Recent Economic Developments

1. The Liberian Authorities have maintained a strong track record, characterized by sustained macroeconomic stability and strong growth. In 2006, real GDP growth is estimated to have risen further to 8 percent from 5.5 percent in 2005. With respect to monetary policy, while the authorities have for the most part maintained broad nominal exchange rate stability, there has been some flexibility as reflected in the 7 percent depreciation against the dollar recorded for the year ending May 2007. Meanwhile, a new, more comprehensive and representative CPI basket has been adopted since the last SMP review. This new data shows a declining inflation trend for the country-wide basket. Inflation dropped to 11 percent in May 2007 from 12 percent in January under the new CPI.

Performance Under the Staff Monitored Program

2. In spite of the sizable pressure from the challenges the Authorities face, Liberia’s performance under the SMP has remained broadly satisfactory. Since the last SMP review in February, public revenues have continued to exceed program targets and these targets are now being adjusted upwards in the current SMP. With respect to the slow pace of fiscal expenditure reported in the last review, this is being corrected. In order to address capacity constraints in public financial management, the authorities established an ongoing capacity building program in public procurement and the time spent in training had the effect of delaying spending under the budget. In the last quarter of the fiscal year, however, spending has accelerated and the target for the current fiscal year will now be met. Given this track record, the Authorities are requesting the IMF Board to continue giving their strong endorsement to Liberia’s performance record under this 2007 SMP, which meets upper credit tranche conditionality requirements, as endorsed by the Board in February.

Fiscal Policy

3. Measures are ongoing to strengthen the government’s general public financial management. The Authorities note the importance of ensuring timely approval of the budget to clarify the resource envelope for line ministries and now expect the 2007/08 budget to be passed by parliament within the next month. Other measures that are underway include an aggressive domestic debt resolution program to address outstanding domestic debt issues such as repayments owed to financial institutions, and cross-debts with state owned enterprises. In this regard, a trust fund has been established to finance the debt resolution strategy and government has allocated $6 million in initial funds to it under the current budget. Over the next three years, 5 percent of the annual budget will be allocated to this trust fund to cover debt resolution payments for the fiscal year. Some progress is also being made with the anti-corruption strategy. The Authorities met with various donors to determine how best to finance the anti-corruption commission and ensure it has adequate capacity to be able to effectively implement the anticorruption strategy. A financial plan for the commission’s operation is being drafted and the Authorities have now budgeted money for the commission, which will be supplemented by donor funds. On the issue of the reform of tax exemption policies, the Authorities have drafted an amendment to the legislation which is currently being reviewed by an IMF legal expert.

Financial Sector Reform

4. The Authorities are also cognizant of the importance of addressing financial sector shortcomings and in this regard, measures are already underway to address financial sector weaknesses identified by IMF staff missions. Work is also ongoing to strengthen the Central Bank function. In order to upgrade its own systems, the Central Bank of Liberia asked the Fund to undertake a voluntary safeguards assessment of its current systems to help identify vulnerable areas. This assessment has recently been completed and the Authorities are now using it to guide their system’s capacity strengthening measures.

5. Generally, the state of the banking sector has improved noticeably. All banks now meet the minimum capital requirement. The Central Bank of Liberia has also intensified on-site examinations and enhanced enforcement has led to improved corporate governance in the banking system. Recent data in 2007 show that the gross assets of the banking sector have risen by 24 percent over the level recorded for December 2006, and by 46 percent when compared to March 2006. Meanwhile, the ratio of non performing loans to total loans and advances of the banks, has declined by 19.9 percentage points since March 2006. At the same time, aggregate deposits of the banks increased by 22 percent over the level recorded for December 2006 and by 50 percent compared to March 2006, reflecting increased confidence in the banking system. Notwithstanding this progress, further steps are being taken to strengthen the supervisory functions of the Central Bank. Furthermore, options are being considered for improving Liberia’s legal system with regard to the enforcement of financial contracts and/or collection debts.

6. The SMP benchmark regarding the audit selection criteria for the Central Bank of Liberia has now been resolved and the Central Bank of Liberia audit is near finalization by the external auditors. The Liberian Authorities are committed to ensuring that the Central Bank of Liberia’s Chief Administrator plays an effective role in the context of the GEMAP.

7. The Central Bank of Liberia is also working closely with the Ministry of Finance to conclude discussions for the liquidation of government debt to the banking system under the new domestic debt strategy. The Authorities thank the IMF for its assistance in providing a long term expert, a measure which has helped the Central Bank of Liberia to improve its supervisory capacity.

Public Financial Management Reform

8. Regarding civil service capacity and the wage level, the Authorities continue to face the dilemma of how to build a civil service of the required quality and quantity, in order to help develop the productive and efficient civil service capacity that is needed, given the significant budgetary constraints. The current civil service wage is so low that it provides little incentive to qualified and competent candidates to join the service. Despite recent salary increases, the minimum civil service wage of $50 a month remains below the global poverty line of $2 a day. Thus, enhanced donor support is necessary within the context of a comprehensive civil service reform strategy that will address this concern as well as other capacity issues such as the training needed for budget planning and implementation in line ministries.

The Imperative of Clearing Liberia’s Protracted Arrears

9. Liberia is a post-conflict country and still bears the scars of decades of war. There is widespread poverty with most of the population living below the global absolute poverty line of $1 a day. Unemployment remains high, at over 80 percent of the labor force, and many of the unemployed are ex-combatants and restive youth. This points to the potential for social pressures if the peace dividend is not seen in a timely manner by the broader population. The government’s revenue base clearly falls far short of the enormous post-conflict reconstruction needs. The Authorities are therefore grateful to donors present in Liberia, who are providing critical project support outside of the budget. Within the available cash budget, there has been a rapid increase in expenditure on key social and rural services such as education, health, agriculture, public works, water and sanitation, in line with rising revenues. In the current fiscal year, expenditure on these social services has been increased by 39 percent.

10. We are grateful to those countries that have agreed to contribute their SCA-1 accounts and deferred charges to Liberia’s arrears clearance package. We are especially grateful to Sierra Leone and the Democratic Republic of Congo, which have contributed despite the daunting challenges they face. Notwithstanding these contributions, a significant funding gap still remains. The preliminary HIPC debt sustainability analysis shows that Liberia would be eligible to use HIPC and MDRI related debt relief to help bring its overall debt down to manageable and sustainable levels. However, this will only happen once adequate financing assurances have been obtained to enable Liberia to clear its arrears. Thus both the IMF and the international community still have a critical role to play in supporting the Authorities’ sustained effort to bring the country’s finances to relative normalcy under a sustainable trajectory. Under the current government, Liberia has consistently conformed to IMF requirements with respect to policy recommendations, reforms and payments. There is therefore, an urgent need for the IMF Executive Directors and the G8 to expedite the process of securing the balance of financial assurances needed for arrears clearance. In this regard, we appeal to all Executive Directors to encourage their Authorities to expeditiously participate in the arrears clearance package needed to re-establish Liberia on a sustainable footing. We are also hopeful that the G8 and management will approach the larger SCA-1 account holders to appeal for their participation.

11. The Authorities have been working on the resolution of Liberia’s commercial debt. With the help of grants from the Swiss government, they have retained the services of financial and legal advisers who are assisting in the restructuring of Liberia’s commercial debt within the parameters set out in the HIPC framework. Several meetings have already been held with various creditors, including hedge funds.

Conclusion

12. In closing, a strong message is sought from the Executive Board to the effect that Liberia is effectively implementing this Fund program, with policies meeting the Upper Credit Tranche (UCT) conditionality level, it is establishing a credible track record, and that the Fund is ready, as soon as adequate arrears clearance assurances have been made, to make quick progress towards the HIPC and MDRI debt relief required to bring Liberia’s debt to normalcy at sustainable and manageable levels. This will then allow for the economic progress needed to sustain peaceful reform in Liberia. The importance of continued financing support from the development community, for Liberia cannot be over-emphasized. This is a critical juncture for the country. Finally, we thank the Executive Board, Management and Staff for the gigantic effort being made to help clear Liberia’s arrears and place the country on a sustainable footing.