Fourth Review of Performance Under the Staff: Monitored Program and Request for Three: Year Arrangement Under the Poverty Reduction and Growth Facility and the Extended Fund Facility: Staff Report; Press Release on the Executive Board Discussion

This paper reviews Liberia’s performance under the staff-monitored program (SMP) through December 2007, and proposes a three-year program to be supported by the Poverty Reduction and Growth Facility (PRGF) and the Extended Fund Facility (EFF) once Liberia’s arrears to the IMF have been cleared and its rights to access IMF resources restored. Satisfactory performance on the PRGF/EFF-supported program would pave the way for comprehensive treatment of external debt under the Heavily Indebted Poor Countries (HIPC) Initiative and beyond-HIPC debt relief.


This paper reviews Liberia’s performance under the staff-monitored program (SMP) through December 2007, and proposes a three-year program to be supported by the Poverty Reduction and Growth Facility (PRGF) and the Extended Fund Facility (EFF) once Liberia’s arrears to the IMF have been cleared and its rights to access IMF resources restored. Satisfactory performance on the PRGF/EFF-supported program would pave the way for comprehensive treatment of external debt under the Heavily Indebted Poor Countries (HIPC) Initiative and beyond-HIPC debt relief.

I. Introduction

1. This paper reviews Liberia’s performance under the staff-monitored program (SMP) through December 2007 and proposes a three-year program to be supported by the Poverty Reduction and Growth Facility (PRGF) and the Extended Fund Facility (EFF) once Liberia’s arrears to the Fund have been cleared and its rights to access Fund resources restored.1

2. The government of President Johnson-Sirleaf took office in mid-January 2006 facing severe challenges. Fifteen years of civil war had destroyed much of Liberia’s physical and human capital and severely damaged its institutions. The new government endorsed the Governance and Economic Management Assistance Program (GEMAP) drafted to improve governance and build capacity, established the Liberia Reconstruction and Development Committee to manage postconflict recovery, and requested IMF assistance in formulating and monitoring policies to stabilize the economy and support economic reconstruction.

3. Progress since has been substantial. Firm implementation of policy has supported a recovery in economic activity, broad price stability, and accomplished structural reforms to reinforce public financial management (PFM). The government has also finalized a strategy to regularize relations with domestic creditors, put in place a comprehensive anticorruption strategy, and substantially improved the financial position of the Central Bank of Liberia (CBL).

4. The government still faces numerous challenges. While real GDP has started to recover, it is still below prewar levels, and with per capita GDP estimated at US$195 in 2007, Liberia is still one of the poorest countries in the world. Social indicators are also weak; in current circumstances Liberia is unlikely to achieve any of the MDGs by 2015.

5. A three-year PRGF/EFF-supported program is critical to move the government’s reform agenda forward and address Liberia’s unsustainable external debt. Satisfactory performance on the PRGF/EFF-supported program would pave the way for comprehensive treatment of external debt under the Heavily Indebted Poor Countries (HIPC) Initiative and beyond-HIPC debt relief.

II. Recent Economic Developments and Performance Under the Staff-Monitored Program


Liberia: Selected Economic Indicators, 2002-07

Citation: IMF Staff Country Reports 2008, 108; 10.5089/9781451822977.002.A001

Sources: Liberian authorities; and IMF staff estimates.

6. The authorities made solid progress in implementing the policies under the SMP through December 2007 (MEFP 12). They achieved all but one of the quantitative benchmarks (Table 1, Appendix I) and are well on the way to achieving the last structural benchmarks (Table 2, Appendix I), although some were met with a delay.2

Table 1.

Liberia: Selected Economic and Financial Indicators, 2006–10

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

The Monrovia CPI was replaced in 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.

Table 2.

Liberia: Balance of Payments, 2006-10

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

Up to 2007 interest payments are charged on total stock of debt. After 2007, they are charged on debt stock after application of traditional debt relief mechanisms.

Donor inflows in the first few years after 2007 are expected to be affected by the projected reduction in UNMIL operations and also reflect a change from humanitarian to development assistance. The latter implies a lower pass-through of donor assistance into the domestic economy.

Starting in 2008, reflects payments after application of traditional debt relief mechanisms.

Starting in 2007, reflects investments in the mineral sector.

Assumes arrears to the WB and AfDB are cleared in December 2007 and to the Fund in March 2008.

Includes 100 percent of WB and AfDB arrears as of Dec. 2007; and MDRI assisitance in end-2010. For the remaining years it reflects HIPC assistance. For 2008, prospective debt relief amounts to US$31 million from HIPC assistance.

Assumed to be financed by deferral of payments to official bilateral, commercial and multilateral creditors.

III. The Medium-Term Program

7. The authorities’ poverty reduction strategy, endorsed during the February 2007 Partners Forum, recognizes that a comprehensive policy framework is required to improve welfare and address those factors that have given rise to past political instability. The interim Poverty Reduction Strategy Paper (I-PRSP) for July 2006-June 2008, and the full PRSP expected to be finalized by mid-2008, focuses on four key issues (MEFP ¶13): (i) enhancing national security; (ii) revitalizing economic growth; (iii) strengthening governance and the rule of law; and (iv) rehabilitating infrastructure and delivering basic services.

8. The three-year PRGF-EFF supported program requested by the authorities will sustain reforms in core Fund areas as part of an internationally coordinated effort. The authorities are receiving extensive assistance from donors on security, governance, and rebuilding physical and social infrastructure. Donors are also helping with reforms to support private sector development, starting with agriculture, forestry, and mining.

9. The main objective of the program is to sustain economic reconstruction by creating a stable macroeconomic environment to underpin rapid economic growth, job creation, poverty reduction, and progress toward the MDGs. It is guided by the policies underlying the authorities’ poverty reduction strategy, and centers on continuing to reinforce economic governance, especially PFM and anticorruption efforts, so that Liberia is ready to exit from the GEMAP once it reaches the HIPC Initiative completion point. It also aims to strengthen revenue administration and the financial sector.

10. The government’s budget will continue to be balanced on a cash basis, and the three-year program does not assume any new domestic or external borrowing. The authorities indicated that domestic borrowing to finance reconstruction or support economic management will be considered only after resolution of all claims in the recently finalized domestic debt resolution strategy, the expansion of institutional capacity, and drafting of a comprehensive debt management strategy.

11. The program will support efforts to strengthen PFM and transparency over the program period (MEFP ¶ 15-16).3 With assistance from FAD, the authorities are developing a comprehensive PFM law to replace the currently fragmented and incomplete legal framework, which 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. Improvements in PFM are expected to encourage donors eventually to offer budget support to help meet poverty reduction objectives through more efficient allocation of resources.

12. While public revenue has benefited significantly from the authorities’ efficiency improvements, the program will aim to further build revenues. Their program targets an increase in revenues (excluding grants) of about 3 percentage points, to 26½ percent of GDP, as a result of further enhancing tax and customs administration, improving taxpayer compliance, and broadening the tax base.4

13. The monetary policy framework will be strengthened over the medium term by developing new tools for liquidity management. In this context, the authorities plan to improve coordination between the Ministry of Finance and Central Bank, improve data on the foreign exchange volumes traded in the foreign exchange market, and consider the introduction of deposit auctions. Moreover, efforts will be relaunched to publicize the monetary policy framework. They will also continue to work in the domestic banking sector to improve private access to credit through, e.g., completing the restructuring of banks and bring to final resolution the abandoned and nonoperating banks. With technical assistance (TA) from MCM, the authorities will also work on strengthening banking supervision to ensure that financial institutions are properly regulated. Finally, they plan to establish a modern national payments system to support economic revitalization.

14. The financial position of the CBL has improved over the past year but needs reinforcement in the medium term. While the CBL’s claims against the government were not discounted under the government’s domestic debt strategy, interest rates are significantly below market rates, and a recapitalization of the CBL may be necessary. Consistent with the recent safeguards assessment and MCM recommendations, the authorities will continue to improve internal management and financial controls to allow for the eventual exit of the Fund-supported special advisor, who is working with the CBL as part of the GEMAP.5

15. The program assumes that stronger institutions and prudent economic policies will catalyze financial and technical donor support and foreign direct investment (FDI). The authorities’ program is directed to achieving annual average real GDP growth of about 11½ percent through 2010 (Box 1) and keeping inflation in single digits. Liberia’s external position is expected to improve over the medium term as export volumes rise and FDI increases, but it is vulnerable to external shocks. The current account deficit excluding grants is expected to be substantial throughout the period, reflecting strong import growth from projects funded by FDI. These flows and official transfers, which is expected to average about $600 million a year through 2011, are expected to help finance the deficit. External debt sustainability is predicated on comprehensive debt restructuring through the HIPC Initiative and beyond-HIPC debt relief.

16. After years of civil war, Liberia’s national statistical capacity is minimal. Renewed effort is required to complete and implement components of the comprehensive medium-term national statistical plan currently being prepared (MEFP ¶21).

IV. Discussions on the Program for 2008

17. Following a decade-and-a-half of deteriorating public institutions and governance, the authorities face significant challenges in implementing policies that can begin to improve the welfare of Liberians and support a lasting peace. The authorities and staff agreed that the measures planned to be taken during the first year of the new program are of macrocritical importance, and are consistent with the authorities’ poverty reduction strategy.

A. Fiscal Policy

18. The budget for fiscal year 2007/08 projects a deficit of 1.8 percent of GDP, to be financed mostly by the estimated surplus from 2006/07. The budget, which the legislature revised significantly after the President submitted it, includes a substantial increase in civil service wages; US$3 million (1.5 percent of expenditures) for a county development program to be administered by local authorities outside the commitment control system; and a significant increase in appropriations for the legislature. The budget also included $14.3 million (7.2 percent of expenditures) to implement the domestic debt strategy and pay other salary and foreign mission arrears. Spending on health and education increased from 3.8 percent of GDP in 2006/07 to 4.8 percent of GDP in the 2007/08 budget, but declined marginally as a share of total spending. The authorities are planning a supplementary budget using the revenue overperformance in the first half of the fiscal year and a budget support grant from the World Bank. To ensure a balanced cash budget, the authorities will consult closely with staff before they finalize spending proposals.

Liberia: Medium-Term Growth Projections

Real GDP growth in 2008-10 is to be driven by the resumption of diamond, timber, and iron ore production. The lifting of UN sanctions cleared the way for resumption of diamond production (in 2007) and timber exports (2008). Iron ore mining is expected to commence in 2009 and also expand quickly. Throughout the period, the services sector is expected to make a significant contribution to real GDP growth. By 2013, timber, iron ore, and diamond production are projected to reach long-run sustainable output, and the annual growth rate of real GDP is assumed to revert to a long-run average of about 3 percent (the average was 3.4 percent for 1961–80).


Liberia: Contribution to Real GDP growth, 2002-10

Citation: IMF Staff Country Reports 2008, 108; 10.5089/9781451822977.002.A001

Liberia’s economic recovery is projected to be faster than the average for conflict-affected non-oil-producing African (SSA) countries. The average growth rate of its real GDP in the first five post-conflict years is projected at 7 percent, compared to the SSA average of 5 percent. Nevertheless, it is expected that Liberia’s output will reach preconflict levels only after six years; the SSA average is four years. The longer recovery period reflects the severity of war damage, which is matched only in neighboring Sierra Leone.


Real GDP in Conflict-Affected, Non-oil Exporting, SSA Countries

(Index, Average During Conflict = 100)

Citation: IMF Staff Country Reports 2008, 108; 10.5089/9781451822977.002.A001

Source: IMF World Economic Outlook Database, Liberian authorities, IMF staff projections, and UCDP/PRIO Armed Conflicts DatasetNote: The start and end-years of the most recent armed conflicts used in the chart are: Burundi (1993–2003); CAR (2001–2003); DR Congo (1997–2002); Eritrea and Ethiopia (1998–2000); Guinea-Bissau (1998–1999); Liberia (2003); Mozambique (1977–1992); Rwanda (1990–2002); Sierra Leone (1991 – 2001).

19. Revenues are budgeted to increase by over 2 percent of GDP in 2007/08 largely due to a one-time $15 million payment from Arcelor Mittal (1.9 percent of GDP). Continued efforts to strengthen domestic tax administration, including full implementation of tax identification numbers (TINs), will help sustain gains in income tax revenues (MEFP ¶¶24-25). Resumption of timber and diamond production with the lifting of UN sanctions and collection of GSM fees after approval of the telecommunications law will also boost revenues in 2007/08 and over the medium term. The authorities expect that tax policy measures they are considering, such as lowering personal and corporate tax rates and increasing the goods and services tax rate, will not affect revenue until 2008/09.

20. The commitment control system has ensured that expenditures do not exceed available revenues and that procurement guidelines are being followed, but budget execution could be better. The authorities’ continued emphasis on increasing the capacity of ministries and agencies to draft realistic and prioritized monthly cash plans to guide budget implementation is laudable. However, transfers between budget line items late in the 2006/07 fiscal year resulted in an outturn that differed significantly from the budget approved by the legislature. Staff expressed concern that administration of county development funds outside the interim commitment control system and a pilot program of quarterly transfers to select autonomous ministries and agencies also risk undermining the credibility of the commitment control system, even though strict reporting requirements for these expenditures would allow for adequate monitoring. Interim measures to improve coordination between the Bureau of the Budget and the Ministry of Finance are welcome, but staff emphasized that passage of legislation to merge the Bureau into the Ministry and limit transfers between budget line items is needed to enhance PFM over the medium term.6

21. Fiscal affairs are more transparent, but auditing needs more work. The Ministry of Finance is posting quarterly fiscal reports on its website, but the authorities agreed that there is a need for more stringent internal and external auditing systems through increasing the capacity of the General Auditing Commission and formulating an internal audit strategy for ministries and agencies. Continued efforts to increase the predictability and transparency of public spending should increase the confidence of donors considering budget support.

22. A medium-term macrofiscal framework for better budgeting is essential to the success of the poverty reduction strategy and civil service reform. The composition of spending in the 2007/08 budget indicates the need to ensure that the budget is consistent with the government’s medium-term objectives. The increase in current expenditure in 2007/08 is being financed in part by one-off sources of revenues (about 3.7 percent of GDP), so that in 2008/09 capital expenditures will decline as a percentage of GDP. Staff and authorities agreed on the need to increase civil service wages over time, but staff reiterated that the increase should be considered only as part of comprehensive civil service reform and be consistent with fiscal sustainability. Moreover, staff emphasized the importance of finalizing it in time to inform preparation of the 2008/09 budget. The multiyear revenue and expenditure projections being developed as the PRSP is prepared need to be integrated into a reinforced budget preparation process to ensure that the budget is aligned with government priorities; early consultations with the legislature will be essential. Here, a new chart of accounts would be useful in preparing budgets, starting with the 2008/09 budget. The authorities should also continue to collect data on donor flows to ensure that resources are efficiently allocated.

B. Monetary and Exchange Rate Policies and Financial Sector Reforms

23. The primary objective of monetary policy is price stability; it will continue to be anchored on exchange rate stability. Monetary policy recognizes that in a highly dollarized and open economy, the exchange rate is the key variable through which monetary imbalances affect prices. The CBL therefore uses the exchange rate as an indicator of domestic monetary conditions and gears its management of Liberian dollar liquidity to keeping the exchange rate relatively stable. Authorities and staff agree, however, that with foreign reserves low, the authorities should not attempt to target a specific level of the exchange rate, or to defend it against downward pressure from exogenous shocks. The authorities agreed on the need to accelerate efforts to strengthen the monetary policy framework (MEFP ¶ 31) and with the staff recommendation to relaunch efforts to publicize monetary policy and regularly disseminate data on economic variables.

24. The authorities plan to consider promoting dedollarization,7 though they agreed that the process should be market-driven and supported by efforts to keep the economy stable, build the banking sector, and establish a record of peace and stability. Staff pointed out some measures that could support demand for the Liberian dollar, such as (i) requiring tax payments and government spending to be made in Liberian dollars; (ii) introducing higher-denomination bank notes; (iii) improving the quality of bank notes; and (iv) reporting public revenue and expenditure in Liberian dollars.

25. Progress has been made on recapitalizing banks. This is welcome, particularly since bank claims on the government have been regularized (Table 5). The authorities nevertheless agreed on the need to further improve regulatory oversight by instituting a regular program of onsite inspections and adopting a comprehensive template for offsite inspections. They also agreed on the need to require banks to promptly address identified deficiencies. With regard to the strategy for resolving the status of abandoned and nonoperating banks, staff agreed that with the legal system weak it would be prudent in the short run to consider alternatives, such as publicizing which institutions are currently licensed by the CBL, while over the longer term continuing to seek their liquidation.

Table 3.

Liberia: Summary of Central Government Operations, 2005/06-2010/11

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

Starting in 2008/09, this represents debt service due after traditional debt relief mechanisms. Payments on external debt during the interim period are assumed to remain at pre–decision point level of US$3.9 million.

Contributions to the domestic debt trust fund are reported as a financing item.

The 2007/08 budget projects a deficit of $13.7 million (1.8 percent of GDP) on a commitment basis financed by the carryover of the 2006/07 fiscal surplus. For 2008/09 and 2009/10, budgets are assumed to be balanced on a cash-basis, with borrowing projected to start in 2010/11. Non-zero fiscal balances reported for 2008/09 and 2009/10 are due to some budget expenditures, including payment of arrears, amortization and payments to the domestic debt trust fund, being reported as financing items; actual budget expenditures on external debt service of $3.9 million per year are equal to the difference between external debt service falling due and debt relief and rescheduling assumed to be provided.

Amount of debt relief expected beyond traditional mechanisms to bring external debt payments to budgeted level of $3.9 million during

Includes pre-NTGL wage and foreign mission arrears.

Table 4.

Liberia: Monetary Survey, 2006-10

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Sources: Liberian authorities; and IMF staff estimates.

Derived from commercial banks’ balance sheets (Liberian dollar denominated).

Liberian dollar currency outside banks and commercial banks reserves (Liberian dollar denominated) held at central bank.

Excluding one bank since May 2003.

Excluding U.S. dollars in circulation.

Table 5.

Liberia: Core Set of Financial Soundness Indicators, 2003-07

(Percent, unless otherwise indicated)

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Source: Central Bank of Liberia.

26. The external audit of the CBL’s financial accounts for 2006 was completed in August 2007. While the auditors expressed no opinion, mainly because of the inconsistent application of the CBL’s accounting system, the staff welcomed the actions that have been taken to ensure adoption of the International Financial Reporting Standards with effect from the 2008 financial year, as well as the timely selection of the auditor for the 2007 audit as recommended in the interim safeguards assessment. They emphasized the need to complete the CBL safeguards assessment and encouraged the authorities to provide the Fund with the information required to ensure prompt completion.8

C. External Sector Policies

27. The external current account deficit excluding grants is projected to widen to about 94 percent of GDP in 2008 with solid growth in imports of goods and services to support increasing economic activity, notably significantly higher FDI. Official transfers are expected to decline to about 29 percent of GDP, resulting in a deficit including grants of 65 percent of GDP. However, the large inflow of FDI into the mining sector in 2007 and the projected increase in 2008 will help finance the current account deficit and support further accumulation of international reserves. In this context, and assuming the full delivery of debt relief through HIPC Initiative, MDRI and beyond-HIPC assistance, as well as possible bilateral and multilateral beyond-HIPC assistance at completion point, Liberia is expected to regain external debt sustainability. The associated reduction in debt service payments, together with the projected evolution of donor support and FDI, would provide Liberia with space to meet its remaining debt obligations, and facilitate the rebuilding of its international reserves (Table 7).

Table 6.

Liberia: External Financing Requirements and Sources, 2006-2011

(US$ millions)

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

Assumed to be financed by deferral of payments to official bilateral, commercial and multilateral creditors (see Table 2).

Table 7.

Liberia: Possible Schedule of PRGF/EFF Disbursements, 2008–11

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In addition to the conditions that generally apply to a PRGF arrangement.

28. The PRGF/EFF-supported program is expected to facilitate comprehensive debt relief, which is critical because Liberia’s external debt is unsustainable.9 The staff analysis presented in the accompanying HIPC decision point document shows that Liberia is eligible for HIPC debt relief based on end-June 2007 data. At that point, Liberia’s debt in net present value terms corresponded to 1,576 percent of exports of goods and services, well above the HIPC threshold of 150 percent. Satisfactory performance under the PRGF/EFF-supported program would pave the way for comprehensive treatment of external debt through HIPC and other debt relief. Liberia is expected to receive debt relief by end-2010 in the context of the HIPC and MDR Initiatives and beyond-HIPC debt relief. This includes financial assistance from other multilateral financial institutions, the Paris Club, and other official bilateral creditors. Liberia also expects to resolve its arrears to private creditors in an agreement which could involve the use of the World Bank’s Debt Reduction Facility for IDA-only countries.

29. The low-income country debt sustainability analysis reveals that Liberia is in debt distress, emphasizing the need for debt relief.10 The NPV of external debt-to-GDP ratio remains above the threshold (30 percent) throughout the projection period, while the NPV of external debt-to-exports ratio moves below the threshold (100 percent) by 2016/17. Liberia’s debt service ratios are above their respective thresholds (15 percent for exports and 25 percent for revenues) up to 2017/18. The alternative scenarios and bound tests indicate that the evolution of Liberia’s external debt position is subject to considerable vulnerabilities. While the stock of domestic debt at the beginning of the projection period is substantial at around 40 percent of GDP, it does not play a significant role in the debt dynamics since it has been restructured on concessional terms, and new domestic borrowing, assumed to commence after the completion point, averages 1 percent of GDP.

30. The authorities still face structural and administrative challenges in facilitating external trade. A diagnostic trade integration study will offer recommendations for addressing bottlenecks in stimulating exports and private sector competitiveness. The authorities also intend to finalize their strategy for phased adoption of a tariff regime consistent with the ECOWAS common external tariff (CET) and begin studying the economic impact of an Economic Partnership Agreement with the European Union.

D. Other Structural Reforms

31. Efforts to improve governance will continue. Since a national anticorruption strategy was adopted in 2006, legislation establishing an independent anticorruption commission has been submitted to the legislature. With donor assistance the authorities are preparing an operational and financial plan for establishing the commission once the legislation is passed. In July 2007 the government launched the Liberia Extractive Industries Transparency Initiative (LEITI) to ensure transparency and accountability in allocation and exploitation of natural resources. All financial flows from natural resource exploitation will be reconciled by an independent administrator, externally audited, and published.11

32. The government’s policies in support of private sector development emphasize putting in place, with donor assistance, solid regulation to better manage natural resources and increase agricultural productivity. In agriculture, efforts are aimed at increasing yields and building planning and monitoring capacity in the Ministry of Agriculture. In forestry, efforts are aimed at implementing the new forestry law and finalizing arrangements for commodity and expenditure tracking systems. Auctions of timber sales and forest management contracts are expected to begin in the current fiscal year. Efforts are underway to draft a national mineral policy and a legal and fiscal minerals framework. With assistance from the World Bank, the authorities have established a Public-Private Sector Dialogue on legal and regulatory reforms, strengthening public and private sector capacity, and improving infrastructure services and access to finance.

33. With assistance from international partners, efforts to rebuild infrastructure continue. Some progress has been made in restoring electricity generation capacity in Monrovia and rehabilitating roads, health facilities, and schools, but continued donor support is necessary to ensure that infrastructure rebuilding supports the authorities’ growth-enhancing policies.

E. Technical Assistance and Capacity Building

34. Liberia must continue to rely on donor assistance to address significant capacity constraints. The authorities have received comprehensive assistance from donors to rebuild capacity to formulate and implement policy, especially in statistics (Box 2). Further assistance from donors, especially financial support, in the first year of the program is important to support the authorities’ efforts to, e.g., complete and implement a comprehensive civil service reform strategy and set up the anticorruption commission.

Liberia: Summary of Technical Assistance from Donors

Since the end of the civil war in 2003 Liberia has received extensive TA from numerous donors in such areas as monetary and fiscal policy, financial sector reform, civil service reform, auditing, statistics, governance, and judiciary and security sector reform. Donors include the United Nations, European Union, IMF, World Bank, African Development Bank, Economic Community for West African States, United States, and United Kingdom.

The GEMAP has placed resident advisors with cosigning authority at key ministries, state-owned enterprises (SOEs), and the CBL, including (i) the Ministries of Finance and of Lands, Mines and Energy; (ii) CBL; (iii) Bureau of the Budget; (iv) National Port Authority; (v) Roberts International Airport; (vi) Petroleum Refining Corporation; and (vii) Forestry Development Agency. The goal of these advisors is to help establish transparent financial management systems and build local capacity.

The IMF has provided TA on (i) fiscal policy—PFM, tax policy, natural resource taxation, and tax and customs administration; (ii) monetary policy—the monetary policy framework, bank supervision, central bank accounting, national payments system, and micro finance institutions; and (iii) statistics—fiscal and monetary, national accounts, consumer prices, and balance of payments.

Other partners have provided TA to support the authorities’ efforts to strengthen governance, the judiciary, and capacity for public policy through the Governance Commission, General Auditing Commission, Civil Service Agency, and the Ministries of Justice, Defense, Police, Agriculture, Commerce, Lands, Mines and Energy, Education, and Health.

V. Access, Program Monitoring and Risks

35. In addition to the amounts from the PRGF and EFF that are necessary to repay the bridge loan used to clear arrears to the Fund (SDR 543 million), PRGF access is proposed at SDR 38.76 million—30 percent of Liberia’s quota. This level of access is in line with average additional access provided in past arrears clearance operations for PRGF-eligible countries. It reflects Liberia’s balance of payments needs, minimal reserves, the strength of the program, and Liberia’s capacity to repay the Fund.12 The additional access would be used primarily to build up reserves at the CBL. The disbursement schedule for the additional access is slightly frontloaded (Table 7); the authorities have stated their intention to place the initial disbursements in Liberia’s SDR account at the Fund to rebuild its SDR holdings to its net cumulative SDR allocation of SDR 21.0 million and thus limit the incurrence of net SDR charges.

36. For refinancing the bridge loan, SDR 200.3 million (155 percent of quota) would be drawn from PRGF resources and SDR 342.8 million (265 percent of quota) under an extended arrangement. Access under the extended arrangement exceeds the annual limit of 100 percent of quota that applies for arrangements within the GRA, and this request is based on the exceptional circumstances of Liberia’s large need that cannot be met through the limited resources of the PRGF. The entire amount of the extended arrangement will be available in the first purchase, and if drawn as expected, the extended arrangement will lapse. This unusual structure reflects the up-front nature of Liberia’s financing requirement to repay the bridging loan; program monitoring will continue under the three-year PRGF arrangement.

37. The proposed access is consistent with Liberia’s capacity to repay the Fund. Assuming that Liberia reaches the HIPC completion point in 2010, it would receive 100 percent relief on eligible Fund debt, and projected repayments to the Fund would peak in 2018 at 2.1 percent of fiscal revenue (excluding grants) and 0.7 percent of exports of goods and services (Table 8).

Table 8.

Liberia: Fund Credit Position and Projected Payments to the Fund, 2008-2021

(SDR millions unless otherwise indicated)

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Source: Finance Department and IMF staff estimates.

A PRGF/EFF-supported program with access in an amount equal to Liberia’s stock of arrears to the Fund at arrears clearance (this amount is eligible for both HIPC and beyond-HIPC debt relief), and new credit in PRGF resources of SDR 38.8 million or 30 percent of quota to be disbursed in 7 semi-annual installments. The first disbursement of the new credit at decision point is

EFF charges during the HIPC interim period (assumed to be March 2008 through December 2010) are based on the adjusted rate of charge of 4.34 percent per annum as of February 19, 2008. Beyond the HIPC completion point, EFF charges are based on the assumed SDR interest rate (gradually rising to 5 percent) plus 108 basis points and adjustments for deferred charges. Projected debt services are before HIPC and beyond-HIPC debt relief and do not include net SDR charges and assessments.

It is envisaged that the Fund would disburse HIPC interim assistance to cover forthcoming interest obligations to the Fund net of payments from the Liberian authorities during the HIPC

Fund credit outstanding after HIPC and beyond-HIPC debt relief.

Liberia’s quota is SDR 71.3 million under the 8th General Review. Following arrears clearance, and before requesting the new arrangements, Liberia will consent to, and pay for its quota increase to SDR 129.2 million under the 11th General Review.

38. The first year of the program will cover the period through December 2008. The program will be monitored on the basis of biannual quantitative performance criteria for June 30 and December 31, 2008, and indicative targets for March 31 and September 30, 2008 (Table 3 and 4, MEFP). Structural conditionality is consistent with the government’s I-PRSP.

39. Although the authorities are firmly committed to reform, there are considerable risks ahead. They relate to continued significant capacity constraints and the need for the cooperation of the opposition-led legislature. A number of structural benchmarks in the first year of the program require the support of donors.

40. Liberia’s statistical capacity is weak, and serious data deficiencies hamper surveillance. However, with Fund TA (Box 2), the authorities have commenced efforts to improve data production and dissemination, particularly monetary and fiscal statistics, and the staff believe that these are adequate to monitor program implementation.

VI. Staff Appraisal

41. The staff considers that implementation of the SMP through December 2007 was broadly satisfactory and met the standard of upper credit tranche conditionality, with the exception of the continued accrual of external payments arrears. Most of the quantitative benchmarks were achieved. Improved tax and customs administration and enforcement of the tax code allowed the government to continue exceeding revenue targets by wide margins; while rigorous implementation of the commitment control system has ended the past practice of financing expenditures through domestic arrears. The challenge for the government now is to ensure that its expenditure targets are achieved without weakening procedures for approving, controlling, and monitoring spending.

42. Most of the SMP structural benchmarks were achieved, though some with a delay. Staff welcomes the progress in reinforcing commercial banks, improving CBL accounting and audit procedures, drafting legislation to establish an independent anticorruption commission, merging the Bureau of Budget into the Ministry of Finance, limiting budget transfers without legislative approval, revising the investment code, and tightening the administrative procedures law. It is now critical that the legislature act on these proposals to ensure that program momentum is not lost. Because statistical data are weak, it is also important to quickly finalize the medium-term statistics plan, an outstanding benchmark for last December.

43. While CBL expenditures in 2007 exceeded the ceiling agreed for the SMP, the bank did record a surplus and met the target for increasing its foreign assets. Unexpectedly high CBL income reflected the slow pace at which the government spent U.S. dollars, which allowed the CBL to receive much more interest income on government deposits held abroad. It will be important to ensure that the CBL budget remains balanced and the CBL continues to meet its targets for foreign assets even if interest income falls when the planned pick-up in government spending draws down government balances.

44. Inflation remains in double digits, mainly because of higher food and oil prices. Because the current highly dollarized environment allows only limited scope for active monetary policy, meeting medium-term inflation objectives will require further efforts to improve monetary policy and strengthen financial sector balance sheets and supervision. While the government has indicated a desire to encourage use of Liberian dollars, dedollarization should be a market-driven process supported by continued economic stability, a sounder banking sector, and a track record of peace and stability.

45. The program for 2008-10 is ambitious. It builds on successes achieved in the SMP. The authorities have made a welcome commitment to a balanced cash-based budget, with no external or domestic borrowing until at least all domestic claims have been resolved, there is a clear debt management strategy, and the necessary institutions have been built up. The focus on further improving PFM, building the financial sector, and implementing the anticorruption strategy is not only appropriate, it could also help attract more donor support, especially for the budget. The debt sustainability analysis in the accompanying HIPC Decision Point document makes clear the risks associated with new borrowing. Staff would stress the need for donor support to be as much as possible on grant terms.

46. Repaying the bridge loan needed to clear Liberia’s arrears to the Fund requires exceptional access under both the PRGF and EFF. The staff considers an upfront disbursement of the entire amount under the EFF to be appropriate in view of large financing requirements for clearing arrears.

47. If the program is to continue to be successful, prompt action on key legislation is necessary, as is technical and financial support from donors. While the PRGF/EFF program is subject to considerable risks, the authorities deserve the support of the international community. The Fund-supported program is a pillar of the reform program needed for Liberia to qualify for debt relief

Figure 1.
Figure 1.

Liberia: Selected Economic Indicators, 2002-08

Citation: IMF Staff Country Reports 2008, 108; 10.5089/9781451822977.002.A001

Sources: Liberian authorities; IMF staff estimates and projections.1 Fiscal year (July-June).
Figure 1.
Figure 1.

Liberia: Selected Economic Indicators, 2001-07

Citation: IMF Staff Country Reports 2008, 108; 10.5089/9781451822977.002.A001

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

Liberia: Exchange Rate Developments, January 2000-December 2007

Citation: IMF Staff Country Reports 2008, 108; 10.5089/9781451822977.002.A001

Sources: Liberian authorities; IMF staff estimates and projections.
Table 9.

Liberia: Millenium Development Goals

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Source: World Development Indicators database