Liberia
Enhanced Initiative for Heavily Indebted Poor Countries: Decision Point Document, Debt Sustainability Analysis, and Staff Supplement
Author:
International Monetary Fund
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Publication Date:
20 Mar 2008
eISBN:
9781451822960
Language:
English
Keywords:
ISCR; CR; debt; real GDP; NPV; deficit; HIPC Initiative; bridge loan; Liberian authorities; fiscal policy; government expenditure; current account; Debt relief; Debt service; Debt service ratios
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This paper presents an assessment of Liberia’s eligibility and qualification for assistance under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The macroeconomic framework underlying the Debt Relief Analysis (DRA) in this paper was updated to reflect discussions on the policy framework underlying a proposed three-year Poverty Reduction and Growth Facility/Extended Fund Facility (PRGF/EFF)-supported program. Finally, this study discusses the floating completion point triggers. Fiscal policy has been anchored on a balanced cash-based budget. The government has also implemented other measures to address long-standing problems in financial management and economic governance.

Abstract

This paper presents an assessment of Liberia’s eligibility and qualification for assistance under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The macroeconomic framework underlying the Debt Relief Analysis (DRA) in this paper was updated to reflect discussions on the policy framework underlying a proposed three-year Poverty Reduction and Growth Facility/Extended Fund Facility (PRGF/EFF)-supported program. Finally, this study discusses the floating completion point triggers. Fiscal policy has been anchored on a balanced cash-based budget. The government has also implemented other measures to address long-standing problems in financial management and economic governance.

I. Introduction

1. This paper presents an assessment of Liberia’s eligibility and qualification for assistance under the Enhanced HIPC Initiative.1 The Executive Boards of the IDA and the IMF discussed the preliminary HIPC document for Liberia on January 31 and February 1, 2008, respectively.2 On these occasions, Directors agreed that Liberia is eligible for assistance under the HIPC Initiative and agreed that Liberia could reach its decision point together with the approval of a Poverty Reduction and Growth Facility (PRGF)/Extended Fund Facility (EFF)-supported program provided that it: (i) continued satisfactory performance under the current SMP; (ii) cleared its arrears to multilateral creditors, or reached agreement with them on a strategy for arrears clearance; and (iii) agreed on appropriate completion point triggers. Regarding the latter, Directors broadly supported the triggers outlined in the preliminary document.

2. This paper builds on the preliminary HIPC document that was recently discussed by the Executive Boards of the IDA and the IMF. The macroeconomic framework underlying the Debt Relief Analysis (DRA) in this paper was updated to reflect discussions on the policy framework underlying a proposed three-year PRGF/EFF-supported program. While it remains largely unchanged, medium-term projections for real GDP growth and foreign direct investment have been lowered slightly. As noted below, the DRA was updated to incorporate revised data on the commercial debt stock that was received from Liberia’s financial advisor, and the common reduction factor was adjusted marginally. Finally, following Directors’ comments, the trigger for the floating completion point relating to the debt management unit was adjusted to ensure it will be operational for at least twelve months prior to the completion point. The trigger relating to the Extractive Industries Transparency Initiative (EITI) was revised to ensure that it is realistic.

3. The analysis indicates that after traditional debt relief mechanisms are applied, Liberia’s NPV of debt-to-exports ratio at end-June 2007 was significantly above the HIPC Initiative threshold. Since the last DRA presented in the preliminary document, further minor revisions were made in February 2008 based on new information provided by the external financial advisor who has been contracted by the government to estimate the commercial creditor claims.3 Possible HIPC Initiative debt relief is estimated to be US$2,845.5 million and Multilateral Debt Relief Initiative (MDRI) and IMF beyond-HIPC relief of about US$147.0 million in NPV terms at end-June 2007. Because Liberia has been servicing almost none of its debt, this relief would not immediately create additional fiscal space. In the medium term, however, the resolution of its arrears will give Liberia access to additional development assistance, helping it make progress toward the Millennium Development Goals (MDGs).

4. This paper is organized as follows. Section II provides background information on Liberia’s eligibility for assistance under the HIPC Initiative and on recent developments. Section III discusses Liberia’s medium- to long-term macroeconomic framework and its poverty reduction strategy. Section IV summarizes the DRA and presents the size of possible HIPC, MDRI and IMF beyond-HIPC assistance, including through arrears clearance and additional bilateral and multilateral assistance beyond these initiatives. Section V discusses the floating completion point triggers. Section VI presents issues for discussion by Executive Directors.

II. Background And Eligibility for HIPC Initiative Assistance4

A. PRGF and IDA Status

5. Liberia’s performance under the SMP since early 2006 has been broadly satisfactory. In the view of the staffs, Liberia’s performance is sufficient to establish a track record for purposes of reaching the decision point. In February and July 2007, IMF Directors agreed with their staff’s assessment that policies under Liberia’s SMP for 2007, subsequently extended to end-March 2008, were of upper-credit tranche quality.5 Discussions for the fourth review of performance under the SMP and a program to be supported by arrangements under the PRGF and EFF were concluded in Monrovia during January 17-23, 2008. The government’s request for three-year arrangements under the PRGF and EFF for SDR 582 million (450 percent of quota under the 11th General Review) in support of a program covering the period through December 2010 will be considered by the IMF Executive Board immediately prior to its consideration of the HIPC decision point document.6 Disbursements under the PRGF/EFF arrangements are front-loaded in order to repay the bridge loan expected to be used to clear Liberia’s arrears to the IMF.

6. Liberia is an IDA-only country with a gross national per capita income of about US$140 in 2006 (using the World Bank’s Atlas methodology). Following a re-engagement strategy discussed by the IDA Board on March 9, 2004, a Joint Interim Strategy Note, prepared in collaboration with the African Development Bank (AfDB), was presented to the IDA Board on June 14, 2007. The note proposed a support program that is closely aligned with the government’s I-PRSP and takes advantage of the opportunity to sustain reform momentum under the current government. The program consolidates and mainstreams the work supported by the World Bank in the areas of economic governance, infrastructure rehabilitation, and community development and that of the AfDB on governance, economic management, and infrastructure (including water supply rehabilitation). The strategy for the first time also proposes intervention in other critical sectors, such as health and civil service reform, in line with the I-PRSP. In December 2007, arrears to the World Bank were cleared with the support of a grant under a Development Policy Operation (DPO); arrears to the AfDB were also cleared in December 2007 through an operation under the framework for assisting Post-Conflict Countries (PCCs).

B. Country Background and Political Developments

7. Thirty years ago, Liberia’s per capita GDP was on par with that of Egypt, Indonesia, and the Philippines and was more than double that of India. Between the mid-1940s and the 1960s, Liberia’s economy grew at rates ranging from 4–7 percent annually. However, marginalization, mismanagement, and perceived inequalities in the distribution of benefits from national resources sowed the seeds for a 1980 coup. GDP growth fell from 5 percent in the early 1970s to less than 1 percent in the mid-1980s. After 1980, Liberia entered a protracted period of instability that included civil wars in 1989–96 and 2000–03. By 2003, most of the country’s roads and railroads, electricity generation and transmission, and potable water and sewage systems had been destroyed.

8. After over 20 years of instability, the Accra Comprehensive Peace Agreement of 2003 initiated a political transition. The National Transitional Government of Liberia (NTGL), established under the peace agreement, governed Liberia until the completion of legislative and presidential elections in October–November 2005. An elected government headed by President Ellen Johnson-Sirleaf assumed office on January 16, 2006. Since the signing of the Accra Peace Agreement, more than 100,000 combatants have been demobilized and most of the displaced population, estimated at a third of the total population, has returned to its place of origin.

9. Liberia is now one of the poorest countries in Africa. The fourteen-year civil war had a devastating impact on Liberia’s economy, reducing real GDP to about 40 percent of its pre-war level. An estimated 64 percent of the population lives below the national poverty line, with 48 percent living in extreme poverty.7 Only an estimated 17 percent of the labor force is formally employed. Besides the destruction of physical infrastructure during the conflict, the delivery of basic services such as health and education was severely disrupted. Net primary school enrolment rates today remain low at 37 percent, while the much higher gross enrolment rate (86 percent) suggests that older children that missed out on education during the war are returning to school. Approximately 50 percent of the population lack access to safe water, and over 60 percent have no access to improved sanitation facilities. National and local institutions are dysfunctional and plagued by poor governance and widespread corruption.

10. Current conditions in Liberia present significant risks. Securing Liberia’s fragile peace and economic recovery is a daunting challenge. A UN military force (UNMIL) of over 12,000 has established, and assumed responsibility for, security throughout the country. Although the UN and the United States are providing police officers with training to form a new Liberian national police force, improvements in the living conditions of the Liberian population will be needed to support sustained security advances. This, in turn, will require the authorities to continue strengthening public institutions and economic governance to ensure that growth is inclusive and sustainable.

C. Post-Conflict Macroeconomic Track Record

11. Performance under the SMP has been broadly satisfactory. Soon after taking office in January 2006, the government requested IMF assistance to develop a program to support economic reconstruction and to begin building a track record of policy implementation needed to resolve its arrears and debt overhang. The key objectives of the 2006 SMP were to rebuild public institutions, restore credible financial management, and accelerate structural reforms. In February and July 2007, the IMF Executive Board discussed the SMP for 2007, which aims to maintain macroeconomic stability, further strengthen PFM and the banking sector, and implement the government’s anticorruption and domestic debt resolution strategies.8 9 Performance under the program through December 2007 has been satisfactory, and the program remains on track, continuing to meet the standards associated with arrangements in the upper credit tranches. The authorities achieved all but one of the quantitative benchmarks and good progress was also made in achieving the structural benchmarks, although a few required more time to be completed.

12. Since 2005, the economy has recovered strongly, underpinned by a relatively stable macroeconomic environment. Following modest growth of 2½ percent in 2004, real GDP growth is estimated to have increased to 9½ percent in 2007. The recovery has been supported mostly by a turnaround in agriculture and the impact of a large donor presence in the services sector. Inflation, anchored on a relatively stable exchange rate, has remained broadly stable.10 Although export growth recovered strongly, a narrow export base (with rubber accounting for about 90 percent of exports) and strong import demand driven by the economic recovery and large donor presence resulted in a widening in the trade deficit to around 36 percent of GDP in 2007 from an estimated 4½ percent of GDP in 2003. Nevertheless, strong support from donors, a resumption of foreign direct investment and the continued accumulation of payments arrears, more than financed the overall balance of payments deficit, and allowed a modest accumulation of gross official foreign exchange reserves to 1½ months of imports. However, net international reserves are still steeply negative, reflecting the CBL’s large external liabilities.

13. Fiscal policy has been anchored on a balanced cash-based budget. Recognizing that the current unsustainable level of public debt makes it imprudent to pursue an active fiscal policy stance, the government is adhering to a cash-based balanced budget. Accordingly, it has implemented, with donor support, an expenditure management program based on an interim commitment control system, to ensure that expenditures do not exceed available revenues and that procurement practices adhere to the new public procurement guidelines. In this context, prioritized monthly cash plans, prepared by line ministries and agencies, are being used to guide budget allotments and provide a framework for reducing expenditures, should the need arise.

14. Strengthened revenue administration and better enforcement of the tax code have boosted revenues, but budget implementation needs further strengthening. The government’s efforts in tax and customs administration have enhanced efficiency and widened the tax base. While customs continued to be the main source of revenue, revenues from income taxes have increased substantially and account for about 30 percent of all revenues. The government has (i) reorganized tax administration; (ii) reduced tax exemptions; (iii) eliminated noncash payments of taxes; (iv) strengthened pre-shipment inspection; (v) strengthened customs administration; and (vi) introduced an automated tax payment system. Fiscal revenues rose by 74 percent in 2006/07, and continued their strong performance in the first half of 2007/08, rising by 46 percent compared with the same period one year ago.

Table 1:

Liberia: Selected Economic and Financial Indicators, 2003–07

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

The Monrovia CPI was replaced from February 2007 with a more comprehensive Harmonized CPI.

The U.S. dollar-denominated GDP deflator is derived mainly from the change in the domestic CPI, the L$/US$ exchange rate, and international commodity prices in a few selected sub-sectors.

Fiscal year basis (July-June). Commitment basis starting in 2006/07.

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

15. On the expenditure side, however, approvals lagged available cash resources for most of fiscal year 2006/07 and also in the first half of 2007/08. The slow pace of spending reflected the legislature’s late approval of the budget,11 continued challenges in implementing the new procurement act, and capacity constraints in line ministries. Expenditure approvals accelerated in the last two months of the fiscal 2006/07, but required significant budgetary transfers between budget line items, highlighting the need for the expenditure approval process to be improved so that expenditures are not concentrated at the fiscal year’s end and to create an institutional framework that ensures the fiscal outturn is consistent with the approved budget. The authorities have taken some recent steps to strengthen budget implementation, including measures requiring that the Budget Committee chaired by the Minister of Finance approve all transfers between budget lines and that major budgetary transfers are also approved by the President and the Legislature.12

16. The government has begun implementing its domestic debt resolution strategy. In January 2007, the authorities finalized a domestic debt resolution strategy. Total outstanding claims of over US$900 million were reviewed with the assistance of an external auditor; approximately one-third of this total was classified “valid,” approximately one-third “contestable” and approximately one-third “rejected”. Valid claims were discounted by increasing percentages depending on the amount (0 percent for claims below US$1,000 to about 88 percent for claims above US$1 million).13 While discussions with some creditors, including state-owned enterprises (SOEs), are ongoing, and the government commenced an assessment of contestable claims with the assistance of an external auditor, payments to small claimants began in 2006/07 and to the CBL and private banks in 2007/08. Owing to scarcity of government resources and significant development priorities, it is envisioned that payments on these domestic debt claims would span 30 years.

17. The CBL has taken steps to strengthen the monetary policy framework and the banking sector, while improving its own financial position. The policy framework recognizes the current limited scope for an active monetary policy, given the high degree of dollarization, and focuses on maintaining low and stable inflation by targeting broad exchange rate stability. Much progress has been made in improving bank capitalization, but the banking system remains fragile and needs stronger supervision. Progress has also been made in improving the financial position of the CBL and in strengthening financial management and processes. The CBL posted a higher-than-projected budget surplus for 2007 on account of the positive impact on income of an unanticipated accumulation of U.S. dollars in the government’s account at the CBL. For 2008, the CBL is projecting another modest surplus.

D. Governance Developments

18. Governance weaknesses pose a major challenge. Many of the civil servants and staff of SOEs recruited in the past two decades were unqualified and poorly educated patronage appointees. External audits during the NTGL revealed malfeasance and poor PFM.

19. In September 2005, the NTGL and its international partners signed the Governance and Economic Management Assistance Program (GEMAP). GEMAP is a direct response to the concerns of the government and partners about the mismanagement of public resources in the post-conflict transition and its threat to the peace process. An Economic Governance Steering Committee (EGSC), chaired by the President and comprising administration officials, CBL, international partners and civil society, oversees the implementation of GEMAP.

20. GEMAP has six components: (i) securing Liberia’s revenue base, (ii) improving budgeting and expenditure management, (iii) improving procurement practices and the granting of concessions, (iv) establishing processes to control corruption, (v) supporting institutions that are key to promoting and sustaining government accountability and good financial management, and (vi) capacity building. The government has made good progress in implementing GEMAP: it deployed international experts and financial controllers with co-signing authority to revenue-generating agencies and the CBL, and completed a review of contracts and concessions approved by the NTGL. It has strengthened public revenues and expenditure management by empowering the cash management committee (CMCo) to limit expenditures to available cash revenues, and adopted a zero-tolerance policy on corruption.

21. The government has also implemented other measures to address long-standing problems in financial management and economic governance. Key achievements include (i) eliminating ghost workers in the civil service; (ii) drafting a Civil Service Code of Conduct; (iii) requiring all serving Cabinet members to publicly declare their assets; and (iv) implementing actions to enable UN sanctions on diamond and timber exports to be lifted. The authorities also approved a comprehensive anticorruption strategy in December 2006 that provides, inter alia, for establishing an independent anticorruption commission. The strategy is based on four main pillars: (i) strengthening governance rules and procedures; (ii) reinforcing institutions; (iii) amending laws on corruption; and (iv) ensuring consultation with all sectors of society. They also ratified the UN and African Union conventions against corruption and began implementing measures to strengthen governance. Draft legislation to establish an independent anticorruption commission has been submitted to the legislature. Moreover, in June 2007, the government launched the Extractive Industries Transparency Initiative in Liberia to ensure transparency and accountability in the allocation and exploitation of Liberia’s natural resources. All financial flows from natural resource exploitation will be reconciled by an independent administrator, subject to external audits, and published.

22. However, significant challenges remain in establishing a transparent and accountable government. While some PFM improvements have been made, budget implementation remains a challenge. The government must integrate the new procurement rules into all its systems, execute the budget more transparently, further enhance governance within agencies and SOEs, strengthen the tracking of aid commitments and flows, and improve its systems for internal audits throughout all its ministries. If the scope for corruption is not reduced, much of the public expenditure donors finance will continue to be executed outside the government’s budget. Furthermore, a medium-term fiscal framework which incorporates data on donor flows must be developed to guide budget preparation and ensure its consistency with the government’s I-PRSP and the PRSP under preparation. A Public Expenditure Management and Financial Accountability Review (PEMFAR), currently underway and led by the World Bank with input from the IMF, aims to help the government address many of these issues.14

23. The lack of reliable and timely data constrains the government’s ability to formulate policies and monitor their implementation. A key challenge will be to complete the preparation of the national statistical development strategy and begin its implementation, and strengthen the capacity of the Liberian Institute for Statistics and Geo-Information Services.

E. Progress with Social and Structural Reform

24. Despite Liberia’s recent rebound in economic growth, the poverty and social situation remains dire. A Core Welfare Indicator Questionnaire conducted in 2007 found that 64 percent of the population lives below the national poverty line. Life expectancy has dropped to 42 years, below the average for low income countries under stress. Infant mortality is around 117 per 1,000 live births and child mortality around 194 per 1,000 live births.15 Maternal mortality is high (580 women per 100,000 live births). Preventable diseases, such as malaria, diarrhea, respiratory infections, and measles, are rife. Malnutrition is considered a key factor in high death rates. Most medical clinics (80 percent) are supported by humanitarian organizations; along with the closure of camps for internally displaced people, the withdrawal of such relief providers will reduce social services. In education, the school system is unable to absorb the large numbers of children who have enrolled in primary schools since the new government abolished school fees. Even as progress is made at the policy and ministerial level, delivering services at the local level will be a daunting challenge.

25. Recent surveys supported by UNDP and FAO/WHO show that many households face food insecurity and lack access to basic services. Indeed, 11 percent of surveyed households were food insecure, 40 percent were highly vulnerable to food insecurity, 41 percent were moderately vulnerable to food insecurity, and only 9 percent were food secure. Access to basic services, including water and sanitation, are also limited (only 51 percent of surveyed households had access to improved water sources and 39 percent to sanitary communal latrines).

Key Poverty & Social Indicators – 2006

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Note: Percent of total populations, unless otherwise indicated

26. The initial 150-Day Action Plan allowed the government to make a strong start in rebuilding the country’s infrastructure and social services. The government began rehabilitating several hundred kilometers of roads and a few bridges; rehabilitated about 36 high schools, 39 clinics, and 4 community health facilities; financed community development projects in all 15 counties; began to rebuild the electricity grid within Monrovia; strengthened the national health strategy to fight HIV/AIDS and provided bed nets in malaria endemic communities as well as medicines for new tuberculosis cases; rehabilitated water pipelines in parts of Monrovia; constructed 100 new water points and 52 new boreholes around the country; initiated reforms in the education sector and rehabilitated several schools; and increased budgetary outlays for health to 8.9 percent of the budget and education to 8.6 percent. The action plan fed into the I-PRSP, the implementation of which is underway.

27. Agriculture is a major component of economic revitalization. Agriculture is the primary source of livelihood for most of the population. Many households reverted to subsistence farming during the war. Yet few resources are available to smallholders, and the poor transportation network makes it hard for farmers to get products to market. Recovery has been quicker in the commercial plantation sector because the high price of rubber has spurred investment. The government’s strategy focuses on efforts to increase yields and production in key cash and export crops utilizing both small-holder and commercial plantation sectors. It also supports measures to create efficient supply chains and more opportunity for value-added and off-farm employment, including the necessary infrastructure for cash and export crops. The government needs to implement improved plantation concession agreements to prevent the abuses of the past from being repeated.

28. The government has also taken steps to strengthen forest sector management. Reforming the forestry sector was a requirement, not only for lifting the sanctions on timber, but also for ensuring that the sector is managed in a sustainable manner and benefits the population. A UN/Government of Liberia Rubber Plantation Task Force was instituted to ensure government-owned plantations are properly administered on an interim basis pending their privatization or return to the original owners.

29. Government and donors are working together on a national health plan to address systemic deficiencies, attract additional investments in infrastructure and human resource development, and fund recurrent expenditures. Community-based development is strengthening social capital and addressing some of the causes of conflict. The government is also working to ensure that its spending is increasingly pro-poor. As more donor financing flows through the government budget, safeguards will need to ensure that poverty-reduction spending makes up an increased proportion of total expenditures.

F. Reform Agenda

30. The government’s medium-term policy framework, defined in its I-PRSP, and the full PRSP expected to be finalized in mid-2008, aims to promote rapid economic growth, create jobs, secure macroeconomic stability, reduce poverty, and help Liberia make progress toward the MDGs. The program aims to strengthen governance and the rule of law by, among other measures, establishing an anticorruption commission; rebuilding national infrastructure; revitalizing the economy; and enhancing national security. Fiscal policy will focus on further strengthening PFM in the context of the medium-term framework developed to implement the poverty reduction strategy, including continued procurement reform, the implementation of a new public financial management law, and improvement in internal processes. Continued measures to strengthen revenue administration, including completing the reorganization of domestic tax administration and outsourcing of customs, should help further increase domestic revenues. Efforts in the financial sector will focus on further strengthening the monetary policy framework and enhancing private sector access to credit, including by improving banking supervision and regulations and modernizing the national payments system. On managing natural resources, the government intends to carry forward recent steps to re-establish forestry concessions and the chain of custody, observe the Kimberly process for diamonds exports, and participate in the Extractive Industries Transparency Initiative (EITI). Creating and carrying out a national statistical plan will strengthen statistical capacity, including improved estimates of national accounts, supporting policy formulation and outcome tracking. Continued financial and technical support from donors will be essential to all these efforts.

III. Medium- to Long-Term Strategy and Prospects16

A. Macroeconomic Framework and Prospects

31. Real output growth is projected to average about 5½ percent over the period 2008–27. In 2008–11, real output growth should strengthen sharply as security conditions improve further, strong Liberia. Selected Economic Indicators: 2006/07-2026/27 external support continues, and private sector-led investment in key export sectors (forestry and mining) increases. Over the long term, real output growth is assumed to stabilize at about 3¾ percent, bringing per capita GDP close to its 1980 level by about 2027.17 The projections for real output growth assume that security holds, political and macroeconomic stability is sustained, progress is made on economic governance, and improvements in social and economic infrastructure support higher private investment, including foreign direct investment. The ratios of key macroeconomic variables to GDP may be overstated due to the probable underestimation of GDP owing to the absence of official national accounts data following the destruction of Liberia’s statistical capacity during the civil war.

Liberia. Selected Economic Indicators: 2006/07-2026/27

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Source: Liberian authorities, and IMF staff calculations and projections.

32. Macroeconomic stability is expected to be supported by a prudent fiscal policy. The government plans to continue targeting a cash-based balanced budget in the near term. In the context of an appropriate debt-management strategy, the government in the medium term is expected to maximize access to grants and to continue seeking external financing on concessional terms. This should allow pro-poor spending and investment to increase without compromising debt sustainability.18

33. Fiscal revenues (excluding grants) are projected to increase to about 27½ percent of GDP in FY2026/27, from about 22 percent in FY2006/07, reflecting increased revenues from forestry and mining and continued revenue administration reforms. The government is expected to continue implementing measures to increase revenues, including by advancing comprehensive tax and customs reforms, improving taxpayer compliance, and broadening the tax base. However, Liberia will continue to need donor support given its large financing needs for reconstruction.

34. Government expenditures are projected to increase to over 30 percent of GDP in FY2026/27, from about 18 percent in FY2006/07. This estimate, however, assumes that Liberia is able to continue increasing its revenues given that its borrowing capacity will likely be limited for some time. In the near term, the government is expected to improve budget implementation, while limiting public expenditure to actual revenue. More government expenditures are expected to go to strengthening institutional capacity in the public sector and to such priority areas as security, infrastructure, health, and education. The framework also assumes that the share of pro-poor spending will increase, allowing poverty to fall steadily.19

35. The external current account deficit (excluding grants) is expected to decline from 69 percent of GDP in FY2006/07 to about 23 percent of GDP in FY2026/27, in part because of improvements in net exports.20 Exports of goods and nonfactor services, mostly in agriculture and mining, are expected to increase on average by about 13 percent annually over the projected horizon. Average growth of exports for 2006/07-2011/12 is projected at about 42 percent, reflecting the lifting of UN sanctions on timber and diamond exports and significant foreign direct investment in the iron ore sector, and to average about 3 percent for the remainder of the projection period. Imports of goods and nonfactor services, meanwhile, are expected to grow, on average, by 9 percent annually over the projected horizon, driven by the economic recovery and reconstruction needs.

36. The main risks to the projections rise from the possibility of faltering progress in securing peace and stability and slower-than-expected reforms. Lack of headway in enhancing security, strengthening governance and the rule of law, and rehabilitating infrastructure and basic services could erode donor support, weaken confidence, and hurt private sector investment, resulting in lower-than-projected GDP growth. Furthermore, the authorities will have to continue efforts to ensure full cooperation of the opposition-controlled legislature to achieve passage of key legislation, and to enhance institutional capacity, which is very limited currently.

B. The I-PRSP Reform Strategy

37. Liberia’s provisional reform strategy is set out in its I-PRSP.21 The I-PRSP, completed in January 2007, is the result of a participatory process that included the public and other stakeholders; a deeper participatory process is underway for the full PRSP which is under preparation and expected to be completed in mid-2008. The full PRSP will include a costing of poverty-reducing policies as well as a monitoring and evaluation framework. Preparation has been supported by the staff of the IMF and World Bank, including on preparation of a medium-term macroeconomic framework, and World Bank-supported surveys, including a Core Welfare Indicator Questionnaire, Demographic and Health Survey, and Participatory Poverty Assessment.

38. The Liberia Reconstruction and Development Committee (LRDC) oversees the I-PRSP’S implementation and serves as a policy board. The LRDC, chaired by the President, includes key cabinet members and Liberia’s international partners. The strategy period, July 2006 through June 2008, spans two annual budget cycles, thus allowing the strategy to be integrated into the budget process.

39. The I-PRSP identifies the government’s key priorities for the plan period. These include (i) fully reforming the security sector; (ii) revitalizing agriculture to ensure pro-poor growth; (iii) rebuilding the road network; (iv) accelerating human resource development; (v) strengthening the environment for private sector growth; (vi) creating jobs; and (vii) promoting good governance and the rule of law.

40. The I-PRSP is organized around four cross-sectoral and cross-ministerial “pillars.” These include (i) enhancing national security; (ii) revitalizing economic growth; (iii) strengthening governance and the rule of law; and (iv) rehabilitating infrastructure, and delivering basic services. The government is keenly aware that it will need to prioritize resource allocation within its limited budget and is seeking the additional donor support it will need for each pillar on the basis of its I-PRSP. The LRDC is organized around the same four cross-ministerial pillars.

41. At the Liberia Partners’ Forum, held in Washington on February 13–14, 2007, development partners gave the government extensive feedback on its I-PRSP. It was agreed that the document was ambitious and reflected the government’s commitment, funding permitting, to quickly address the most serious constraints to growth and poverty reduction. A Joint Staff Advisory Note was presented to the Executive Boards in May 2007, and the government has committed to take the comments received into account in the PRSP.

IV. Debt Relief Analysis and Possible HIPC, MDRI and beyond-HIPC Assistance22

A. Debt Reconciliation Status

42. The DRA was prepared jointly by the authorities and the IDA and IMF staffs. It draws on data provided by the authorities and creditors for the public and publicly-guaranteed external debt disbursed and outstanding as of end-June 2007. The reconciliation process was completed by the authorities in February 2008.

43. Of Liberia’s external debt as of end-June 2007, 90.6 percent has been reconciled. Many of the debt records of the Ministry of Finance were looted, burned or lost during the years of civil conflict. With assistance from creditors, it was possible to reconcile 100 percent of Liberia’s multilateral and bilateral debt. With donor support, the authorities have contracted an external financial advisor to estimate and partially reconcile commercial debt and discussions with private creditors on the reconciliation are ongoing. This DRA is based on the advisor’s latest estimates of commercial debt stocks as of end-June 2007, incorporating new information provided by certain creditors in February 2008, and providing 72 percent reconciliation of total commercial debt (Box 1).

B. Structure of External Debt

44. Liberia’s public and publicly guaranteed external debt was estimated at US$4.7 billion in nominal terms at end-June 2007 (Table A1). Prior to the clearance of arrears to the World Bank and AfDB in December 2007, multilateral and bilateral creditors held approximately two-thirds of Liberia’s external debt in nominal terms before traditional debt relief (Figure 1A). As of end-June 2007, Liberia’s largest individual creditors were the IMF (17 percent of total claims) and IBRD/IDA (9 percent of total claims). The largest bilateral creditors are Germany and the United States (each holding 9 percent of total claims). Non–Paris Club official creditors hold approximately 3 percent of Liberia’s total external debt.

Table A1.

Republic of Liberia: Nominal Stock and Net Present Value of Debt at end-June 2007 by Creditor Group 1/

(Millions of US$, unless otherwise specified)

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Sources: Liberian authorities and staff estimates.

Liberia’s fiscal year runs from July to June.

Discount rates applied are the average commercial Interest Reference Rates published by the OECD over the 6 month period prior to June 2007

Assumes a stock-of-debt operation on Naples terms at end-June 2007; and comparable action by other official bilateral creditors on eligible debt (pre-cutoff and non-ODA).

Paris Club cutoff date is January 1, 1983.

End-June 2007 debt stock reinstates Chinese loans in the amount of USD 10.1 million in nominal value (USD 5.3 million in NPV terms after traditional relief) that were canceled prior to decision point as a contribution towards poverty alleviation. The subsequent relief will count towards the HIPC relief expected from the creditor.

Based on the estimated stock of debt provided by the government’s financial advisor.

Figure 1A.
Figure 1A.

Republic of Liberia: Composition of Stock of External Debt at End-June 2007 by Creditor Group

(Nominal stock: $4,732.2 million)

Citation: IMF Staff Country Reports 2008, 106; 10.5089/9781451822960.002.A001

Figure 1B.
Figure 1B.

Republic of Liberia: Potential Costs of the HIPC Initiative by Creditor Group

(Total Estimated Enhanced HIPC Assistance: $2,845.5 million, end-June 2007 NPV terms)

Citation: IMF Staff Country Reports 2008, 106; 10.5089/9781451822960.002.A001

Sources: Liberian authorities and staff estimates.

45. Most of Liberia’s external debt (about 96 percent) was in arrears at end-June 2007. Some 93 percent of its debt to multilateral creditors was in arrears. All multilateral maturities except some on debts owed to IDA, the African Development Fund (AfDF), the AfDB-administered Nigerian Trust Fund, IFAD, and the EU have already fallen due. All debts to commercial creditors, 92 percent of the debt to non–Paris Club bilateral creditors, and 96 percent of the debt to Paris Club bilateral creditors are in arrears.

Estimation of Commercial Debt

Many of Liberia’s records on external debt were lost during the conflict years. To reconcile commercial debt, the authorities have contracted the services of an external financial advisor; the DRA is based on the advisor’s estimates of commercial debt stocks as of end-June 2007, incorporating new information provided by certain creditors in February 2008.

To assess Liberia’s eligibility for the HIPC Initiative, the staffs have used the stock of commercial debt resulting from the methodology developed by the financial advisors. This methodology uses available records to estimate the outstanding stock of commercial debt, 72 percent of which has been reconciled with commercial creditors.

The methodology is based on the following:

  • obtaining a clear segregation between outstanding principal and accumulated arrears by using default interest rate provisions or by selecting an appropriate market interest rate and adding a margin (this responds to the fact that over time the principal in arrears is fixed whereas the interest in arrears is accrued);

  • assuming that all principal amounts have been outstanding since January 1, 1984 (based on the fact that no records of new debt were found after this date);

  • estimating past-due interest from January 1, 1984, or, where a Court Judgment is applicable, from the case closing date, using default interest rate provisions, if known, or otherwise a LIBOR, plus a margin, on a compounding basis;

  • estimating the arrears of each loan on the basis of its original currency denomination and by capitalizing the interest on the loan every six months using the relevant interest fixing date.

Additional data that become available between the decision point and the completion point and are considered by the staffs to be of sufficient quality can be used at the time of the completion point.

For uniformity of treatment considerations, the methodology used for estimating Liberia’s stock of commercial debt would be available in the future for other countries in a similar situation (i.e., countries lacking complete records on their stock of commercial debt).

C. Arrears Clearance Strategy

46. Liberia’s arrears to IBRD and IDA were cleared in December 2007 through a bridge loan provided by a bilateral donor. Liberia then used the proceeds of a Development Policy Operation (DPO) to repay the bridge loan. This operation was financed with an exceptional allocation of IDA resources, provided on grant terms, and in accordance with IDA’s systematic approach to the clearance of arrears to IBRD and IDA.

47. Arrears to the AfDB Group were also cleared in December 2007 through an operation under the framework for assisting Post-Conflict Countries (PCCs). Under this framework, the cost for clearing arrears is generally shared by the country, donors, and the AfDB’s Post-Conflict Countries Facility (PCCF). The proportion of the cost covered by each participant is determined on a case by case basis. For Liberia, one-third of the cost was financed by bilateral donors and two-thirds from PCCF resources. In recognition of Liberia’s limited payment capacity, the country received bilateral donor assistance to finance the 1 percent contribution that would otherwise have been required from them.

48. Arrears to the IMF are expected to be cleared in March 2008 through a bridge loan obtained from a bilateral donor. This will place the IMF in a position to approve new financing for Liberia. The new financing by the IMF, provided under a blend of financing from the PRGF and EFF, will be front-loaded to repay the bridge loan. This will pave the way for Liberia to reach the HIPC decision point which will allow it to begin receiving interim relief from the IMF.

49. Strategies for arrears clearance with Liberia’s six smaller multilateral creditors have been agreed or are under discussion. As of end-June 2007, arrears to the six smaller multilateral creditors – the OPEC Fund for International Development (OFID), the International Fund for Agricultural Development (IFAD), the Arab Bank for Economic Development in Africa (BADEA), the European Union (EU), the European Investment Bank (EIB) and the Economic Community of West African States (ECOWAS) – totaled US$82.9 million, around 2 percent of Liberia’s total arrears. Government has written to these creditors requesting negotiations regarding clearance of arrears in the context of the HIPC Initiative. Five of the six – BADEA, EIB, EU, IFAD and OFID – have confirmed their intention to negotiate arrears clearance in the context of the HIPC Initiative. ECOWAS has not yet been able to confirm such an intention and is not currently participating in the HIPC Initiative. However, Liberia’s arrears to ECOWAS are US$5 million, or 0.1 percent of the country’s total arrears as of end-June 2007.

50. The grant element embedded in the clearance of arrears towards multilateral creditors will be counted toward their contribution to debt reduction under the HIPC Initiative. This is consistent with the standard HIPC Initiative methodology.23

D. Possible HIPC Initiative Assistance

51. Liberia’s debt in NPV terms, after full application of traditional debt relief mechanisms, is an estimated US$3,143.9 million (as of end-June 2007). This is equivalent to 1,576 percent of exports of goods and services.24 Liberia would thus qualify for debt relief under the HIPC Initiative’s export window, based on end-June 2007 data, having an NPV of debt-to-exports ratio above the 150 percent threshold. 25

52. The reduction of Liberia’s NPV of debt-to-exports ratio from 1,576 percent to 150 percent would require HIPC debt relief of US$2,845.5 million in end-June 2007 NPV terms. This implies a common reduction factor of 90.5 percent after traditional debt relief, one of the largest common reduction factors thus far under the HIPC Initiative. Under a proportional burden-sharing approach, multilateral creditors would contribute approximately US$1,425.8 million and bilateral and commercial creditors about US$1,419.6 million. If we assume the time line and modalities presented below, this translates into about US$4,007.5 million of nominal debt service relief over time, compared with payments that would have been required following the assumed application of traditional debt relief and arrears clearance from multilateral creditors.

53. The following assumptions were made in projecting the time line of possible HIPC Initiative assistance using end-June 2007 data with a decision point in mid-March 2008:

  • IDA would have fully provided its share of HIPC debt relief amounting to US$375.2 million in NPV terms through the grant element embedded in the clearance of Liberia’s arrears to both IBRD and IDA.26

  • IMF assistance would total US$732.2 million in NPV terms of which US$30.9 million would be delivered through the concessional element during a three-year interim period associated with the use of PRGF resources used to repay the bridge loan for arrears clearance, and would count toward the IMF’s contribution to HIPC assistance. All necessary financing assurances are in place for the IMF to deliver HIPC assistance as well as beyond-HIPC assistance. After the decision point is approved by the Boards of IDA and the IMF, it is expected that the IMF would provide HIPC interim assistance to cover for each 12-month period Liberia’s forthcoming interest obligations to the IMF net of payments equivalent to Liberia’s current payment capacity of about US$720,000 per annum.27

  • AfDB assistance would total US$238.1 million in NPV terms which would have been fully delivered through the arrears clearance operation.

  • Assistance provided by all other multilateral creditors would total US$80.4 million in NPV terms. Given the fiscal constraints faced by Liberia, it has been assumed that Liberia will not make payments to these other multilateral creditors until the completion point. It is then assumed that these creditors will assist Liberia to clear the total outstanding arrears at completion point through a combination of arrears clearance grants and concessional loans with additional debt-service reduction where necessary.

  • Paris Club bilateral creditors are assumed to provide their share of HIPC debt relief (US$857.4 million in NPV terms) through a flow treatment on Cologne terms—i.e., a 90 percent NPV reduction on eligible debt—after reaching the decision point, with delivery of the remaining required assistance at the completion point through a stock-of-debt operation.

  • Comparable treatment is assumed to be provided by non-Paris Club official bilateral creditors and by commercial creditors (delivery of US$562.3 million in NPV terms of required assistance under the HIPC Initiative). 28 The Liberian authorities have confirmed to staff that they intend promptly to pursue good faith discussions with Liberia’s commercial creditors in order to agree on a settlement of commercial claims on financial terms that are not more generous to creditors than those outlined above.29

  • The high level of debt service payments due during the interim period even after HIPC Initiative assistance will require a further exceptional deferral of payments given Liberia’s limited payment capacity.

54. Based on these assumptions, approximately 49 percent of the HIPC debt relief due from multilateral creditors (US$699.4 million in NPV terms) would be provided through financing in support of clearance of Liberia’s arrears (since the grant element embedded in the clearance of arrears towards multilateral creditors is counted toward their contribution to debt reduction under the HIPC Initiative). The remaining 51 percent (US$726.4 million in NPV terms) would be provided through the reduction of future debt service in the amount of US$951.9 million in nominal terms. As a result of arrears clearance operations, Liberia’s future debt service payments due to multilaterals would increase cumulatively from US$127.3 million to US$1,266.4 million (see Figure 2). The repayment of the IMF PRGF and EFF loans would induce a sharp increase in the debt service in FY2012/13–17/18 (there will be no principal obligations falling due for the first 4½ years after the decision point). However, most of this increase would be netted out by the combination of HIPC Initiative debt service reduction during the interim period and beyond-HIPC relief at the completion point. As a result, Liberia’s remaining cumulative nominal debt service payments to multilaterals after debt service reduction through the HIPC Initiative, MDRI and IMF beyond-HIPC relief would total US$57.9 million as of December 2007.

Figure 2.
Figure 2.

Republic of Liberia: External Debt Sustainability Indicators, 2006/07-2026/27

Citation: IMF Staff Country Reports 2008, 106; 10.5089/9781451822960.002.A001

Sources: Liberian authorities and staff estimates and projections.

55. The World Bank and the AfDB are expected to provide interim assistance above and beyond the HIPC Initiative and MDRI relief. It is assumed that IDA will maintain strongly positive net flows to Liberia, including through grant support included in DPOs which would help meet Liberia’s foreign exchange costs associated with interim period debt service.30 The AfDB is expected to provide additional grant financing that would cover Liberia’s remaining interim debt service payments due.31 As a result, Liberia’s debt service payments to multilaterals after debt service reduction through the HIPC Initiative, MDRI and beyond-HIPC relief, and additional voluntary multilateral interim-period assistance, would be further reduced to US$40.5 million as of December 2007.

E. Expected Impact of Debt Relief on Liberia’s Debt Ratios

56. This analysis assumes rapid economic growth, underpinned by improved security and political stability, continuous implementation of an ambitious reform agenda (particularly in the areas of economic governance and institution building capacity), and infrastructure improvements to promote private investment (Box 2). The framework also assumes the continuation of sound macroeconomic policies, including maintaining fiscal prudence while increasing revenues and seeking financial and technical donor support, as well as concessional external financing.

57. On the basis of the assumptions above and assuming the unconditional delivery of HIPC Initiative assistance, Liberia’s NPV of debt-to-exports ratio is expected to decline from 150 percent as of end-June 2007 to approximately 18 percent by FY2026/27 (Table A6). The staff projection indicates that the ratio would remain consistently below the HIPC Initiative threshold of 150 percent in FY2007/08–FY2026/27. External debt service as a ratio of exports is also expected to decline gradually.

Table A2.

Republic of Liberia: HIPC Initiative–Assistance Under a Proportional Burden-Sharing Approach 1/ 2/

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: Liberian authorities and staff estimates and projections.

The proportional burden-sharing approach is described in “HIPC Initiative--Estimated Costs and Burden Sharing Approaches.”

Based on end-June 2007 data after full application of traditional debt relief mechanisms. Includes a hypothetical stock-of-debt operation on Naples terms and comparable treatment by other official bilateral creditors.

Each creditor’s HIPC relief in NPV terms in percent of its exposure at the decision point reference date. A common reduction factor of 90.48 percent is applied to debt remaining after traditional mechanisms. For non-concessional bilateral or commercial debt this would imply a total reduction of 96.86 percent.

Based on the three-year export average (backward-looking average, i.e., 2004/05-2006/07).

Note: Exports of non-factor services are estimated using the methodology described in Annex II.
Table A3.

Republic of Liberia: Discount and Exchange Rate Assumptions at End-June 2007

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Sources: OECD; and IMF, International Financial Statistics.

The discount rates used are the average Commercial Interest Reference Rates published by the OECD over the six-month period prior to end-June 2007.

The exchange rates are expressed as national currency per U.S. dollar at end-June 2007.

Table A4.

Republic of Liberia: External Debt Service, 2007/08–2026/27 1/

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: Liberian authorities and staff estimates and projections.

All external debt statistics correspond to public and publicly guaranteed debt. Fiscal year ends on June 30.

Includes only scheduled debt service on current maturities and does not include projected penalty interest on arrears.

Reflects debt service on the projected borrowing needed to close the gap which assumes lending from IDA and new PRGF borrowing above that required for IMF arrears clearance.

Arrears towards the World Bank and AfDB groups were cleared at through grants on the 5 and 18 of December 2007, respectively. For the AfDB, maturities falling due during the 2008 calendar year were cleared as part of the arrears clearance operation. Additional interim payments are expected to be covered by through grant support. Arrears towards the IMF are to be cleared through a PRGF/EFF blend at the decision point date. Other multilateral creditors are assumed to clear their arrears at the completion point through their own modalities, which would include payments falling due during the interim period. The NPV reduction embedded in the arrears clearance operations is scored as part of each creditor’s share of HIPC debt relief.

Assumes a hypothetical stock of debt operation on Naples terms and comparable treatment from other bilateral creditors, after multilateral arrears clearance.

Paris Club and commercial creditors are assumed to deliver their share of relief as of the completion point (end-December 2010). Non Paris Club creditors are assumed to provide a Cologne flow rescheduling on eligible debt and the remaining required HIPC assistance is to be delivered at the completion point through a stock of debt operation. Multilateral creditors start delivering HIPC assistance through the arrears clearance process. This starts at December 2007 for the IMF, World Bank and the AfDB. Other multilaterals are assumed to clear their arrears as at the completion point date of end-December 2010.

The reduction is measured as the difference between the projected debt service after full use of traditional debt relief plus arrears clearance, and debt service after the application of HIPC relief.

MDRI assistance applies to the World Bank, IMF, and AfDB Group and starts at the completion point (end-December 2010).

It is assumed for the purposes of these simulations that IDA debt service payments falling due during the interim period will be offset by additional flows to Liberia through DPOs over and above otherwise expected new financing from IDA such as from the proposed Reengagement and Reform Support Grant. The AfDB is expected to provide additional grant financing that would cover Liberia’s remaining interim debt service payments due. Financing to cover AfDB maturities falling due during the 2008 calendar year are included as part of the AfDB arrears clearance operation.

Paris Club creditors deliver, through bilateral initiatives, additional debt relief beyond the HIPC Initiative at the completion point. Details on the modalities of the delivery are presented in Table A10.

Exports of goods as defined in IMF, Balance of Payments Manual, 5th edition, 1993. Refers to fiscal year exports. Exports of non factor services are estimated using the methodology described in Annex II.

Revenues are defined as central government revenues, excluding grants.

Projections for official bilateral and commercial creditors do not reflect possible flow relief during the interim period.

Table A5.

Republic of Liberia: Net Present Value of External Debt, 2006/07-2026/27 1/

(Millions of U.S. dollars, unless otherwise indicated.)

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Sources: Liberian authorities and staff estimates and projections.

All NPV debt stocks refer to public and publicly guaranteed debt at end-June 2007. Fiscal year ends on June 30.

Shows the external debt situation after the full use of traditional debt-relief mechanisms and arrears clearance, and assumes at least comparable treatment from official bilateral creditors.

Unconditional delivery of HIPC assistance assumes that the completion point will be reached. Therefore this scenario shows the full impact of HIPC debt relief on the NPV of debt before 2010/11. However, conditional delivery of HIPC assistance assumes that the full delivery of HIPC assistance will only be considered after the expected completion point. Thereore, in this scenario the NPV of debt is higher than under the unconditional scenario during the interim period.

In terms of simple historical three-year average of exports of goods and nonfactor services.

MDRI assistance applies to the World Bank, IMF, and AfDB Group and starts after the completion point (end-December 2010).

It is assumed that IDA will maintain strongly positive net flows to Liberia, including through grant support included in DPOs which would help meet Liberia’s foreign exchange costs associated with interim period debt service. A first US$$5.0 million for such foreign exchange costs is included in the Reengagement and Reform Support Grant approved by the IDA Board in December 2007. The AfDB is expected to provide additional grant financing that would cover Liberia’s remaining interim debt service payments due. Financing to cover AfDB maturities falling due during the 2008 calendar year are included as part of the AfDB arrears clearance operation.

Paris Club creditors deliver, through bilateral initiatives, additional debt relief beyond the HIPC Initiative at the completion point. Details on the modalities of the delivery are presented in Table A10.

Table A6.

Republic of Liberia: External Debt Indicators, 2006/07-2026/27 1/

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Sources: Liberian authorities and staff estimates and projections.

All external debt statistics correspond to public and publicly guaranteed debt. Fiscal year ends on June 30.

Exports are defined as in IMF, Balance of Payments Manual, 5th edition, 1993. Exports of non-factor services are estimated using the methodology described in Annex II.

Based on a three-year average of exports on the previous year (e.g., export average over 2005/2006-2007/2008 for NPV of debt-to-exports ratio in 2007).

Revenue is defined as central government revenue, excluding grants.

MDRI assistance applies to the World Bank, IMF, and AfDB Group and starts after the completion point (end-December 2010).

F. Debt Relief Under MDRI and Possible Bilateral and Multilateral beyond-HIPC Assistance

58. On reaching the completion point under the HIPC Initiative, Liberia would qualify for MDRI debt relief from IDA and AfDF as well as for beyond-HIPC assistance from the IMF. Beyond-HIPC debt relief from the IMF would cover that portion of the successor arrangements under the PRGF and EFF corresponding to the stock of arrears at arrears clearance32 that was not already reduced by the HIPC Initiative debt relief. MDRI debt relief from IDA would cover all outstanding debt disbursed before end-2003 and still outstanding at the beginning of the quarter following the date of the HIPC completion point approval (which would amount to the full cancellation of all remaining World Bank Group claims on Liberia). MDRI relief from AfDF would cover all such outstanding debt disbursed before end-2004 and still outstanding at the completion point (which, except for remaining Nigeria Trust Fund claims, would effectively cancel all remaining AfDB Group claims on Liberia).

Key Macroeconomic Assumptions Underlying the DRA

Key medium- to long-term macroeconomic assumptions used in the baseline DRA scenario include:

Annual real GDP growth averages 5½ percent a year over the projection period (2008–27). Growth is projected to be supported by private investment in mining and agriculture, public infrastructure, and broader-based private investment derived from improvements in security and the strengthening of institutions.

CPI inflation is projected to decelerate from 11.7 percent in 2007 to 5 percent in the medium term, in line with assumed international prices and the domestic monetary policy stance.

Fiscal policy aims to meet the government’s spending priorities while limiting future borrowing. Central government revenue is expected to increase gradually from 22 percent of GDP in FY2006/07 to about 27½ percent of GDP in FY2012/13, remaining there over the rest of the projection period. Expenditure is expected to increase to over 30 percent of GDP in the long run, with an increased share of pro-poor spending in overall outlays. After debt relief delivery and the adoption of a debt management strategy, Liberia is assumed to commence borrowing in FY2010/11. The central government overall deficit (including grants), to be financed by both domestic and external borrowing, before HIPC Initiative assistance, is projected to average 3 percent of GDP over the projection period.

Official loan financing (excluding the IMF) is assumed to be on concessional terms (a 10-year grace period, 40 years maturity, and 0.75 percent interest rate) over the projection period. The resulting grant element for new disbursements is estimated at about 50 percent.

External grants, which increasingly go through the budget, are assumed to increase at about half the rate of increase in nominal GDP, declining from 33 percent of GDP in 2006/07 to about 12 percent by 2026/27, as the overall political situation and per capita GDP improve.

The external current account deficit (excluding grants) is expected to narrow from 69 percent of GDP in FY2006/07 to about 23 percent in FY2026/27, partly on the strength of net exports. FDI is projected to rise from 9 percent of GDP in 2006/07 to about 46 percent in 2008/09 (related to a significant investment in mining), and then to an average of 27 percent of GDP up to 2012-13, gradually stabilizing at about 7 percent of GDP for the remainder of the projection period. The net liquid foreign assets of the CBL are expected to increase from under a month of imports of goods and services in 2006/07 to about five months in 2026/27.

59. Assuming that Liberia reaches the completion point in the last quarter of 2010, preliminary estimates indicate that the MDRI and IMF beyond-HIPC debt relief could amount to US$242.6 million in nominal terms (US$147.0 million in NPV terms). Of this amount, US$69.1 million would be provided by IDA, US$17.8 million by the AfDF, and US$155.7 million by the IMF.33 This compares with possible nominal HIPC Initiative assistance of US$4,007.5 million (US$2,845.5 million in NPV terms).34

60. Pending Liberia’s successful implementation of the HIPC Initiative process, some Paris Club creditors are expected to provide further relief and cancel 100 percent of their claims against Liberia after it reaches the completion point (see Table A10). This additional assistance would amount to US$33.7 million in nominal terms (US$19.2 million in NPV terms).

Table A7.

Republic of Liberia: External Debt Indicators and Sensitivity Analysis, 2006/07-2026/27 1/

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Sources: Liberian authorities and staff estimates and projections.

All external debt statistics correspond to public and publicly guaranteed debt. Fiscal year ends on June 30.

As defined in IMF, Balance of Payments Manual, 5th edition, 1993. Exports of non-factor services are estimated using the methodology described in Annex II.

Based on a three-year average of exports on the previous year (e.g., export average over 2004/05-2006/07 for NPV of debt-to-exports ratio in 2006/07).

Revenue is defined as central government revenue, excluding grants.

Assumes that the interest rate on all new debt is 2 percentage points higher than in the baseline from 2010/11 onwards.

Assumes on average 1¾ percentage points lower export growth in 2006/07-26/27.

Assumes on average 1.8 percentage points lower GDP growth in 2006/07-26/27.

Assumes that the government will undertake the projects currently financed through grants from outside the budget and finance them with new borrowing.

Assumes a combination of all shocks.

Table A8.

HIPC Initiative: Status of Country Cases Considered Under the Initiative, December 31, 2007

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Sources: IMF and World Bank Board decisions, completion point documents, decision point documents, preliminary HIPC documents, and staff calculations.

Assistance levels are at countries’ respective decision or completion points, as applicable.

In percent of the net present value of debt at the decision or completion point (as applicable), after the full use of traditional debt-relief mechanisms.

Equivalent to SDR 1,698 million at an SDR/USD exchange rate of 0.644524, as of October 4, 2007.

Table A9.

Liberia: Possible Delivery of IMF Enhanced HIPC Initiative Assistance and Beyond-HIPC Debt Relief, FY 2008-2021 1/

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

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Source: Fund staff estimates and projections.

Total IMF assistance under the enhanced HIPC Initiative is US$ 732.2 million in NPV terms calculated on the basis of data available at end-June 2007. Of this amount, US$ 30.9 million represents the concessional element (through assumed completion point at end-2010) associated with the disbursement of a PRGF loan following Liberia’s clearance of arrears to the IMF. The remaining balance of US$ 701.3 million will be provided as a grant toward debt relief under the HIPC Initiative.

This section shows notional delivery of HIPC assistance on a flow basis. However, it is expected that total debt relief will be provided at completion point on a stock basis.

The projected debt service is based on PRGF/EFF arrangements in the amount equal to the stock of arrears at arrears clearance, plus a new PRGF credit of 30 percent of quota under the 11th General Review which will be disbursed in 7 installments. Interest obligations do not include net SDR charges and assessments.

EFF charges during the interim period are based on the adjusted rate of charge of 4.34 percent per annum as of February 19, 2008. Beyond the completion point, EFF charges are based on assumed SDR interest rate (gradually rising to 5 percent) plus 108 basis points and adjustments for deferred charges.

The remaining IMF’s grant HIPC assistance would be disbursed into the member’s account at the assumed completion point in December 2010, which is reflected in the calculation of interest.

Estimated interest earnings on: (a) amounts held in the member’s Umbrella Account; and (b) up to the completion point, amounts committed but not yet disbursed. The projected interest earnings are estimated based on assumed interest rates which are gradually rising to 5 percent in 2013 and beyond; actual interest earnings may be higher or lower.

Debt service after HIPC assistance during the interim period reflects Liberia’s current payment capacity of about US$720,000 per annum.

Associated with the stock of arrears at arrears clearance (subject to HIPC and beyond-HIPC assistance) and the first disbursement of new credit under the PRGF (subject to HIPC assistance).

Table A10

Paris Club Creditors’ Delivery of Debt Relief Under Bilateral Initiatives

Beyond the HIPC Initiative 1/

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Source: Paris Club Secretariat.

Columns (1) to (7) describe the additional debt relief provided following a specific methodology under bilateral initiatives and need to be read as a whole for each creditor. In column (1), “HIPCs” stands for eligible countries effectively qualifying for the HIPC process. A “100 percent” mention in the table indicates that the debt relief provided under the enhanced HIPC Initiative framework will be topped up to 100 percent through a bilateral initiative.

Canada: including Bangladesh. Canada has granted a moratorium of debt service as of January 2001 on all debt disbursed before end-March 1999 for 13 out of 17 HIPCs with debt service due to Canada. Eligible countries are Benin, Bolivia, Cameroon, Dem. Rep. Of Congo, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Rwanda, Senegal, Tanzania, and Zambia. 100% cancellation will be granted at completion point. As of July 2004, Canada has provided completion point stock of debt cancellation for Benin, Bolivia, Guyana, Senegal and Tanzania.

100 percent of ODA claims have already been cancelled on HIPCs, with the exception of Myanmafs debt to Canada.

Denmark provides 100 percent cancellation of ODA loans and non-ODA credits contracted and disbursed before September 27, 1999.

France: cancellation of 100 percent of debt service on pre-cutoff date commercial claims on the government as they fall due starting at the decision point. Once countries have reached their completion point, debt relief on ODA claims on the government will go to a special account and will be used for specific development projects.

Finland: no post-COD claims

Italy: cancellation of 100 percent of all debts (pre- and post-cutoff date, ODA and non-ODA) incurred before June 20, 1999 (the Cologne Summit). At decision point, cancellation of the related amounts falling due in the interim period. At completion point, cancellation of the stock of remaining debt.

The Netherlands: 100 percent ODA (pre- and post-cutoff date debt will be cancelled at decision point); for non-ODA: in some particular cases (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Mali, Mozambique, Nicaragua, Rwanda, Tanzania, Uganda and Zambia), the Netherlands will write off 100 percent of the consolidated amounts on the flow at decision point; all other HIPCs will receive interim relief up to 90 percent reduction of the consolidated amounts. At completion point, all HIPCs will receive 100 per cent cancellation of the remaining stock of the pre-cutoff date debt.

Norway has cancelled all ODA claims.

Due to the current World Bank/IMF methodology for recalculating debt reduction needs at HIPC completion point, Norway has postponed the decisions on whether or not to grant 100% debt reduction until after the completion point.

Russia has no ODA claims

Sweden has no ODA claims.

Switzerland has cancelled all ODA claims.

In some particular cases (Central African Republic, Liberia, Republic of Congo, Sierra Leone, Togo), Switzerland will write off 100 percent of the remaining debt stock at completion point; all other HIPCs will receive debt relief according to Paris Club terms.

United Kingdom: “beyond 100 percent” full write-off of all debts of HIPCs as of their decision points, and reimbursement at the decision point of any debt service paid before the decision point.

United States: 100 percent post-cutoff date non-ODA treated on debt assumed prior to June 20, 1999 (the Cologne Summit).

61. Additional multilateral debt relief from IDA and the AfDB, beyond HIPC, during the interim period is described above. It is expected to take the form of grant financing to offset the costs of interim period debt servicing by Liberia to these institutions.

62. The delivery of MDRI and IMF beyond-HIPC assistance and additional multilateral and bilateral debt relief beyond HIPC would further reduce Liberia’s external debt. After the completion point, Liberia’s NPV of debt-to-exports ratio would significantly fall, remaining below 17 percent over the projection period (through 2026/27).35 Compared to a projection including only HIPC assistance, this represents a reduction of about 22 percentage points at completion point (Table A6 and Figure 2).

G. Sensitivity Analysis

63. Simulations under five scenarios were conducted to test the sustainability of Liberia’s external debt after HIPC Initiative assistance (Table A7 and Figure 3). Liberia’s external debt situation would deteriorate under each scenario and the debt indicators would breach the HIPC threshold in the scenario with a combination of shocks under the first four scenarios.

Figure 3.
Figure 3.

Republic of Liberia: Sensitivity Analysis, 2006/07-2026/27

Citation: IMF Staff Country Reports 2008, 106; 10.5089/9781451822960.002.A001

Sources: Liberian authorities and staff estimates and projections.

  • The first scenario highlights the sensitivity of debt indicators to the concessionality of new borrowing. In contrast to the baseline scenario, new borrowing starting in FY2010/11 and remaining in place throughout the projection period is contracted with an assumed 200-basis-point increase in the interest rate paid. Exports receipts are assumed to be unchanged from the baseline scenario. Under this scenario, Liberia’s NPV of debt-to-exports ratio slowly deteriorates relative to the baseline scenario, and gradually converges to about 25 percent in FY2026/27.

  • The second scenario considers the sensitivity of the projections to lower export prices (25 percent lower than in the baseline). Under this scenario, the average growth rate of exports falls by about 1¾ percentage points relative to the baseline (from 14.2 percent to 12.5 percent), and the NPV of debt to exports, assuming full delivery of HIPC Initiative assistance, declines until FY2012/13, reaching 51 percent. The NPV of debt to exports then gradually increases, reaching 116 percent by FY2026/27 (Table A7). Compared with the baseline scenario, this represents a deterioration of approximately 30 percentage points in FY2007/08, increasing to about 98 percentage points by FY2026/27.

  • The third scenario considers the sensitivity of the projections to lower GDP growth. In this scenario, GDP is assumed to grow by 2.0 percentage points less than in the baseline (baseline assumes average growth of 8.3 percent FY2006/07–FY2016/17 and 3.8 percent in FY2017/18–FY2026/27) because of slower than expected progress in enhancing security, strengthening governance and the rule of law, and rehabilitating infrastructure and basic services. The lower growth in turn would hurt government revenues and increase the need for new borrowing. Based on these assumptions, the NPV of debt-to-exports ratio, assuming full delivery of HIPC Initiative assistance, would decline until FY2012/13, reaching 32 percent. The NPV of debt to exports would then gradually increase to about 110 percent in FY2026/27. Compared with the baseline, the debt-to-exports ratio would be about 4 percentage points higher in FY2007/08 and 93 percentage points higher by FY2026/27.

  • The fourth scenario considers the sensitivity of the projections to a substitution of loans for the grants in the baseline assumed to finance projects outside the budget (about 80 percent of total grants). Under this assumption, the NPV of debt-to-exports ratio, after assuming full delivery of HIPC Initiative assistance, would decline until FY2012/13, reaching 46 percent; the NPV of debt-to-exports would then gradually increase to about 143 percent by FY2026/27, just under the HIPC threshold. Compared with the baseline scenario, this represents an increase of 125 percentage points by FY2026/27. These results show the importance of external grant assistance to Liberia’s economic and social recovery, and the adverse impact that additional borrowing could have on debt sustainability.

  • The fifth scenario considers the sensitivity of the projections to a combination of shocks under the preceding four scenarios. Under this assumption, the NPV of debt to exports, assuming full delivery of HIPC Initiative assistance, would be above 150 percent immediately after the occurrence of the shocks in FY2007/08, reaching 185 percent. The NPV of debt to exports would then decline slightly before continuing to increase to about 633 percent in FY2026/27. Compared with the baseline, debt to exports would be about 40 percentage points higher in FY2007/08 and 616 percentage points higher by FY2026/27.

64. The sensitivity analysis indicates that Liberia’s ability to service its external debt after HIPC relief is particularly vulnerable to the use of borrowing to compensate for possible limited external grant assistance, the external environment, as well as the continued implementation of the reform agenda. The achievement of a robust external debt position will also depend on real GDP growth and export performance. The analysis stresses the importance of strong and sustained efforts by the government and donors to (i) enhance national security; (ii) provide a conducive environment for private investment, particularly by strengthening governance and the rule of law and rehabilitating infrastructure and basic services; and (iii) design and implement a prudent debt management strategy which recognizes that external assistance needs to be largely in the form of grants. The importance of a debt management strategy is reflected in the completion point triggers, discussed below.

V. The Floating Completion Point

A. Triggers for the Floating Completion Point

65. IDA and IMF staff have reached understandings with the authorities on the completion point triggers (Box 3). Reflecting the views expressed by the Executive Directors during the discussions of the preliminary HIPC document, staff clarified with the authorities the scope, feasibility and monitoring of the triggers. As outlined in Sections II and III, a program of key economic, governance, and structural reforms would support the peace and development of Liberia. The I-PRSP provided the framework for the design of these floating completion point triggers. Besides the standard triggers regarding the preparation and implementation of the full PRSP and the maintenance of macroeconomic stability, the triggers focus on PFM, governance and debt management.

66. These triggers are designed to ensure that, prior to the completion point, Liberia has transitioned from the current GEMAP-supported fiduciary arrangements to permanent systems and procedures to ensure efficient and effective use of public resources. In addition, the triggers will help to ensure progress in other critical aspects of the poverty reduction strategy. It is expected that, if the country maintains macroeconomic stability and makes good progress on its PRSP, all triggers could be achieved within three years of the HIPC decision point.

B. Monitoring Public Spending Following Provision of HIPC Assistance

67. Securing the effective use of public spending for pro-poor growth is a key objective of the HIPC Initiative. The actual cash flow benefits of HIPC relief for Liberia will initially be extremely small. With the exception of small token payments to the IMF (US$60,000 per month) and the AfDB (US$15,000 per month), and goodwill payments to the World Bank (US$25,000 per month, held in an escrow account and to be used for the benefit of Liberia), the government has not been servicing external debts to any of its creditors prior to arrears clearance. Nevertheless, debt relief under the HIPC Initiative, MDRI and beyond-HIPC assistance must be accompanied by a strong program that ensures the effective use of domestic and external resources and reflects the expenditure priorities in the government’s poverty reduction strategy. This will require continued efforts to strengthen the programming, management, control and monitoring of expenditures, and improved service delivery in key sectors. It will also require costing PRSP priorities and developing a medium-term expenditure framework to efficiently allocate public resources for meeting PRS objectives. A projected increase in the resource envelope over the medium term as a share of GDP combined with an assumed resumption in borrowing after completion will support increased expenditures as a share of GDP over the medium term.

Triggers for Liberia’s Floating Completion Point

PRSP

  • Prepare a full PRSP through a participatory process and implement satisfactorily its recommended actions for at least one year, as evidenced by an Annual Progress Report submitted by the government to the staffs of IDA and the IMF

Macroeconomic stability

  • Maintain macroeconomic stability, as evidenced by satisfactory performance under a PRGF/EFF-supported program

Public financial management

  • Quarterly Publication in the Procurement bulletin and monthly publication in the Website of all signed procurement contracts over US$25,000 for goods, US$10,000 for consulting services, and US$50,000 for works and all signed-sole source procurement and concessions contracts which have been identified by the PPCC as a result of the PPCC’s compliance monitoring activities for at least 6 months leading up to the completion point

  • Complete successive annual external audits of five key government ministries (Health, Education, Public Works, Finance and Lands, Mines and Energy), prepared under the authority of the General Auditing Commission, submitted to the legislature and disclosed publicly

  • Implement the new PFM law and supporting financial regulations for at least 12 months leading up to the completion point

Social sectors

  • Ensure that the Basic Package of Health Services is delivered in at least 40 percent of all health facilities nationwide

  • Complete a harmonized and regularized Ministry of Education payroll36

Debt Management

  • Develop a debt management strategy in consultation with partners and establish a debt management unit recording all information on external and domestic public and publicly guaranteed debt, including for state owned enterprises, and ensure it is operational for at least 12 months leading up to the completion point

  • Publish, on a quarterly basis and on a government website, data on external and domestic public and publicly guaranteed debt, including debt stocks and terms and conditions of new loan agreements for at least 6 months leading up to the completion point

Governance

  • Implement a revised investment incentive code to ban granting tax exemptions outside the Liberia Revenue Code

  • Regular public reporting of payments to, and revenues received by, the government for the extractive industries (mining and minerals) in a participatory manner in line with EITI criteria during at least the year leading up to the completion point

  • Establish an independent Anti-Corruption Commission consistent with the Anti-Corruption Act, and ensure it is operational for at least 12 months leading up to the completion point

68. With IMF and World Bank technical assistance and other support under GEMAP, major steps have been taken to improve PFM. The interim commitment control system successfully prevented new domestic arrears and ensures that commitment vouchers are reviewed by the CMCo. An international expert maintains co-signing authority for the CMCo, and coordinates with the international special advisor on the monitoring of the government’s account at the CBL. Under the GEMAP, international controllers have similar authority at the major revenue-generating SOEs and the Ministry of Lands, Mines and Energy; and under a memorandum of understanding, SOE revenues flow through a special account for each SOE at a single commercial bank, where they may be monitored. Progress has also been made in strengthening the budget preparation process and on improving fiscal reporting.

69. Notwithstanding the progress to date, further efforts are needed to improve PFM. Budget preparation, implementation, and cash management need enhancing; revenues also need to be increased further.

70. Liberia is receiving substantial technical assistance to help strengthen its PFM. The World Bank, IMF, and AfDB provide technical assistance and training in PFM to the Ministry of Finance, and the United States to the Bureau of the Budget; the government intends to merge the Bureau into the Ministry of Finance. The IMF provides financing to support the special advisor at the CBL and technical assistance in revenue mobilization to the Ministry of Finance. The United States has assisted in the introduction of a computerized payment system with full accountability checks at each stage. The World Bank is providing capacity building and training support to ministries and agencies to improve compliance with public procurement legal requirements. However, enduring gains in transparency, financial management systems, and accountability will require Liberia’s international partners to sustain their support of the government’s reform process.

71. The government is developing a medium-term PFM reform strategy with support from the IMF’s Fiscal Affairs Department (FAD), and input from the PEMFAR being led by the World Bank with input from the IMF.37 The PEMFAR will help assess fiduciary risks associated with budget support, identify areas for a prioritized action plan, and deepen the dialogue between Liberia and its partners on PFM. The content of the PEMFAR includes a Country Financial Accountability Assessment (CFAA), a Country Procurement Assessment Review (CPAR), an assessment of the systems and arrangements for budget planning, and a PFM reform strategy that includes an action plan for reforms to be implemented over the short, medium, and long term. The PEMFAR findings will be used to compile a set of standard PEFA ratings covering as many of the 31 PEFA performance assessment indicators as possible, creating a benchmark to inform and assess the impact of future PFM reforms.38

72. With assistance from FAD, and in consultation with the World Bank, the authorities are developing a comprehensive PFM law to replace the currently fragmented and incomplete legal framework. This will, among other things: (i) clarify and bring up to date the roles and responsibilities across all areas of PFM; (ii) formalize the key stages in budget preparation and prescribe essential elements to be included in budget documents; (iii) comprehensively address all aspects of budget execution, including management of appropriations, commitments and procurement, cash management, internal control, accounting and reporting; and (iv) stipulate deadlines for the production and dissemination of annual accounts and financial statements, as well as external audit reports.

73. A basic monitoring mechanism for tracking expenditures is being implemented. The government will track expenditure manually, or using existing systems, until the Integrated Financial Management Information System (IFMIS), which is being developed according to the needs of the Ministry of Finance, is designed and installed. Until then, certain budget codes will be designated as PRSP priority expenditures so that the existing system for expenditure authorizations can track such spending.

74. The government intends to use these systems to track its total budget outlays against its medium-term expenditure priorities, as defined by its I-PRSP and successor PRSP. Possible medium-term expenditure priorities are in Box 4. These benchmarks, however, are indicative only, and will be elaborated in consultation with the government as it develops its PRSP and expenditure plans.

Possible Medium-Term Expenditure Priorities

Expenditure priorities identified in the government’s I-PRSP include the following:

  • Education: Rehabilitation of 80 percent of damaged primary and secondary schools; rehabilitation of three teacher training institutions; school feeding programs introduced; and training facility for artisans and craftsmen opened.

  • Health: Improving 354 existing health facilities and provisioning the basic health services in 70 percent of health facilities; renovating and staffing three county hospitals; operating four facilities for youth offenders and four facilities for people with disabilities; preparing long-term health development plans specific to each county; creating a National AIDS commission and strengthening welfare institutions to assist vulnerable groups; rehabilitating nine potable water facilities; and operating a new waste disposal system.

  • Agricultural Development: preparing a national food security policy; providing seeds and tools to smallholders through regional seed centers; rehabilitating 1,000 hectares and 100 abandoned fish ponds; assisting 2,000 coastal fishers; providing 1,000 short-cycle ruminants; revitalizing the tree crops subsector; increasing investment in commercial plantations; identifying impediments to private sector participation in agriculture and endorsing appropriate incentives; reactivating extension services; and restructuring agricultural marketing credit and input supply through the private sector.

  • Public Works: Rebuilding 109 miles of roads, 300 miles of feeder roads, and 25 miles of urban roads; renovation of the road maintenance and training center; and restoration of Roberts International Airport to international standards.

VI. Issues for Discussion

75. This paper presents an assessment of Liberia’s qualification for assistance under the Enhanced HIPC Initiative. Executive Directors’ views and guidance are sought on the following issues:

  • Qualification and decision point: Do Directors agree that Liberia qualifies for assistance under the HIPC Initiative and do they recommend approval for the decision point?

  • Amount and delivery of assistance: In order to reduce the NPV of debt-to-exports ratios to the threshold of 150 percent, the total amount of assistance under the Enhanced HIPC Initiative is estimated at US$2,845.5 million in NPV terms. Of this amount, US$375.2 million in NPV terms has been provided by IDA through its recent DPO in support of Liberia’s arrears clearance; and US$732.2 million in NPV terms would be provided by the IMF. Do IMF Directors agree that the IMF should provide interim assistance between the decision and completion points in line with existing guidelines?

  • Floating completion point: Do Directors agree that the HIPC floating completion point will be reached when the triggers in Box 3 have been met? Debt relief will be provided unconditionally only when the completion point triggers have been met and satisfactory assurances of other creditors’ participation under the enhanced HIPC Initiative for Liberia have been received.

Table A11.

Liberia: Possible Delivery of World Bank Group’s Assistance Under the Enhanced HIPC Initiative, 2007/2008 - 2034/35

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

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Source: Staff estimates.

Savings on debt service to IDA in 2007/08 include payments that were cleared as part of the arrears clearance in December 2007.

ANNEX I

Liberia: Debt Management

1. Prolonged civil conflict in Liberia has severely disrupted the capacity of the various institutions that are responsible for debt management. Since the mid-1980s, the government has been unable to service its debts. The large accumulation of arrears has curtailed Liberia’s access to new financing and thus financing is available only in the form of grants. These events have weakened debt management processes as institutional capacity has weakened, and established procedures and practices have broken down.

2. This annex documents the institutional and legal framework as well as the current practices and capacity of the agencies responsible for debt management in Liberia.

Institutional and Legal Framework

3. Debt management in the Republic of Liberia is the responsibility of the Ministry of Finance and the Central Bank of Liberia (CBL). The existing legislation does not clearly specify the different tasks of each institution or its responsibility for designing and implementing a cohesive debt strategy.

4. There are four pieces of legislation that constitute the legal framework to regulate debt management in Liberia:

  • The constitution of 1986 states in article 34 that “no loan shall be raised by the government on behalf of the Republic or guarantees given for any public institution or authority otherwise than by or under the authority of legislative enactment.”

  • The executive law creating the Ministry of Finance, Chapter 21.3, states that one of the duties of the Deputy Minister of Finance for fiscal affairs is debt management.1

  • The Revenue Code of Liberia Act of 2000 states in Section 2300 that “the president is authorized and empowered to negotiate, conclude and contract with any individual group, foreign government or any financial institution at home or abroad, long or short term loans for the overall development of the country.” Section 2301 gives the president the power to guarantee loans to state-owned enterprises (SOEs).

  • The 1999 Act to Authorize the Establishment of the CBL regulates the functions of the CBL. It lists among the functions of the CBL “to provide credit to bank-financial institutions on a discretionary basis” and to “advise the central bank on financial and economic matters.” Part VI of the Act states that the central bank may “contract, purchase, and market financial instruments, debt obligations rated in one of the two highest rating categories recognized by reputed international credit rating agencies, and other securities issued or guaranteed by foreign central banks, governments or international financial institutions.” Part VII states that the central bank may purchase from, sell to, discount and re-discount for, or contract with financial institution treasury bills. Part VIII regulates central bank credits to the government.

Debt Recording and Statistics

5. The Debt Management Unit (DMU) of the Ministry of Finance is now the main source of public debt statistics. The DMU recently completed a review of domestic debt, with assistance from KPMG Ghana. As part of the HIPC process, Liberia has undertaken a reconciliation of multilateral and bilateral external debt, with assistance from the World Bank and IMF. Houlihan Lokey (financial consultants) were contracted by the government with support from the government of Switzerland to work on the reconciliation of commercial creditor data.

6. No comprehensive public debt database currently exists. The Unit does not have any debt recording software installed. Instead, debt data is stored in various Excel spreadsheets. The work processes of the DMU are constrained by its limited technological capacity. Also, there are no standard procedures to monitor and record incoming data, no explicit access controls or data back-up procedures for data records, and no clear division of responsibility between individual staff members.

7. Many original loan agreements that were lost or destroyed during the civil conflict are missing from the archives. Loan documentation is not filed in a systematic manner and is not kept in a secure archive.

Debt Strategy and New Borrowing

8. Currently, the debt strategy consists solely of the domestic debt resolution strategy, largely because debt flows have been very limited during the past two decades owing to the civil conflict. As Liberia has yet to produce both a debt and new financing strategy, it has yet to establish appropriate procedures for contracting new financing. Furthermore, a domestic debt issuance policy has yet to be developed and implemented. The government has made clear, however, that it proposes in the next few years to follow a “no borrowing” strategy.

Contingent Liabilities and Guarantees

9. There are currently no formal procedures to monitor the contracting of debt by SOEs. Unless the creditor requires a state guarantee, SOEs currently do not need ministerial approval to take on new debts. The last guarantee was provided to Liberian Electricity Corporation in 2002 following a request from ECOBANK. The Bureau of State Enterprises (BSE) is the government agency that is responsible for monitoring the financial performance of SOEs. Any potential financial problems are to be flagged for the Ministry of Finance at an early stage so as to minimize the risk of debt default. A significant portion of the government’s existing domestic debt has been inherited from SOEs that have defaulted on their debt obligations.

Debt Servicing and Projections

10. The process for servicing obligations starts at the DMU which sends a payment order to the Controller General, who, after approving, would forward it to the Deputy Minister of Expenditure and Debt for signature, and then on to the CBL. As the depositary of the Treasury, the CBL conducts debt payments. Although this is still the formal procedure, in reality, there has not been systematic coordination with the Ministry of Finance before payment instructions are sent to the CBL, in part because only small “good will” payments are currently being made to the IMF, World Bank Group, and AfDB Group.

11. Despite plans to obtain CS-DRMS 2000+, the government does not currently use any computerized debt strategy tool. A lack of a reliable debt recording system severely limits the government’s capacity to make reliable debt service projections.

Publication and Transparency

12. No national debt report is currently produced. Various publications/sources contain some basic debt statistics. These include:

  • The annual report of the MOF. The Bureau of Concessions leads an interdepartmental team to prepare the Annual Report. The last report published was for 2006.

  • Annual budget. The annual budget includes some provisions for debt servicing, but no debt stock data.

  • The Quarterly Economic Bulletin (QEB) produced by the CBL. The appendix tables summarize Liberia’s public debt by quarter and by creditor type using data from the Ministry of Finance. Another table contains the monetary survey that displays domestic credit claims on the general government and public corporations by quarter. The QEB is disseminated to the wider public and usually published within three to six months of the reference period.

Staffing and Capacity

13. The Ministry of Finance’s DMU employs seven staff members. Only two staff members are employed in a technical capacity; the other staff members work in a supportive role. The Debt Unit of the CBL employs two staff. The DMU has limited office space and it has an unreliable internet connection.

14. One Ministry of Finance staff member attended a CS-DRMS course in July 2005 but never applied the knowledge and was thus unable to retain it. Two CBL technical staff members and one Ministry of Finance technical staff member attended a Debt Sustainability Analysis workshop organized by the World Bank in March 2007. Applications are pending for Ministry of Finance staff to attend Loan Negotiation and Evaluation and Debt Restructuring courses provided by the Crown Agents and the External Debt Statistics course of the IMF.

Recent Reform Measures

15. In an effort to coordinate debt management, the Liberian Government created the Debt Management Task Force (DMTF) in April 2004. The body was represented by the CBL, Ministry of Finance, Ministry of Planning and Economic Affairs, General Auditing Office and the Bureau of the Budget. This task force was temporarily successful in reconciling domestic debt data and was able to effect some degree of cooperation and coordination between the different institutions involved in debt management. However, apparently in part because of lack of funding, the DMTF ceased to exist from end-2005. Until recently, very little information was being circulated between the institutions and departments involved in debt management.

Future Reforms Required

16. The institutions participating in the debt management process will be able to cope with the tasks under their responsibility only if their capacity is increased significantly. The first challenge is to start producing accurate public debt statistics, inclusive of SOEs, on a timely basis and to make them publicly available via a periodically published debt report. The government also needs to design and implement a debt management strategy, including borrowing by SOEs. Support from the international community will be critical for achieving these goals.

ANNEX II

Liberia: Proposed Methodology for Imputing Value of Services Receipts1

1. Lack of official or other reliable source data on services receipts precluded the usual calculation of the net present value of external debt to exports (goods and services) to assess Liberia’s eligibility for the Heavily Indebted Poor Countries (HIPC) Initiative. It was, therefore, necessary to impute the value of services receipts.

2. Staff has used historic comparator country data to derive a benchmark ratio of services receipts2 to merchandise exports. This ratio was then applied to existing Liberian data for merchandise exports to impute the value of services receipts for the periods required.3 There were three main considerations in deciding how to undertake these estimates: (a) choice of comparator country group; (b) data from which to derive the ratio; and (c) time period over which to sample data.

3. The comparator country group includes countries that are (a) both PRGF-eligible and included in the World Bank’s group of low-income countries (WB LIC); and (b) post-conflict. It was determined on the basis of having reviewed several groups of countries with shared characteristics (Box II.A).

  • Using the PRGF-eligibility criterion alone was deemed not sufficiently robust given the large variation in the results (Table II.1). Applying a stricter income criterion (i.e., limiting the sample to the countries below the World Bank’s low-income classification 2005 cutoff of $875 per capita) was considered an objective basis on which to refine the group given Liberia’s likely extremely low per capita income.

  • Furthermore, it appeared appropriate to further refine the comparator group based on low-income countries with shared characteristics that are obvious impediments to trade in services, such as a history of conflict.

Overview of Comparator Country Group and Criteria

  • The proposed comparator country group and each of the subgroups are summarized here.

  • The proposed comparator country group of low-income countries that are post-conflict covers 18 countries: Burundi, Cambodia, Central African Republic, Chad, Democratic Republic of Congo, Côte d’Ivoire, Ethiopia, Guinea, Guinea-Bissau, Haiti, Mozambique, Niger, Rwanda, Sierra Leone, Sudan, Tajikistan, Timor Leste, and Yemen.

  • Of these, PCCs were identified on the basis of a country’s access to the IMF’s Emergency Post-Conflict Assistance and various IMF research papers (e.g., Occasional Paper No. 247, Rebuilding Fiscal Institutions in Post Conflict Countries), supplemented by information from the “mag” index from the Armed Conflict and Intervention Project of the Center for Systemic Peace at the University of Maryland (http://members.aol.com/cspmgm/warlist.htm). Key features of PCCs included deteriorating governance, prolonged political crisis, post-conflict transition, and gradual but still fragile reform processes (http://members.aol.com/cspmgm/warlist.htm).

4. The time period for calculating the benchmark ratio was chosen to cover the longest available data time frame (1980–2005). Consideration was given to the possible relationship between the performance of services receipts in other PCCs in the periods preceding and following the conflict. Conceptually, a conflict could potentially have different impacts on merchandise exports than on services. This could reflect severe damage to infrastructure or the presence of foreigners. However, the lack of consistent data over time for these countries made it impossible to identify such patterns.

5. Results for estimates of Liberian services receipts. While the use of estimates may draw criticism regarding the subjectivity and uncertainty of results, they represent a practical solution to a seemingly intractable problem. The results are presented in Table II.1.

  • The criteria for defining the comparator country group are both relatively objective and well-justified.

  • The benchmark ratio of total services receipts to merchandise exports in comparator countries is a sound choice given the limited range of data available in Liberia and comparator countries.

  • Although the proposed benchmark ratio (38.0 percent) may err on the side of being too high to avoid criticism of under-estimation (and over-estimating of HIPC debt relief),4 it represents a pragmatic middle ground. The results do not seem out of line with other groups. They are comparable with the results for all HIPCs, with the benchmark ratio for the comparator group (38.0 percent) falling between the median (26.5 percent) and average (42.8 percent) for HIPCs (Figure II.1)

Figure II.1.
Figure II.1.

Service Credits as a percentage of Merchandise Exports in HIPCs

Citation: IMF Staff Country Reports 2008, 106; 10.5089/9781451822960.002.A001

Table II.1.

Republic of Liberia: Estimates of Services Receipts

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Comparator ratio derived from the IMF’s Balance of Payments Yearbook (database) based on data covering 1980-2005.

IMF estimates.
1

Debt management is now the responsibility of the Deputy Minister of Finance for Expenditure and Debt Management.

1

“Enhanced HIPC Initiative” is hereafter referred to as “HIPC Initiative.”

2

See Country Report No. 08/53, January 15, 2008.

3

The DRA is based on a joint IDA/IMF staff mission to Monrovia in March-April 2007, with subsequent revision based on updated information received in October and November 2007 and February 2008. The DRA prepared jointly with the authorities, is based on a reconciliation of external debt data as of end-June 2007.

4

See “Heavily Indebted Poor Countries (HIPC) Initiative—List of Ring-Fenced Countries that Meet the Income and Indebtedness Criteria at end-2004,” April 12, 2006 (www.imf.org).

5

On January 14, 2008, the IMF’s Executive Board amended the IMF’s PRGF-HIPC Trust Instrument to allow certain SMPs in clearly defined circumstances to count toward the track record under the HIPC Initiative (“Proposals to Modify the PRGF-HIPC Trust Instrument-Further Considerations,” December 19, 2007, www.imf.org). In the view of IMF staff, Liberia has established a track record within the meaning of this provision given performance since July 2007.

6

Given that Liberia’s financing needs would exceed the exceptional access limit under the PRGF (185 percent of quota), resources from the General Resources Account would also be needed.

7

Core Welfare Indicators Questionnaire, 2007.

8

In February and July 2007, a broad majority of IMF Executive Directors agreed with the IMF staff’s assessment that the macroeconomic and structural policies under the 2007 SMP met the standards associated with arrangements in the upper credit tranches.

9

In December 2007, the SMP was extended to end-March 2008 to enable Liberia to maintain a continuous track record of satisfactory policy implementation.

10

Inflation data is affected by the replacement in February 2007 of the Monrovia CPI (under which inflation remained mostly in single digits) with a more comprehensive Harmonized CPI (under which inflation has remained broadly stable in low double digits).

11

While the 2006/07 budget was submitted before the end of the previous fiscal year, consistent with the SMP benchmark, the legislature did not approve it until late August 2006. As a result, the Cash Management Committee (CMCo) was unable to approve any commitments in the first two months of the fiscal year. The 2007/08 budget was approved more than one month into the fiscal year contributing to an accumulation of a surplus in the first half of 2007/08.

12

A major budgetary transfer is defined as a transfer between ministries, agencies or branches of government which totals 30 percent of the affected institution’s appropriation on a cumulative basis.

13

Special consideration was given to debt owed to the CBL (over 90 percent of the total debt) and other financial institutions, given ongoing efforts to strengthen the financial system. The debt was rescheduled on concessional terms with a 30 year maturity, 10 year grace period on principal, and interest rates increasing from 1.0 percent at the start of the repayment period to 2.5 percent for the latter part of the period.

14

Some of the proposals discussed were developed by the government in a July 2007 Budget Cycle Workshop.

15

Liberia, “Millennium Development Goals Report”, 2004 (data from 2000).

16

The macroeconomic projections in this analysis cover the next 20 years and were prepared in consultation with the authorities. The medium-and long-term projections were revised for the HIPC Decision Point Document, based on the final agreement on arrangements under the PRGF and EFF, which cover March 2008-March 2011.

17

Real output growth projections over 2012-27 are similar to those observed in 1961-70, when Liberia had significant foreign direct investment related to natural resource exploration.

18

In the current projections, for illustrative purposes starting in 2011, the central government is assumed to undertake moderate deficit financing, with the overall deficit (including grants) projected to average about 3 percent of GDP per year over the projection period.

19

Real GDP per capita is expected to grow, on average, by 2.4 percent a year over the projection period.

20

Including grants, the current account deficit is projected to decline from 36 percent of GDP in 2006/07 to 11 percent in 2026/27.

21

Republic of Liberia, “Breaking with the Past: from Conflict to Development: Interim Poverty Reduction Strategy,” (January 2007 IDA/SecM2007-0339 and EBD/07/16, 02/09/07).

22

The Debt Relief Analysis presented in this section is based on the HIPC Initiative’s methodology.

23

See “HIPC Debt Initiative: the Chairman’s Summary of the Multilateral Development Banks’ Meeting,” March 6, 1998, IDA/Sec M98–90.

24

The NPV of debt-to-export ratio is calculated using a backward-looking three-year average of exports of goods and services, using staff estimates of services receipts (Annex II).

25

Although Liberia meets qualifying criteria for both the export and revenue windows, the export window results in greater debt relief than the revenue window. Based on the current data, qualification under the fiscal window would provide HIPC debt relief of US$2,777.6 million, implying a slightly lower common reduction factor of 88.3 percent. Countries qualifying for HIPC Initiative debt relief through the fiscal revenue window may receive debt relief based on a common reduction factor sufficient to reduce the NPV of debt-to-fiscal revenues to 250 percent when this will result in more debt relief than a common reduction factor based on qualification through the export window (which reduces the NPV of debt-to-exports to 150 percent). To qualify for the fiscal revenue window, governments must have an export-to-GDP ratio of at least 30 percent and a fiscal revenue-to-GDP ratio of at least 15 percent.

26

The Preliminary Document, based on the preliminary DRA, suggested that a small amount of IDA’s HIPC Initiative debt relief would be outstanding after arrears clearance, to be delivered through some interim relief and upon arrival at HIPC completion point. It was suggested that, at the time Liberia reaches the decision point, IDA staff would seek approval from IDA’s Executive Directors to the one-third NPV limit on IDA’s interim debt relief being applied to the balance of IDA’s HIPC Initiative debt relief to be delivered through debt service reduction. However, the new information on commercial debt stocks incorporated in the decision point DRA has resulted in a small reduction in the common reduction factor such that all of IDA’s HIPC Initiative debt relief would have been delivered through the arrears clearance grant. As such, there is no longer scope for IDA to deliver any interim HIPC debt relief to Liberia.

27

There will be no principal obligations falling due for the first 4½ years. Interest obligations falling due to the IMF during the interim period will vary due to the variable rate of charge on the EFF purchase. A higher rate of charge may require higher payments from Liberia.

28

The moratorium interest falling due after Cologne flow rescheduling for both bilateral and commercial creditors would induce a sharp increase in debt service due during the interim period (2007/08-10/11), which would be reduced after the stock of debt operation at the completion point.

29

The Government and its advisers are exploring a full range of options to retire commercial debt, including a cash buyback at a very deep discount; execution of a debt instrument by Liberia and its commercial creditors replicating, as closely as possible, the financial terms of Liberia’s Paris Club deal; or a tax-deductible donation of the claims to one or more recognized charities active in Liberia.

30

A first US$5.0 million for such foreign exchange costs is included in the Reengagement and Reform Support Grant approved by the IDA Board in December 2007.

31

Financing to cover AfDB maturities falling due during the 2008 calendar year are included as part of the AfDB arrears clearance operation.

32

The new PRGF credit (equivalent to 30 percent of quota under the 11th General Review) is not eligible for beyond-HIPC assistance.

33

The US$242.6 million reflect total nominal debt service savings (principal and interest payments). However, the MDRI is a debt stock operation on all debt outstanding (principal only) as of end-2004 (IMF and AfDB) and end-2003 (IDA) that is not covered by HIPC assistance. This is expected to amount to US$131.8 million.

34

The IMF has mobilized sufficient financing assurances to cover its cost of HIPC and beyond-HIPC debt relief to Liberia. The total financing commitments amount to about SDR 540 million from 102 bilateral contributors.

35

This assumes that the MDRI has no impact on Liberia’s new borrowing over the projection period.

36

Harmonized" means that teachers are paid according to coherent payroll regulations. “Regularized” means that they are paid with fixed periodicity and through an established and effective mechanism.

37

The IMF will place a resident PFM advisor in Monrovia starting in March 2008.

38

The 3-year program supported by the PRGF and EFF is expected to be discussed by the IMF Executive Board in mid-March 2008. It contains end-March 2008 SMP benchmarks consistent with recommendations of the FAD mission on PFM reform, including (i) passage of legislation to allow the merger of the Bureau of the Budget into the Finance Ministry and to limit the transfer of resources between budget lines without legislative approval; and (ii) preparing a chart of accounts, consistent with GFSM 2001-compatible budgetary classifications.

1

This methodology is similar to the one developed and used in the case of Afghanistan and that was endorsed by the Boards of IDA and the IMF during their discussion of the HIPC preliminary document for this country.

2

In the IMF’s Balance of Payments Manual (fifth edition) services cover travel and transportation as well as communication services, construction services, financial and insurance services, various business-related services (e.g., computer services), and government services (e.g., goods and services purchases by embassies).

3

Exports of goods and services data were required for 2003/04-05/06 for the preliminary DRA presented in this document.

4

If, before a country reaches the completion point, there are revisions to the data (debt or economic) used in the decision point DRA, a revised DRA will be prepared. Adjustments to the amount of HIPC debt relief will depend on the nature of data revisions. First, for revisions to the export data provided by, or at the behest of, the member (e.g., official merchandise export data for the period covered by the decision point NPV ratio (i.e., 2003/04-2005/06)), the amount of debt relief can be adjusted upward or downward (if it exceeds or falls short of the de minims 1 percent threshold specified in the HIPC Trust Instrument). Second, adjustments in HIPC debt relief attributable to incorrect information on export data that was not provided by, or at the behest of, the member (e.g., staff estimates of the ratio between total services receipts to merchandise exports) would only be made if they lead to higher assistance. Given that Paris Club creditors are likely to provide 100 percent relief in the context of the HIPC Initiative, any revised debt relief calculations would ultimately only affect the time profile with which their claims are forgiven. However, the amount of HIPC debt relief to be provided by other creditors could be affected.

4

See “Debt Sustainability in Low-Income Countries: Proposal for an Operational Framework and Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/020304.htm and IDA/SECM2004/0035, 2/3/04) and “Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework, Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/091004.htm, 9/10/04) and “Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief” (www.imf.org, 11/6/06).

5

On the historical averages for the stress tests, average GDP growth is calculated using data from 1961-1980 which excludes significant volatility during the last 25 years due to political instability; the historical averages for some of the other key variables are taken over different subsets of the last 10 years due to the poor quality of data. Also, as noted in “Liberia: Enhanced Initiative for Heavily Indebted Poor Countries - Preliminary Document”, Annex II (Country Report No. 08/53), service exports for Liberia were estimated using data from comparator countries, as was done for the HIPC DRA.

6

In addition, the results of the LIC DSA differ from the HIPC DRA because of two other methodological differences related to the definition of: (i) discount rates; and (ii) exchange rates.

7

FDI-related imports are assumed to represent about 85 percent of FDI over the projection period.

8

The stock of external debt at end- 2007/08 reflects large up-front borrowing from the IMF to clear arrears to the IMF, as well as other reschedulings, and fully grant-financed clearance of World Bank and African Development Bank arrears.

9

See “Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries” (www.imf.org, 03/05/2007).

10

Debt owed to the Central Bank of Liberia represents over 90 percent of the total domestic debt at end-June 2007 and was rescheduled on concessional terms with a 30 year maturity, 10 year grace period on principal, and interest rates increasing from 1.0 percent at the start of the repayment period to 2.5 percent for the latter part of the period.

11

If Liberia were to start collecting a greater portion of revenues in Liberian dollars, resulting in a greater mismatch on the government’s balance sheet, the implications of this scenario would become more important.

12

The outcome of the further vetting of approximately $0.3 billion of “contestable” domestic claims is uncertain due to the need to establish the validity of claims and the discount factor, as well as potential legal action on the part of claimants. Without prejudging the results of the vetting exercise, the scenario assumes that the discounted value of claims will be 10 percent of GDP (approximately $80 million).

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Cover IMF Staff Country Reports
Liberia: Enhanced Initiative for Heavily Indebted Poor Countries: Decision Point Document, Debt Sustainability Analysis, and Staff Supplement
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 106
Publisher:
International Monetary Fund
ISBN:
9781451822960
ISSN:
1934-7685
Pages:
75
DOI:
https://doi.org/10.5089/9781451822960.002
  • Figure 1A.
    View in gallery
    Figure 1A.

    Republic of Liberia: Composition of Stock of External Debt at End-June 2007 by Creditor Group

    (Nominal stock: $4,732.2 million)

  • Figure 1B.
    View in gallery
    Figure 1B.

    Republic of Liberia: Potential Costs of the HIPC Initiative by Creditor Group

    (Total Estimated Enhanced HIPC Assistance: $2,845.5 million, end-June 2007 NPV terms)

  • Figure 2.
    View in gallery
    Figure 2.

    Republic of Liberia: External Debt Sustainability Indicators, 2006/07-2026/27

  • Figure 3.
    View in gallery
    Figure 3.

    Republic of Liberia: Sensitivity Analysis, 2006/07-2026/27

  • Figure II.1.
    View in gallery
    Figure II.1.

    Service Credits as a percentage of Merchandise Exports in HIPCs

Figure 1A.

Republic of Liberia: Composition of Stock of External Debt at End-June 2007 by Creditor Group

(Nominal stock: $4,732.2 million)
Figure 1B.

Republic of Liberia: Potential Costs of the HIPC Initiative by Creditor Group

(Total Estimated Enhanced HIPC Assistance: $2,845.5 million, end-June 2007 NPV terms)
Figure 2.

Republic of Liberia: External Debt Sustainability Indicators, 2006/07-2026/27
Figure 3.

Republic of Liberia: Sensitivity Analysis, 2006/07-2026/27
Figure II.1.

Service Credits as a percentage of Merchandise Exports in HIPCs