economic developments are broadly in line with the original program projections for the year. The authorities have made considerable progress in implementing the IMF staff-monitored program (SMP), and the program is broadly on track. Substantial efforts to improve revenue administration raised revenue by 18 percent in February-June 2006, compared with the corresponding period in 2005. The financial position of the Central Bank of Liberia (CBL) also improved. Serious capacity constraints also affect the ability of the authorities to achieve all of the objectives.

I. Introduction

1. The government of President Ellen Johnson-Sirleaf took office on January 16, 2006. The authorities quickly requested Fund staff assistance in developing a program to support economic reconstruction, and to begin building a track record needed for the eventual resolution of Liberia’s arrears and debt overhang. An SMP for February-September 2006 was agreed with the staff in February 2006 and approved by Fund Management in early April. The key objectives of the SMP are to rebuild public institutions, restore credible financial management, and accelerate structural reforms. To this end, the program incorporates ambitious macroeconomic and structural targets. Full details of the authorities’ program and its objectives were presented in IMF Country Report No. 06/166. This paper provides an update on recent economic developments and progress under the SMP in the period through end-June 2006. It is accompanied by a separate paper reviewing Liberia’s overdue obligations to the Fund.

II. Recent Developments and Performance Under the Program

2. Economic developments in the first half of 2006 appear broadly in line with the staff’s earlier projections. Inflation has remained relatively stable, with year-on-year inflation at 6.6 percent in June, compared with 7 percent in December 2005.1 The Liberian dollar has traded in a narrow range between 56 and 59 Liberian dollars per U.S. dollar during January-June 2006; the real effective exchange rate depreciated by 8.6 percent (end-May) from end-2005. Broad money (which excludes U.S. dollars circulating outside banks) expanded at rates in the range of 25-40 percent (year-on-year) during January-June 2006. The economy is expected to continue its recovery during 2006, with real GDP growth projected to rise to 7.7 percent from an estimated 5.3 percent in 2005, and inflation remaining in single digits. The trade deficit is projected to remain largely unchanged, with an expected increase in rubber exports (on account of a substantial increase in world rubber prices) offsetting the increase in the oil import bill.


Inflation and Exchange Rate Developments

(January 2003-July 2006)

Citation: IMF Staff Country Reports 2006, 412; 10.5089/9781451822908.002.A001

Source: Liberian authorities.

3. Fiscal management has greatly improved under the new government. Revenues rose substantially during February-June 2006 as the government made a strong effort to improve tax and customs administration.2 Actual revenues were 19 percent higher than projected in the recast budget (February-June), which was approved by the legislature in early April. On the expenditure side, the late approval of the recast budget, strengthening of the interim commitment control system, and introduction of the Public Procurement and Concessions Act, significantly delayed spending approvals during February-May, and resulted in the accumulation of sizable balances in the government’s accounts at the CBL. However, the pace of expenditure approvals by the Cash Management Committee (CMCo) picked up notably in late-May and June, and most of the balance in the government account at the CBL at end-June represented checks issued, but not yet cashed in fiscal year 2005/06 (Text Table).

Liberia: Implementation of 2005/06 Recast Budget

(February-June 2006)

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Cash basis balance is actual balance on June 30 converted using the market exchange rate.

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

4. The government has also made progress in improving governance. As agreed under the Governance and Economic Management Assistance Program (GEMAP),3 international experts were deployed to the main revenue-generating agencies, the CBL, the BoB, and the Ministry of Lands, Mines and Energy. The authorities also finalized a framework for reviewing concessions and contracts originated under the National Transitional Government of Liberia (NTGL), and prepared a draft anticorruption policy paper to guide preparation of the anticorruption strategy. In the area of civil service reform, the authorities have begun reducing the number of ghost workers and political appointees in the civil service, drafted a civil service code of conduct, and required all serving ministers to publicly declare their assets.

5. UN sanctions on timber exports were provisionally lifted on June 20, 2006, though sanctions on diamond exports were extended for a further period of six months. The permanent removal of the timber sanctions is subject to the adoption of appropriate forestry legislation. The removal of sanctions is not expected to have a significant impact on economic activity in 2006, although timber-related exports and tax receipts are projected to pick up during 2007.

6. The authorities have made considerable progress in implementing the SMP in the period through end-June 2006, and the program was broadly on track. Paragraphs 4-10 of Appendix I (the Letter of Intent) provide further details of this performance. In particular, all the quantitative benchmarks under the program through end-June were achieved (Table 1A, Appendix I), as were most of the structural benchmarks, albeit some with temporary delays (Table 2, Appendix I).

III. Policy Discussion and the Outlook for the Remainder of 2006

7. A continued strong effort will be required to implement the outstanding structural benchmarks under the SMP by the end of September.4 Discussions during the mission focused on actions required to ensure that remaining structural benchmarks can be met. Given serious capacity constraints, which the authorities described as being greater than expected when they took office, timely donor support remains critical for achieving the SMP’s objectives.

A. Fiscal Policy

8. The authorities submitted a cash-based balanced budget for 2006/07 to the legislature on June 29, which was approved by the legislature on August 22.5 The budget targets an increase in revenues of 43 percent over the 2005/06 fiscal year, based on expectations of continued progress in strengthening revenue administration, further reduction in tax and tariff exemptions, collection of overdue taxes, and a continued economic recovery.6 On the expenditure side, the budget reallocates government resources to pro-poor sectors, and the budget for the social services subsector, which includes education and health, has been increased by 56 percent relative to the annualized recast budget, to a quarter of all government expenditure. The budget also provides for an increase in the wage bill by 51 percent, inter alia raising the salaries of the lowest paid civil servants from US$15 per month to US$30 per month. The World Bank staff indicated that they consider the composition of expenditures in the budget to be broadly appropriate.

Revenue Projections: 2005/06 vs. 2006/07

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Source: Liberian authorities.

9. Achieving the revenue target will require substantial effort to further strengthen tax and customs administration. Staff emphasized the importance of further reducing tax exemptions, including through the timely completion of the contracts and concessions review, and further strengthening the Large Taxpayers Unit (LTU). The authorities noted that implementation of the strategy for the collection of overdue tax payments (see Appendix I, paragraph 5) is expected to boost revenues in the second half of the fiscal year, while a further strengthening of the LTU would be considered drawing on advice from FAD on revenue administration.7

10. The staff emphasized the importance of strictly adhering to prioritized monthly cash plans to ensure that expenditures do not exceed available revenues. Since revenue projections are subject to significant uncertainty, contingent expenditures would need to be identified in each line ministry’s cash plan so that expenditures can be appropriately adjusted, should the need arise. The authorities confirmed that prioritized monthly cash plans will guide budget implementation in 2006/07 to ensure that appropriate expenditure adjustments can be made.

11. The commitment control system has been considerably strengthened. The staff welcomed the rigorous implementation of this system, but noted that it had led to uneven monthly expenditures during February-June, and that a large quantity of purchase orders had been approved toward the end of the fiscal year. The authorities stressed that all regulations were observed, but agreed that implementation of the new procurement guidelines requires continued assistance to line ministries to ensure that voucher requests are supported by appropriate documentation and are approved in a timely manner. In the absence of an approved 2006/07 budget, the CMCo could not approve any expenditure during July and most of August.8 The authorities informed the staff that line ministries were able to continue functioning during the initial part of the fiscal year on the basis of the surge in expenditure approvals in late-May and June.

12. The authorities indicated that no new arrears had been accumulated from mid-January through end-June. They noted that public notices in April and July had made it clear that commitments not accompanied by a CMCo voucher (with Bureau of General Accounting (BGA) seal) were not a legal claim on the government. The staff nonetheless urged the government to continue providing guidance to line ministries to ensure that no new commitments are made without first securing an approved purchase order. However, available information suggests that wage arrears relating to wages for July may have been incurred; in accordance with regulations, civil service wages are due within the first week following the end of a calendar month; this would constitute a breach of a continuous quantitative benchmark.

13. Progress on the verification of the government’s domestic debt arrears has been slower than envisaged under the program (Box 1). The staff emphasized the importance of completing the verification of domestic claims, and of finalizing a debt resolution strategy, in part, since finalization of such a strategy would be an important element of ongoing efforts to strengthen the financial sector. The authorities agreed, and confirmed their intention to complete the verification of these claims and finalize the strategy by end-September.

B. Monetary Policy and Financial Sector Issues

14. Monetary policy aims to contain inflation by maintaining a stable exchange rate. Consistent with the SMP, regular foreign exchange auctions have been held since end-March. The staff, however, noted that the currency had depreciated toward the bottom of the range considered by the authorities to be broadly consistent with exchange rate stability. The CBL agreed with the staff’s suggestion that the Liberian dollar component of money supply should be expanded cautiously to maintain a broadly stable exchange rate.

15. The framework for monetary policy implementation has been strengthened since February. The authorities noted that the focus of the Money Management and Policy Review Committee had been clarified, and that it regularly considered a broad range of economic indicators in assessing domestic liquidity developments. The staff encouraged the authorities to begin using the liquidity monitoring framework which had been revised with assistance from MFD.

16. The staff welcomed the improvement in the financial position of the CBL, and noted the importance of adhering to the budget for the remainder of the year in order to cement the gains achieved thus far. Noting that the financial health of the CBL remains vulnerable on account of large unremunerated claims on the government, the staff stressed that the CBL should further improve its financial position during 2007, and should target a balanced cash-based budget. CBL staff concurred with the mission that the operations of the CBL should not continue to be a drain on Liberia’s scarce foreign reserves, and noted that improving the CBL’s income position by resolving the government’s arrears to the bank was a priority.

Liberia: Domestic Debt and Arrears

Domestic debt and arrears on March 31, 2006 are estimated at US$754 million, or 142 percent of 2005 GDP, of which US$483 million has been internally verified.

  • CBL debt – The CBL is the largest creditor with US$260.9 million of verified claims. Discussions on a comprehensive debt restructuring plan are under way.

  • Commercial bank debt – The total debt owed to commercial banks is US$20.5 million.

  • Salary arrears – During February-June 2006, US$3.8 million was paid to settle all existing wage arrears from the period of the NTGL. Thirteen months of salary arrears from the pre-NTGL period remain outstanding, totaling US$16.4 million.

  • State-owned enterprises (SOEs), vendors and bonds – The total claims are estimated at US$411 million, of which over 80 percent are vendor claims and most of the rest are SOE claims.

Domestic Debt and Arrears (March 31, 2006)

(In millions U.S. dollars)

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Building on the work of the National Debt Management Task Force established in July 2004, the new government created an interministerial vetting committee comprising senior officials from the MoF, CBL and other agencies. The committee began meeting in June and is tasked with vetting domestic debt and arrears, and recommending to the government strategies for resolving these claims. In addition, the committee is expected to recommend a roadmap for developing a national debt management strategy.

Regarding the vetting of claims, the government has decided to hire an external auditor for claims above US$10,000 for services, US$25,000 for goods, and US$50,000 for public works. The tender closed in late July. These claims constitute 95 percent of pre-NTGL domestic debt and arrears under consideration; the interministerial vetting committee will consider the rest. A domestic debt resolution strategy is expected by end-September.

Expenditure on Arrears since February 2006

(In millions U.S. dollars)

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Previous TA on domestic debt focused on a subset of salary arrears, vendor claims and savings bonds. It recommended that salary arrears be paid in full and that vendor claims and bonds be settled at a discount rate that increases with the size of the claim. Small claims would be settled in full.

17. The staff and the authorities discussed the importance of finalizing restructuring strategies for the banking sector. The staff considered it important that the CBL and the two commercial banks with large unremunerated claims on the government, cooperate in preparing an assessment of the impact of possible alternative scenarios for resolving this debt, as this could be a useful input in finalizing the domestic debt resolution strategy which is targeted for end-September.

C. Economic Governance

18. In a sharp break with the past, the authorities have made considerable progress in strengthening economic governance. The staff welcomed progress to date, but stressed the importance of completing the review of contracts and concessions as soon as possible. The authorities concurred, but noted that delays in commencing the review process was due in part to delays in finalizing donor financing for the international experts who, under the GEMAP-approved framework, must participate in the review.

19. The staff welcomed the draft anticorruption policy paper, but urged the authorities to complete a comprehensive national anticorruption strategy, including an implementation matrix, with assistance from their international partners. The authorities acknowledged the importance of finalizing this strategy, but noted that the government was still considering the appropriate institutional framework, particularly whether an independent anticorruption institution should be established, or whether the strategy should be pursued within the existing judicial system.


20. The authorities have made substantial progress in preparing an Interim Poverty Reduction Strategy Paper (I-PRSP). A draft I-PRSP is being finalized in consultation with the various stakeholders and development partners. The authorities aim to submit the finalized I-PRSP paper to the staffs of the Fund and World Bank by end-September. The Fund staff has been providing assistance in its areas of expertise, including in the development of updated baseline and alternative medium-term macroeconomic scenarios.

E. External Debt and Arrears

21. The authorities remain keenly interested in pursuing arrears clearance and debt relief. The staff indicated that, while it was too early for a precise timetable, strong performance under the SMP would be a precondition for moving forward. The staff also indicated that any consideration of a rights accumulation program (RAP) following the SMP will require adequate financial assurances to cover the Fund’s subsequent debt relief to Liberia. The staff urged the authorities to continue their work with bilateral and commercial creditors to reconcile loan-by-loan debt data, as this would facilitate the preparation of a preliminary HIPC document. Some progress has already been made in this area; Paris Club creditors have provided updated creditor statements and copies of most of the original commercial loan agreements have been obtained.9

F. De-escalation

22. Based on their performance under the SMP thus far, the authorities request that the Fund begin de-escalating the remedial measures being applied against Liberia (Appendix I). The staff’s assessment of this request and recommended decision are provided in the companion paper that reviews Liberia’s overdue obligations to the Fund.

IV. Program Risks and Monitoring

23. The authorities have made encouraging progress under the SMP, and remain strongly committed to implementing policies under the program. Nonetheless, there is some uncertainty going forward. The main risks to the program arise from capacity constraints in ministries and the tensions between the government and the legislature.

  • Delays in the execution of spending in February-May and in the implementation of key structural measures under the SMP were in part caused by capacity limitations. This could continue to be a problem in the period ahead. Timely TA from the international community is a pre-condition for success. The Fund has already provided extensive TA to the new government in the areas of fiscal and monetary policy, and statistics (see Box 2).

  • Tensions between the government and the legislature have delayed key legislation, including the budget for the 2006/07 fiscal year, which complicated expenditure management at the beginning of the fiscal year. The ability of the government to ensure passage of important legislation, including integrating the BoB and the Bureau of Maritime Affairs into the Ministry of Finance, will depend on the president’s ability to develop a working relationship with the legislature.

24. Performance under the SMP will be monitored on the basis of quantitative and structural benchmarks for end-September (Tables 1B and 2 attached to the Letter of Intent). The end-September floor on revenue collections has been raised to make it consistent with the 2006/07 budget. The floor on the cash-based fiscal balance has also been revised to allow for the clearance of checks issued before the end of the 2005/06 fiscal year, and to spend the uncommitted balance at the CBL at end-June 2006. Moreover, for the CBL, the quantitative benchmarks have been revised to reflect the actual outturn to end-June 2006. Going forward, the staff has recast the quantitative benchmarks as cumulative targets rather 25. than as quarterly flow targets to allow carry-over from one quarter to the next of unspent balances, as well as not to automatically raise (or lower) the CBL’s reserve accumulation target in case of over-(or under-) performance in one quarter. Preliminary quarterly benchmarks were agreed for the budget for the remainder of the 2006/07 fiscal year (Tables 1B) as a precursor to a possible RAP.

The Fund’s Support for Capacity Building in Liberia

The Fund has been providing extensive TA to the authorities since the new government took office in mid-January 2006. The authorities have been very receptive of the Fund’s support for their efforts to enhance capacity, and have already implemented a number of TA recommendations.

In terms of its assistance to the GEMAP, the Fund supported the deployment of an international expert as Chief Administrator (CA) to the CBL since February 2006. The CA has made a significant contribution to the improvement in the financial management at the CBL and its strong performance under the SMP to date. The CA’s term has been extended for one year to August 2007.

Fund TA has been instrumental in formulating a monetary policy framework for Liberia in the current highly dollarized economy, and addressing Liberia’s weak financial sector. Based on Fund TA recommendations, the authorities publicized the monetary policy framework, reinstated regular foreign exchange auctions, and strengthened the terms of reference of the Money Management Committee. Fund staff also assisted the authorities in establishing a Bank Restructuring and Resolution Policy, and in improving supervision of troubled banks.

Continuous assistance from the Fund’s regional advisor on public financial management has been central in strengthening the interim commitment control system. The authorities implemented a key recommendation requiring purchase orders to be validated by the BGA to prevent unauthorized spending by line ministries. During the first eight months of 2006 the Fund also fielded missions on public financial management (focusing on budget planning, execution and monitoring), tax policy, and revenue administration. The budget for 2006/07 implemented a number of recommendations on tax policy, including imposing a uniform excise on alcoholic beverages, increasing the excise on cigarettes, and reducing the import tariffs on books and notebooks and zinc metal sheets.

Fund TA has also helped the authorities to rebuild Liberia’s statistical database, which was destroyed during the civil war, and to improve data quality. In the first half of the year, the Fund fielded missions on government finance statistics and the consumer price index.

Additional TA planned for the remainder of the year includes two MFD missions to continue assistance in the financial sector, two FAD missions on revenue administration, the deployment of a regional public financial management expert to Monrovia, and two STA missions on monetary and balance of payments statistics.

Under the GEMAP, the authorities have also been receiving extensive assistance from key international donors, including the World Bank, UNMIL, EU, DFID, ECOWAS, and the United States. Assistance has focused on strengthening economic governance, and included deployment of international experts to key revenue-generating agencies, finalizing a framework for reviewing contracts and concessions originated under the NTGL, drafting an anticorruption policy paper, strengthening public procurement procedures, developing a domestic debt resolution strategy, and reform of the forestry sector (which enabled the provisional lifting of UN sanctions on timber exports). External assistance has also been critical in rebuilding Liberian institutions to ensure continued peace and stability following the eventual withdrawal of UNMIL forces.

V. Staff Appraisal

26. Despite severe capacity constraints, the government has made considerable progress in recent months in implementing key policies under the SMP, and the program is broadly on track. The staff welcomes this progress, as well as the government’s continued commitment to achieving the goals of the SMP.

27. Most of the SMP’s quantitative and structural benchmarks for end-March and end-June were met. Public expenditure management has improved through implementation of the interim commitment control system, and strengthened cooperation between line ministries, the Ministry of Finance, and the BoB. The government has commenced a program for reviewing concessions and contracts originated under the NTGL. Moreover, under the GEMAP, international financial experts have been deployed to the main revenue-generating agencies. Encouraging measures have also been taken to strengthen the management and operations of the CBL and to boost tax collection. Among measures where temporary delays have been encountered, it is important to quickly establish an anticorruption strategy in cooperation with international partners, and to finalize the verification of the stock of domestic debt without further delay so that a domestic debt resolution strategy can be developed.

28. The budget for 2006/07 is based on an ambitious revenue target. Given the significant uncertainty about the pace at which revenues will increase over the course of the year, it will be particularly important for the government to adhere to prioritized monthly cash plans so that adjustments to actual expenditures can be made during the year, should the need arise. Similarly, approval of legislation to merge the BoB and the Bureau of Maritime Affairs into the Ministry of Finance will be critical to help further strengthen public financial management, and make budget implementation more effective.

29. Achieving all the end-September benchmarks on a timely basis will be challenging. Finalizing the review of concessions and contracts is likely to take longer than originally planned although many of the major contracts should have been considered by end-September. This review is particularly important for reducing the number of tax exemptions, and hence raising government revenues. Similarly, finalization of a domestic debt resolution strategy, consistent with a plan for restructuring the CBL will require a sustained effort. The Fund will continue to provide timely technical assistance in its areas of expertise including tax administration, public financial management, the financial sector, and statistics.

30. Liberia’s external debt is clearly unsustainable. However, the staff believes that achieving the objectives of the SMP will provide a basis for generating the support from the international community required to resolve Liberia’s large external debt overhang.

Figure 1.
Figure 1.

Liberia: Selected Economic Indicators, 2000-06

Citation: IMF Staff Country Reports 2006, 412; 10.5089/9781451822908.002.A001

Sources: Liberian authorities; and Fund staff estimates and projections.
Figure 1.
Figure 1.

Liberia: Selected Economic Indicators, 2000-06 (concluded)

Citation: IMF Staff Country Reports 2006, 412; 10.5089/9781451822908.002.A001

Sources: Liberian authorities; and Fund staff estimates and projections.1/ Percent of total money supply.
Figure 2.
Figure 2.

Liberia: Exchange Rates Developments, January 2000-May 2006

Citation: IMF Staff Country Reports 2006, 412; 10.5089/9781451822908.002.A001

Sources: Liberian authorities; Fund staff estimates and projections.
Table 1.

Liberia: Selected Economic and Financial Indicators, 2003-2007

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

Technical adjustments were made to the CPI in 2004 in light of the substitution of some items in the CPI survey in mid-2004.

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

Table 2.

Liberia: Balance of Payments, 2003-2007

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

Apart from token payments to international financial institutions, Liberia is not servicing its external debt.

Table 3.

Liberia: Summary of Central Government Operations, 2002/03-2006/07

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

2006/07 revenue projections are GOL estimates for the budget. Expenditure projections include US$17.4 million of commitments at end-2005/06 projected to be recorded as expenditure in 2006/07.

Adjustments in 2005/06 and 2006/07 are a result of commitments at end-2005/06 projected to be recorded as expenditure in 2006/07.

Table 4.

Liberia: Monetary Survey, 2003-2007

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

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.

Excluding U.S. dollars in circulation.

Table 5.

Liberia: Medium-Term Scenarios, 2006-11

(Percent of GDP, unless otherwise indicated)

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

This scenario is based on prudent macroeconomic and reform policies, with effective implementation of the GEMAP.

A steady rise is assumed for donor inflows at about half the rate of nominal GDP growth, based on the country’s extensive reconstruction needs and assumed strong policy performance that would likely elicit continued strong donor support.

This scenario is based on a slower pace of reform, with consequently lower levels of donor support.

Based on weaker policy reform, donor inflows are assumed to equal about two-thirds of those in the baseline scenario.

Appendix I. Liberia – Letter of Intent

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431


September 12, 2006

Dear Mr. de Rato,

1. We would like to take this opportunity to inform you of our progress in implementing Liberia’s staff-monitored program (SMP) that was agreed with IMF staff in February and approved by you in April. You will recall that, after decades of mismanagement and internal conflict that have left the Liberian economy in ruins and the vast majority of the population desperately poor, the SMP’s key objectives are to rebuild public institutions, restore credible financial management, and accelerate structural reforms to bring hope and confidence back to the country. To this end, the program is based on ambitious macroeconomic policy and structural reform targets.

2. We believe we have made good progress in implementing our economic program, notwithstanding even more serious capacity constraints than we foresaw in the first weeks of the new administration and the need to reach agreement with the opposition-led legislature on some key measures. We have greatly strengthened fiscal management and made significant advances on our structural reform agenda. The SMP’s quantitative benchmarks through end-June were met (Table 1A), as were most of the structural benchmarks, with some encountering temporary delays (Table 2). We are taking corrective action to ensure that these benchmarks are also met. As stipulated under the SMP, we submitted a balanced budget proposal for the 2006/07 fiscal year to the legislature on June 29. The legislature approved the budget on August 22.

3. This critical break with the past and our resolute commitment to push our reform agenda ahead with the support of the international community offer the promise of sustained growth for Liberia over the medium term and the alleviation of the suffering of the Liberian people going forward.

4. Since February, revenue performance has improved dramatically, due, in part, to the more comprehensive implementation of pre-shipment inspections of all imports and exports, a strengthening of the Large Tax Payer Unit (LTU) (a benchmark for end-March), and the elimination of noncash methods for the settlement of tax obligations. Overall, revenues for the period February-June 2006 rose 18 percent over the corresponding period the year before, and exceeded the program floor by a comfortable margin. While the number of tax payers covered by the LTU fell short of the end-June benchmark, we are in the process of auditing a number of companies and expect to meet the target by end-September 2006. We recognize, however, that a reorganization and further strengthening of the LTU is needed and, following an audit of the unit by the Auditor General, are now considering additional changes in the broader context of a review of revenue administration on the basis of technical assistance from the Fiscal Affairs Department of the IMF.

5. We also developed a strategy to deal with overdue tax obligations (a benchmark for end-June). This entailed the identification of businesses with overdue obligations, the amounts involved, the period covered, and reasons for delayed settlement. Notifications for payment have been sent. In the event a business persists in its failure to settle overdue obligations, it will be sent warning notices calling for payment within a reasonable timeframe as allowed by the Liberian Revenue Code, or face closure in line with remedies provided by the Code.

6. In line with our commitment under the SMP to implement a balanced cash-based budget and avoid the accumulation of further domestic arrears, we have strengthened the role of the Cash Management Committee, a crucial element of our commitment control system. This has been achieved by ensuring that the Bureau of the Budget does not make allotments that exceed revenues and that line ministries do not make commitments that exceed their allotments. We have also made a public announcement that, to be valid, all government purchase orders must be stamped with a special seal from the Bureau of General Accounting (a continuous benchmark from end-June). Delays in approval of the recast budget until April and the strict implementation of the new interim financial rules and enforcement of the provisions of the Public Procurement and Concessions Act led to slower than expected expenditure approval during February-April and caused the accumulation of central bank balances in the government’s accounts at the Central Bank of Liberia (CBL). In May and June, we were able to execute a large volume of expenditures, bringing overall spending in February-June into line with the recast budget, without breaching the requirements of the commitment control system. In our view, following a number of workshops, the ability to execute spending in June reflects the increased familiarity of line ministries with the proper procedures for submitting expenditure requests. We recognize the importance of prioritized monthly cash plans for keeping expenditures in line with revenues and will, therefore, strictly adhere to them in the 2006/07 fiscal year. We fully expect expenditure plans to be executed in a more timely fashion in the period ahead.

7. Going beyond understandings in the SMP, we have submitted legislation that would prevent the executive from making changes to budget allocations exceeding 30 percent of a ministry’s or agency’s approved budget without the approval of the legislature. We have also submitted to the legislature draft legislation to allow for the full integration of the Bureau of Budget and the Bureau of Maritime Affairs into the Ministry of Finance. To facilitate the timely approval of the budget, we chose not to submit this legislation to the legislature until after the passage of the 2006/07 budget. However, the intent and spirit of the integration have been met - in February, the President instructed the heads of these agencies to report directly to the Minister of Finance, thus adhering to the substance of the draft legislation. This has improved budget execution as well as the budget formulation process.

8. The verification of the stock of the government’s domestic debt (a benchmark for end-June) has proved to be a more challenging task than we envisaged. We judged it necessary to appoint an interministerial vetting committee to verify smaller claims and selected, through international tender, an external auditor to verify the larger claims. We recognize that the verification of the stock of outstanding claims is a crucial first step toward finalizing our domestic debt resolution strategy by end-September. We are, therefore, pushing for the verification process to be completed as soon as possible. In addition to the verification of smaller claims on the government, the interministerial committee will provide input into the task of designing the domestic debt resolution strategy and developing a debt management policy for the government.

9. Monetary policy has been effective in maintaining inflation in single digits. In view of the high dollarization of the economy, the expansion of the Liberian component of money supply will continue to be limited to maintain a broadly stable exchange rate, while meeting the reserve accumulation targets under the SMP. The CBL has held regular foreign exchange auctions since end-March (a continuous benchmark from end-March), which have contributed to the maintenance of the relative stability of the exchange rate. The foreign exchange market remains the main channel through which monetary impulses affect prices, and the exchange rate continues to be the most meaningful indicator of monetary policy conditions. The monetary policy framework has been improved by clarifying the role of the Money Management and Policy Review Committee (a continuous benchmark from end-March) and the posting of the final monetary policy framework paper on the CBL website (a benchmark for end-March) in March. Financial management at the CBL has been strengthened significantly, and the CBL will continue to target a balanced cash-based budget in line with its commitment under the SMP. Moreover, a financial restructuring plan for the CBL will be completed by end-September 2006, while an external audit of the CBL (a benchmark for end-September) will be undertaken in early October. We have also requested a voluntary safeguards assessment in anticipation of a Fund-supported program.

10. We have taken important steps to improve governance that are consistent with the donor-supported Governance and Economic Management Assistance Program (GEMAP) and the SMP. In particular, internationally recruited experts with co-signatory authority have been placed at the main revenue generating agencies and a Fund-recruited expert, working under the guidance of the Executive Governor, has been serving as Chief Administrator at the CBL since February. A program for reviewing all concessions, contracts, and licenses granted under the previous transitional government (a benchmark for end-April) was approved by the steering committee of the GEMAP in May. This review, which is now under way, is likely to be completed only by the end of the year, due to delays in appointing internationally recruited experts. We expect, however, that the review of the most important contracts (e.g. MITTAL Steel and Firestone) will be completed by end-September 2006. A new travel ordinance, incorporating the main recommendations of the ECOWAS-financed audit report, was issued on April 1 (a benchmark for end-March). Substantial progress has been made in developing a national anti-corruption strategy (a benchmark for end-May). A draft anti-corruption policy paper that lays out the main elements of an anti-corruption strategy has been completed and is being reviewed in consultation with donors. Following approval by the President, the EGSC and the LRDC, the strategy will be finalized by end-September 2006. In the meantime, legislative ratification of the anticorruption conventions of the United Nations and African Union have been obtained. The government has also implemented a number of anti-corruption measures, including requiring incoming ministers to declare their assets, drafting a code of conduct for the civil service, publishing an ECOWAS audit of the previous government, and preparing for judicial action against officials named in that audit.

11. We are pleased to report that good progress has been made in preparing an Interim Poverty Reduction Strategy Paper (I-PRSP). A draft I-PRSP has been completed and is being finalized in consultation with stakeholders and development partners. In line with our commitment expressed to you in April, we expect to be able to send the final I-PRSP document to the IMF and World Bank by end-September 2006.

12. The 2006/07 budget targets a cash balance, recognizing that any loan financing, whether external or domestic, will be imprudent for some time to come. The budget targets an increase in revenues of 43 percent over the 2005/06 fiscal year. While ambitious, we believe that this target is attainable, based on revenue performance during the last five months of the previous fiscal year and the significant further strengthening of revenue administration that we intend to implement. In order to broaden the revenue base, we also plan to eliminate some tax and tariff exemptions. Moreover, we expect to see benefits from a safer and more enabling security and business environment. We have also sought to enhance the poverty reduction impact of government expenditures. Thus, the budget for the social services subsector, which includes education and health care, has been increased by 56 percent, to a quarter of all government expenditure. Also, spending on community services and rural development, including agriculture and forestry, are slated to increase by 183 percent and 278 percent, respectively. We fully recognize that a strong domestic revenue mobilization effort is crucial to providing much needed additional resources to address Liberia’s numerous poverty and development challenges. Moreover, we acknowledge the uncertainty about government revenues and the importance of implementing prioritized expenditure plans to ensure that appropriate adjustments to expenditures can be made, should the need arise.

13. In consultation with IMF staff, we have modified the end-September 2006 quantitative benchmarks of the SMP and developed preliminary quarterly benchmarks for the remainder of the 2006/07 fiscal year that are consistent with the 2006/07 budget (Table 1B). Regarding the latter, it is our hope that these can be established as quantitative performance criteria under a rights accumulation program (RAP) that would succeed the SMP.

14. In June, the U.N. Security Council provisionally lifted sanctions on the export of timber from Liberia in recognition of our efforts to strengthen the management of forestry resources. Progress has also been made in making Liberia compliant with the Kimberley Process Certification Scheme, which should lead to the lifting of sanctions on diamond exports. We see the lifting of these sanctions and our performance under the SMP and the GEMAP as providing a foundation for the restoration of stability and growth, but recognize that deeper reforms are needed to sustain progress. Implementation of a solid macroeconomic framework under the SMP has already yielded substantial benefits in terms of improved fiscal performance and structural reforms, and ongoing Fund technical assistance provides important policy recommendations for both the short and medium-term. Liberia faces immense economic challenges and we remain committed to implementing the necessary reforms to continue on the path of economic recovery and poverty reduction.

15. We are working with our development partners on programs to address the government’s crippling capacity constraints, including the concept of a Senior Executive Service to fill technical needs below the ministerial level. In the longer term, we expect that our efforts to reform the civil service will further enhance the capacity of the government to effectively implement its policies.

16. It is our view that, under the SMP, Liberia has demonstrated a credible strengthening of its cooperation with the IMF on economic policies. We also continue to meet our monthly payment commitments. Going forward, we remain strongly committed to further improving our cooperation with the IMF with a view to resolving our arrears to the IMF and obtaining comprehensive relief on our unsustainable external debt as soon as possible. Against this background, we request that the IMF consider initiating the process of de-escalation of the remedial measures that are being applied against Liberia. The initiation of this process would provide an important confirmation to the long-suffering Liberian people and the international community that Liberia has indeed begun to turn the corner.

Sincerely yours,

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Table 1A.

Liberia: Quantitative Indicators (flow basis)

(Millions of US$)

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The fiscal balance, on a cash basis, is defined as the difference between (a) total central government revenue plus budget support (excluding project grants), and (b) total current expenditure plus investment expenditure (excluding foreign-financed investment expenditure).

Table 1B.

Liberia: Quantitative Indicators 2006/07 (cumulative basis, unless otherwise noted)

(Millions of U.S. dollars)

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The fiscal balance, on a cash basis, is defined as the difference between (a) total central government revenue plus budget support (excluding project grants), and (b) total current expenditure plus investment expenditure (excluding foreign-financed investment expenditure).

The floor on revenue collections is total revenue for 2005/06 and the floor on cash-based fiscal balance is accumulated government surpluses at the CBL as of end-June. Most of the latter amount respresents checks approved by the CMCo prior to end-2005/06 which were not cashed prior to end-2005/06. After taking into account commitments made, but not cashed, the balance of the government account at the CBL at end-June 2006 was $2.1 million. Under the cash-based budget, these are recorded as expenditures when they are cashed at the CBL. All CBL data are Jan.-Jun. 2006.

The original program data for September 2006 reflects actual outturn at end-June, plus the original flow targets for September.

Table 2.

SMP for February-September 2006—Structural Benchmarks

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Appendix II. Liberia—Relations with the Fund: (As of July 31, 2006)

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. Outstandiing Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Obligations to the Fund10 (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 a managed float, with no predetermined path for the exchange rate. 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-July 2006 was L$59.5=US$1.

VIII. Article IV Consultation

The 2006 Article IV consultation discussions were held in Monrovia during February 16-March 1, 2006 in Monrovia. The staff report (Country Report No. 06/166, 5/08/06) was discussed by the Executive Board on April 26, 2006.

IX. Technical Assistance

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X. Resident Representative

A resident representative has been posted in Monrovia since April 3, 2006.

Appendix III. Liberia—Relations with the World Bank Group

(As of July 31, 2006)

The World Bank suspended disbursements to Liberia in December 1986 as a result of mounting arrears, and Liberia’s loans were placed in nonaccrual status in June 1987. To that date, disbursements had totaled US$141.3 million from 22 IBRD loans and US$91.5 million from 17 IDA credits; only US$ 43.6 million owing on these disbursements has been repaid. By May 30, 2006, Liberia’s arrears to the World Bank were US$456.14 million, reflecting further interest charges. Liberia has an outstanding obligation of US$2.2 million to the World Bank, since August 24, 2005, to fulfill the Maintenance of Value (MOV) clause in the Bank’s Articles of Agreement.

Following the Comprehensive Peace Agreement in August 2003 and the installation of the National Transitional Government of Liberia (NTGL) in October 2003, the Bank co-hosted with the UN and US the International Reconstruction Conference for Liberia in February 2004. In March 2004, the Executive Directors of the Bank discussed the Liberia Country Re-engagement Note. In April 2004 a US$4.0 million grant from the Bank’s newly created LICUS Implementation Trust Fund was approved to fund activities in four areas: community empowerment, including a rapid social assessment; public procurement and financial management; forestry sector management; and the coordination and implementation of the Results-Focused Transition Framework (RFTF). A US$25 million grant from the Bank’s IBRD surplus, was endorsed by the Bank’s Executive Directors in August 2004 and approved by the Bank’s Board of Governors in October 2004. This grant extends funding of the above activities, funds additional activities in the area of infrastructure, and will provide support for the internationally supported Governance and Economic Management Assistance Program (GEMAP) agreed to with the NTGL in September 2005. The first subgrant from this source of funding, the Technical Assistance Component for Infrastructure Rehabilitation (US$5.0 million), was approved in December 2004, and the second subgrant, Community Empowerment (US$6.0 million), in February 2005. Other subgrants are being prepared.

In addition to the trust-funded operations mentioned above, the Bank has prepared its first IDA operation for Liberia, the Liberia Emergency Infrastructure Pre-Arrears Clearance Grant of US$30.0 million which was approved by the Bank’s Board on June 20, 2006. This grant will focus on the reconstruction of two primary roads, construction of 6 major bridges and the repair of an additional 65, restoration of a water treatment plant, and support for the reestablishment of power in Monrovia as well as on strengthening institutional capacity within the Ministry of Public Works to manage the above activities.

Since July 2004 the Bank has had a Senior Country Officer in Monrovia to coordinate the Bank’s activities in Liberia. The Bank will open a full Country Office in Monrovia as of July 1, 2006 headed by a Country Manager and supported by several operational and administrative staff.

The working environment in Liberia is characterized by close coordination and consultation among the government, the Bank, the IMF, the UN group, bilateral donors, local and international NGOs, and civil society. This approach was forged during the transition through the high-level RFTF Implementation and Monitoring Committee, the Liberia Reconstruction and Development Committee, and the Economic Governance Steering Committee of the GEMAP and its Technical Team. In December 2005 the Bank became a member of the International Consultative Group on Liberia.

World Bank Group Statement of Loans/Credits/Grants for Liberia Summary in U.S. Dollars at April 30, 2006

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