Statement by the IMF Staff Representative on Liberia

The drop in demand and commodity prices in Liberia is adversely affecting investment and exports in some key sectors. The staff report examines Liberia’s second review under the Poverty Reduction and Growth Facility and request for Waiver and Modification of Performance Criteria. The global recession is slowing Liberia’s post-war economic recovery. There is limited room for countercyclical fiscal action owing to high debt levels while monetary policy is constrained by high dollarization. In the mining sector, investment continues, and iron ore exports are expected to resume with the global economic recovery.

Abstract

The drop in demand and commodity prices in Liberia is adversely affecting investment and exports in some key sectors. The staff report examines Liberia’s second review under the Poverty Reduction and Growth Facility and request for Waiver and Modification of Performance Criteria. The global recession is slowing Liberia’s post-war economic recovery. There is limited room for countercyclical fiscal action owing to high debt levels while monetary policy is constrained by high dollarization. In the mining sector, investment continues, and iron ore exports are expected to resume with the global economic recovery.

This statement summarizes developments in Liberia since the issuance of the staff report (www.imf.org). The information that has become available does not change the thrust of the staff appraisal.

1. The program through end-March 2009 is on track. All fiscal and monetary quantitative targets were met (on preliminary data) as was a performance criterion on the audit of government accounts.

2. Recent economic data are consistent with program projections. The 12-month inflation rate for March remained stable at 7 percent. The exchange rate against the U.S. dollar depreciated during March, but the annual depreciation rate remains moderate at approximately 4.5 percent. The net foreign asset holdings of commercial banks remained high through March, while the net foreign exchange position of the central bank improved as programmed. The merchandise trade deficit widened significantly during the first quarter of 2009 compared to 2008, mostly as a result of a decline in rubber exports, Liberia’s main export product.

3. There is a risk of a revenue shortfall through June 2009, but the program revenue target for fiscal year 2009/10 remains within reach. The revenue projection for the fiscal year through June 2009 assumes an upfront payment of US$20 million related to an iron ore mining concession, but this payment may now slip into the next fiscal year. This shortfall would likely be covered through higher-than-expected budget support grants from the African Development Bank that could cover about half of the shortfall; for the remainder, the authorities envisage expenditure reductions through deferral of community development fund spending and other non-priority expenditures, partly reflecting also expenditure capacity constraints. Staff confirmed with authorities during a recent staff visit that the program revenue target for 2009/10 remains feasible. The 2009/10 budget is expected to be finalized shortly; the authorities indicated that they remain committed to a balanced cash-based budget with revenue estimates broadly in line with program projections.

4. On April 16, 2009, Liberia reduced its foreign debt by buying back US$1.2 billion in outstanding government debt at a discount of nearly 97 percent of face value. The operation was concluded with the payment of US$38 million to retire 25 commercial claims, lowering Liberia’s foreign debt to less than US$2 billion. Most of the remaining debt would be cancelled when Liberia reaches the completion point under the Heavily Indebted Poor Country (HIPC) initiative. The buyback was made possible through contributions to the IDA Debt Reduction Facility including from Germany, Norway, the United Kingdom, and the United States.

Liberia: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver and Modification of Performance Criteria, and Financing Assurances Review: Staff Report; Staff Supplement; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Liberia
Author: International Monetary Fund