Liberia
Third 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; Informational Annex; and Press Release

This paper discusses key findings of the Third Review for Liberia Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). The program remains on track. All performance criteria (PC) for end-June 2009 were met, except the PC on total revenue collection. IMF staff supports the authorities’ request for a waiver on the basis that the deviation was temporary and did not jeopardize key program objectives. Structural reform commitments were largely met, albeit some with delays. The 2010 quantitative and structural reform program is appropriately ambitious.

Abstract

This paper discusses key findings of the Third Review for Liberia Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). The program remains on track. All performance criteria (PC) for end-June 2009 were met, except the PC on total revenue collection. IMF staff supports the authorities’ request for a waiver on the basis that the deviation was temporary and did not jeopardize key program objectives. Structural reform commitments were largely met, albeit some with delays. The 2010 quantitative and structural reform program is appropriately ambitious.

I. Introduction

1. The political and security situation in Liberia remains stable. Cooperation between the Executive and the Legislature has improved following leadership changes in the Senate and the House of Representatives. The United Nations peacekeeping force of over ten thousand soldiers and police remains the cornerstone of security through to presidential and legislative elections in November 2011.

II. Recent Developments and Performance Under the Program

2. The global crisis has slowed exports, investment and economic growth (Table 1 and Figure 1). Difficulties are most acute in the rubber sector, which has increased rural unemployment, and there are delays in foreign investment. Nonetheless, growth remains positive and broadly in line with projections made at the time of the second review—though much reduced from the double digit growth envisaged under the original program.

Table 1.

Liberia: Selected Economic and Financial Indicators, 2007-11

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

IMF Country Report No. 09/177

The Monrova CPI was replaced in February 2007 with a more comprehensive harmonized CPI.

The base year is updated from 1997 to 2005 (2005 = 100).

Fiscal year ending in June on a cash basis (debt service payments shown after all debt relief).

Defined as Liberian currency outside banks plus demand, time, and savings deposits in Liberian and US dollars.

October 2009.

September 2009.

Figure 1.
Figure 1.

Liberia: Recent Economic Developments, 2005-09

Citation: IMF Staff Country Reports 2009, 332; 10.5089/9781451823028.002.A001

Sources: Liberian authorities and Fund staff estimates and projections.

3. The downturn has affected the exchange rate more than expected. Despite an improvement in the current account due to lower-than-expected imports, the exchange rate against the U.S. dollar depreciated by 11 percent during January-October 2009. As a result, average inflation is likely to remain above 7 percent in 2009, 5 percentage points higher than projected, but still significantly lower than its 2008 level. The real exchange rate has been broadly stable.

4. The external reserve position is much improved (Table 2 and Figures 2-3). The Central Bank of Liberia (CBL) accumulated net foreign exchange reserves modestly higher than programmed through end-September. Gross reserves were boosted in August by SDR 103 million from the general and special SDR allocations, raising reserve coverage to 2.1 months of goods and services imports (3.2 months coverage non-aid imports).

Table 2.

Liberia: Balance of Payments, 2007-11

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

Net of estimated value of goods and services purchased by UNMIL (and its staff) in Liberia.

From 2007, interest charged on debt stock after application of traditional debt relief mechanisms.

Assumes full delivery of debt relief at Completion Point in December 2010.

Includes short-term trade credits and private sector operating balances abroad.

Includes SDR assets and excludes SDR liabilities for US$ 163.2 million.

Includes debt forgiveness from multilateral creditors (US$665 million) and Paris Club creditors (US$254 million).

Includes deferred debt service payments in the interim period.

Figure 2.
Figure 2.

Cross Country Comparison 2005-09

Citation: IMF Staff Country Reports 2009, 332; 10.5089/9781451823028.002.A001

Sources: Liberian authorities; and Fund staff estimates and projections.Note: Fragile countries are Burundi, Central African Republic, Comoros, Congo Dem. Rep., Côte d’Ivoire, Eritrea, The Gambia, Guinea, Guinea-Bissau, Liberia, São Tome & Principe, Sierra Leone, and Togo.
Figure 3.
Figure 3.

Liberia: External Outlook, 2007-12

Citation: IMF Staff Country Reports 2009, 332; 10.5089/9781451823028.002.A001

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

5. The financial sector continues to expand (Table 3 and MEFP ¶11). Competition has increased with the entry of two new foreign owned banks (7 of 8 licensed banks are foreign owned). While capital and liquidity are high, the share of nonperforming loans is significant and the return on assets remains near zero.

Table 3a.

Liberia: Monetary Survey, 2007-10

(In millions of US dollar; unless otherwise indicated)

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

Include public enterprises and the local government.

Including valuation.

SDR holdings are included from December 2009.

Table 3b.

Liberia: Monetary Survey, 2007-10

(In millions of Liberian dollar; unless otherwise indicated)

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

Include public enterprises and the local government.

Including valuation.

SDR holdings are included from December 2009.

6. In FY2008/09, revenues fell short of program objectives and spending was trimmed in order to maintain a balanced cash budget and to avoid accumulating new arrears1 (Table 4 and Figure 4). Total revenue for the financial year fell short of program objectives by US$19 million (2½ percent of GDP). Tax revenue overperformed, but nontax revenue fell short by 4¼ percent of GDP due to technical delays in a mining project signing bonus and the sale of forestry leases. The authorities responded with sufficient spending cuts to meet the performance criterion on the overall deficit, mostly from current expenditure.

Table 4a.

Liberia: Fiscal Operations of the Central Government (Cash Basis), 2006/07-2010/11 1

(In millions of US dollars)

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

Budget is shown on a cash basis (i.e. debt service payments are shown after all debt relief).

Through fiscal year 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 up to 2009/10 are due to some budget expenditures (e.g., payments of arrears, amortization) being reported as financing items; and to the drawdown of government deposits accumulated in prior years.

Table 4b.

Liberia: Fiscal Operations of the Central Government (Cash Basis), 2006/07-2010/11 1/

(Percent of GDP)

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

Budget is shown on a cash basis (i.e. debt service payments are shown after all debt relief).

Through fiscal year 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 up to 2009/10 are due to some budget expenditures (e.g., payments of arrears, amortization) being reported as financing items; and to the drawdown of government deposits accumulated in prior years.

Figure 4.
Figure 4.

Liberia: Fiscal Developments and Outlook, 2007/08-2010/11 (Percent of GDP)

Citation: IMF Staff Country Reports 2009, 332; 10.5089/9781451823028.002.A001

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

Fiscal Outturn (Cash Basis), 2008/09

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Source: Liberian authorities.

7. Liberia’s ambitious structural reform program continues to advance, albeit with some delays due to limited implementation capacity. An external audit of 2007/08 government accounts was completed on schedule (performance criterion; end-March 2009). The Public Financial Management Act (PFM) was enacted in September 2009, with supporting regulations issued in December (benchmark; end-June 2009). New accounting standards were adopted in November (structural benchmark: end-June 2009). The revised chart of accounts for government, originally a structural benchmark for end-June 2009, was also delayed and is now expected to be completed in March 2010 for the 2010/11 financial year (revised structural benchmark). All other benchmarks were met or are on track.

III. HIPC Completion Point

8. The authorities significantly advanced implementation of HIPC completion point floating triggers (MEFP Table 3). Progress includes: expansion of the availability of a basic health services package at government health facilities; validation of resource revenues by the Extractive Industries Transparency Initiative; regular publication of domestic and external debt data; adoption of the PFM Act and accompanying financial regulations. In light of slow progress in implementing the Poverty Reduction Strategy, mainly due to capacity constraints, the authorities targeted numerous specific 90-day deliverables to be implemented through November 2009.

9. Staff anticipate that implementation of the remaining triggers will be completed in 2010. This concerns, in particular, implementation of the PFM Act and supporting regulations, revisions to the Investment Incentive Act and regularization of the education ministry payroll.

IV. Policy Discussions

A. Macroeconomic Framework and Outlook

10. The Liberian economy is projected to recover in 2010, while inflation moderates (Table 5). Increased output of timber and food crops contribute to a projected pick-up of growth to 7½ percent in 2010.2 In the forestry sector, production plans of companies that have acquired surface rights indicate a substantial increase of output and exports. A strong expansion is likely from traditional agriculture (food crops) as government incentive programs and improved extension services take hold. Rising commodity prices would support these trends. Inflation, however, is expected to moderate as the external position improves and the exchange rate stabilizes.

Table 5.

Liberia: Medium-term Outlook, 2007-14

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