Liberia
Enhanced Initiative for Heavily Indebted Poor Countries-Completion Point Document and Multilateral Debt Relief Initiative

The Liberia Poverty Reduction Strategy (LPRS) was completed in March 2008. Since reaching the decision point in March 2008, Liberia has maintained macroeconomic stability. The global financial crisis adversely impacted Liberia shortly after the LPRS was released. Investments were postponed, and export revenues were sharply reduced in the rubber sector as external demand weakened. The authorities’ strict adherence to a cash-based balanced budget, in place since February 2006, has contributed substantially to regaining fiscal discipline, putting debt on a downward path while also increasing pro-poor expenditures.

Abstract

The Liberia Poverty Reduction Strategy (LPRS) was completed in March 2008. Since reaching the decision point in March 2008, Liberia has maintained macroeconomic stability. The global financial crisis adversely impacted Liberia shortly after the LPRS was released. Investments were postponed, and export revenues were sharply reduced in the rubber sector as external demand weakened. The authorities’ strict adherence to a cash-based balanced budget, in place since February 2006, has contributed substantially to regaining fiscal discipline, putting debt on a downward path while also increasing pro-poor expenditures.

I. Introduction

1. This paper discusses the progress made by Liberia under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. It recommends that the Executive Directors of the International Development Association (IDA) and the International Monetary Fund (IMF) approve the completion point for Liberia under the Enhanced HIPC Initiative. In the view of the staffs, Liberia has made substantial progress in achieving the completion point triggers despite the difficult environment following the decision point, including the food and fuel price crisis and global recession. Liberia has satisfactorily implemented HIPC completion point triggers regarding: (i) Poverty Reduction Strategy (PRS) preparation and implementation, (ii) ensuring macroeconomic stability, (iii) strengthening government procurement, (iv) conducting successive external audits of key ministries, (v) developing a debt strategy, (vi) reporting debt data, (vii) eliminating discretionary tax incentives, (viii) reconciling revenues from extractive industries, (ix) improving payroll management in the education sector, (x) expanding basic health service coverage, and (xi) introducing an Anti- Corruption Commission. However, one trigger has not been fully implemented, specifically the 12-months implementation of the PFM law and related regulations. The authorities are requesting a waiver on the basis of the substantial progress achieved over 10 months. To this end, the budget for FY2010/11 was prepared in line with the new PFM law, a new chart of accounts and accounting standards were adopted, the accounting function in the Ministry of Finance was unified and a new Debt Management Committee was established.

2. In March 2008, the Executive Boards of the IDA and IMF agreed that Liberia had met the requirements for reaching the decision point under the Enhanced HIPC Initiative.2 Directors welcomed the substantial progress made under the Staff Monitored Program since early 2006, and which was deemed to be of upper credit tranche standard since 2007. Executive Directors also agreed that a total of US$2,845.5 million in end-June 2007 PV terms would be required to reduce the PV of debt below 150 percent of exports. At the same time, interim relief was granted by the Boards of the IMF and the AfDB until the country reached its floating completion point. Executive Directors of the IDA and IMF decided that the completion point would be reached when the triggers set out in Box 3 of the decision point document were achieved and satisfactory assurances of other creditors’ participation in the Enhanced HIPC Initiative were received.

3. The document is organized as follows: Section II discusses Liberia’s performance in meeting the requirements for the completion point, Section III provides an updated debt sustainability analysis (HIPC-DSA), including the status of creditor participation, delivery of debt relief and consideration of topping up, Section IV presents the main conclusions and Section V presents issues for discussion by the Boards of IDA and the IMF. The Annexes cover the development of debt management capacity and an update of the forward-looking debt sustainability analysis (LIC-DSA).

II. Assessment of Requirements for Reaching the Completion Point

4. Liberia has made good progress in meeting the completion point triggers. The conditions for reaching the floating completion point triggers, as set out in the decision point document and summarized in Box 1, were as follows:

  • Preparation and satisfactory implementation of the PRSP.

  • Maintenance of macroeconomic stability, as evidenced by satisfactory performance under the ECF/EFF supported program.

  • Strengthened public finance management through implementation of a new Public Financial Management (PFM) Law, including operational regulations, and completion of successive external audits in key Ministries (Health, Education, Public Works, Finance and Lands, Mines and Energy).

  • Regular publication of all signed procurement contracts.

  • Provision of a basic package of health services, and harmonization and regularization of the education payroll.

  • Development of a debt strategy and establishment of a debt management unit in the Ministry of Finance, and publication of quarterly reports on external and domestic debt.

  • Revision of the Investment Incentives Act to eliminate discretionary tax incentives and ensure a high degree of transparency in the extractive industries in compliance with the criteria established by the Extractive Industries Transparency Initiative (EITI).

Status of Floating Completion Point Triggers

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A. Poverty Reduction Strategy

5. The Liberia Poverty Reduction Strategy (LPRS) was completed in March 2008. The completion point trigger required that the Government 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 (APR) submitted to the staffs of IDA and the IMF.

6. The LPRS prepared by the Government builds on the first 150-day action plan and its interim PRS prepared in 2007. It was prepared through unprecedented broad-based consultations with all levels of society including at the district and county levels, as well as civil society organization, the private sector, the legislature, and international partners. The mode and extensiveness of the consultations for the LPRS established a positive precedent for subsequent consultations on key policy and institutional reform issues.

7. The LPRS elaborates a comprehensive strategy to enhance growth and reduce poverty. The strategy explicitly recognizes that Liberia’s history of political instability and conflict is to a large part rooted in the past economic and political structures, which produced widespread income disparities, economic and political marginalization, and deep social cleavage. The strategy rests on four mutually reinforcing pillars: (i) consolidating peace and security; (ii) revitalizing the economy; (iii) strengthening governance and the rule of law; and (iv) rehabilitating infrastructure and delivering basic services. Six cross-cutting themes including gender equity, peace building, environment issues, HIV and AIDS, children and youth, and monitoring and evaluation enhance the comprehensiveness of the strategy.

8. The LPRS was discussed at the IDA and IMF Boards in August 2008. The Joint Staff Advisory Note (JSAN)4 noted that the LPRS presented a comprehensive, credible medium-term strategy to improve socioeconomic indicators and reduce poverty consistent with the rates of change underlying the Millennium Development Goals (MDGs). However, the JSAN also noted that the LPRS lacked specificity on the short-term strategy for preserving social stability and peace until the benefits of the medium-term strategy are widely felt. Further, the JSAN noted a number of areas for action or further elaboration including: developing a detailed and prioritized costing of LPRS actions and policies; providing greater specificity of the strategy for pro-poor growth; expediting the law to establish the Land Commission; elaborating Government’s strategy and timetable for devolving political and financial authority to lower levels of government; and elaborating measures (including piloting social accountability systems) to ensure broad involvement in monitoring and evaluating the implementation of the LPRS.

9. The implementation of the LPRS during the first year was initially slow. However, in the Annual Progress Report submitted to IDA and the IMF, the Government was not only candid in its assessment of progress, but also swift and resolute in its actions to bring implementation back on track through a series of 90–day Action Plans. To improve the coordination of the implementation of the LPRS, the Government has integrated the Liberia Reconstruction and Development Committee (LRDC) with the government-partner forum charged with coordination of implementation into the Ministry of Planning and Economic Affairs.

10. The staffs of the IDA and IMF conclude that the trigger on preparation (through a participatory process) and satisfactory implementation, though slower than expected, of the LPRS for at least one year has been met. The overall implementation should be assessed in the context of the ambitiousness of the LPRS (as noted in the JSAN), the weak public sector capacity and the challenging external economic environment. The Government’s Annual Progress Report (APR) on the LPRS and the accompanying JSAN have been submitted to the IDA and IMF Boards jointly with this document. The APR highlights that after initial slow progress on implementation in the first year, the rate of implementation of the LPRS accelerated from 21 percent in March 2009 to 88 percent by end-November 2009. Progress has been particularly strong on public finance management and building an effective system for monitoring and evaluation.

B. Macroeconomic Stability

11. Since reaching the decision point in March 2008, Liberia has maintained macroeconomic stability. The authorities have established a solid track record of implementing prudent monetary and fiscal policies under the Extended Credit Facility (ECF)-supported program with the IMF. The third review under the ECF was completed on December 18, 2009 and the fourth review is scheduled for consideration by the Executive Board of the IMF on June 23, 2010.

12. The global financial crisis adversely impacted Liberia shortly after the LPRS was released. Investments were postponed and export revenues were sharply reduced in the rubber sector as external demand weakened. Real GDP growth slowed to an estimated 4½ percent in 2009 as a result of these developments. Signs of recovery are evident in early 2010, although the pace will depend significantly on developments in large iron ore concessions. In 2010, growth is projected to rebound to 6 percent. Sustained economic activity in the following years will depend on the size and timing of foreign direct investments (FDI) in the commodity and agriculture sectors. Inflation has reflected external price volatility, rising during 2008 on account of food and fuel price increases, and then moderating in 2009 as these increases reversed. The exchange rate has remained broadly stable, though it came under pressure during 2009 when exports weakened. The reserve position has improved significantly, largely due to an SDR allocation of SDR103 million.

13. The authorities’ strict adherence to a cash-based balanced budget, in place since February 2006, has contributed substantially to regaining fiscal discipline, putting debt on a downward path while also increasing pro-poor expenditures. Government revenues, including grants, have continued to rise reaching 30 percent of GDP in FY2009/10. Spending for LPRS objectives has remained above the target of 60 percent of revenue set by the LPRS for FY 2009/10 and is expected to rise to 65 percent in FY 2010/11. For the post HIPC completion point period, the authorities intend to follow prudent fiscal rules including: (a) maintaining a basic balance surplus; (b) setting a sustainable annual ceiling of public sector borrowing on concessional terms; and (c) adopting an overall public sector debt ceiling. Along with the containment of unproductive expenditures, and allowing for moderate borrowing for critical investments, these rules should prevent the re-accumulation of unsustainable debt. In addition, their commitment to refrain from central bank financing of the budget, except for temporary shortfalls of external financing, should help dampen inflationary pressures and contain exchange rate fluctuations.

Text Table 1.

Liberia: Selected Economic Indicators, 2006-2010

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Sources: Liberian authorities and staff estimates and projections

14. A large current account deficit has been financed in the main by foreign direct investment and debt relief. Since the decision point, the current account deficit, including official transfers, averaged over 40 percent of GDP. A slowdown of foreign investment, notably in the iron ore sector, temporarily lowered the current account deficit in 2009. Donor transfers, which remain largely off-budget, have averaged 50 percent of GDP since 2007, are also a significant contributory factor to very large trade deficits. Gross reserves have risen significantly since the decision point: the recent SDR allocation contributed to an increase in imports coverage from 0.5 months in 2008 to 2.2 months (3.1 months excluding UNMIL-related imports).

15. The IDA and IMF staffs consider that Liberia has maintained macroeconomic stability and has implemented its Fund-supported program satisfactorily.

C. Public Financial Management

16. Since the decision point in 2008, the government has made substantial progress in improving the legal, regulatory, operational, and oversight aspects of public financial management, including procurement. Recent improvements in PFM have encouraged more donor support to be delivered through the budget. The completion point triggers required the government to: (i) have 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; (ii) 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; and (iii) implement the new PFM law and supporting financial regulations for at least 12 months leading up to the completion point.

17. Public financial management reforms have been at the center of government’s efforts to improve the efficiency of budget planning, preparation and execution and have critical components for improving economic governance. The reforms supported under the Enhanced HIPC initiative are complementary to other key elements of the Government’s PFM reform agenda. Several pieces of analytical work have helped to guide these reforms including the 2008 Public Expenditure Management and Financial Accountability Review (PEMFAR), which was the first comprehensive assessment of public expenditure and financial management systems in Liberia, and the Public Expenditure and Financial Accountability (PEFA) report completed in 2008. Technical assistance in these areas has also been substantial, including the provision of a resident advisor in PFM issues.

18. The government currently publishes on a quarterly basis (although with some lag) 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. This reflects substantial progress in implementing the Public Procurement and Concessions Act (PPCA), particularly in light of the challenges faced in the Liberian post-conflict context. One of the key achievements has been the creation of a greater public awareness of the benefits of a well functioning public procurement system by engaging civil society, beneficiaries, and the private sector. The wide dissemination of the PPCA and the numerous training sessions organized by the Public Procurement and Concessions Committee (PPCC) have resulted in a better understanding of the PPCA by the public procurement practitioners and the private sector. Awareness campaigns orchestrated by the PPCC have also informed Liberian citizens of the relevance of procurement and concessions reform in ensuring an efficient use of public resources. It is expected that this will trigger a long-term process of procurement monitoring by the private sector and civil society, which would translate into gradual social accountability and behavior change on the part of all stakeholders of the Liberia public procurement system.

19. Successive annual external audits for fiscal years 2006/07 and 2007/08 of five key government ministries (Health and Social Welfare, Education, Public Works, Finance, and Lands, Mines and Energy) have been prepared by the General Auditing Commission (GAC), submitted to the Legislature, and disclosed publicly. The Government has made considerable progress in implementing its external audit strategy. Efforts have been made to strengthen the GAC through the engagement of experienced auditors from neighbouring countries. In addition, the logistical capability of the GAC has been enhanced through technical assistance support from IDA and other developments partners. Through April 2010, the GAC completed over 20 audits including four forensic audits. These published audits are likely to have a positive impact on accountability within the public sector. As the Auditor General has pointed out: “More broadly, but equally important, GAC’s recent audit reports have begun to legitimately attack the culture of impunity that pervades many of these institutions.” 5 The GAC audit strategy is now evolving to focus less on transactional issues while increasing emphasis on systems.

20. In August 2009, the Legislature approved a new Public Finance Management (PFM) law.6 The draft law was submitted to the Legislature in September 2008. Substantive discussion occurred over the following nine months, including consideration of an alternative draft PFM law. The law was passed in a special session of the Legislature some six to nine months later than expected. As a result of delays in approving the law, there were corresponding delays in drafting the regulations (which were prepared with Fund technical assistance). The law covers the full public financial management cycle, including budget preparation, approval and execution, borrowing, public debt and guarantees, cash management, accounting and reporting, internal control and audit, and autonomous agencies and special funds. Following this, in November 2009, the President approved the enabling regulations for the law. Since that time, the authorities have made impressive advances in implementing the new law: (i) the FY2010/11 budget was prepared according to law,(ii) a unified accounting function was put in place in the Ministry of Finance, (iii) a high level debt management committee was established, which issued a revised debt management strategy for the post-HIPC completion point period, and (iv) a chart of accounts and international accounting standards were adopted.

21. The IDA and IMF staffs consider that Liberia has fully implemented the triggers on procurement and external audits, while the trigger on implementation of the PFM law has been substantially implemented and staffs recommend that a waiver be granted on the basis of the significant progress to date.

D. Social Sector

22. The social sectors, particularly education and health, remain key priorities for the Government. The completion point triggers required the government to: (i) complete a harmonized and regularized Ministry of Education (MoE) payroll,7 and (ii) ensure that the Basic Package of Health Services is delivered in at least 40 percent of all health facilities nationwide.

23. The substantial investment in infrastructure is aimed to ensure improved access to these basic services. Approximately 21 percent of the FY2009/10 budget is allocated to the social sector with the education and health sectors accounting for 52 percent and 35 percent, respectively, of the social sectors’ total budget. However, government per capita health expenditure remains low at less than US$5 in FY2007/08, and during FY08/09 the share of the national budget allocated to the health sector was 7.7 percent. The Ministry of Finance estimated that the education and health sectors will together receive about 25.7 percent of the total projected sector aid flows of approximately US$443.5 million for FY2009/10.

24. In April 2010, the Government completed the harmonization and regularization of the Ministry of Education (MoE) payroll in the context of its overall strategy to reform pay and grade in the civil service. In December 2009, the Government adopted the Medium Term Pay Reform Strategy as well as a new rationalized grading structure for civil servants, including teachers. This allowed the government to move into the new grading structure and reduce discretionary allowances. The pay reform is supported by the on-going Human Resources Management Information System (HRMIS) exercise, which has helped to remove the “ghosts” from the payroll using biometric identification and create a clean “one-employee-one file” registry of all civil servants including teachers. The new HRMIS system will harmonize the currently separate employee databases between the Civil Service Agency and Ministry of Finance payroll. In April 2010, the General Auditing Commission, with support from USAID, completed a comprehensive audit of the ministry of education payroll to verify all teachers in Monrovia and the 14 Counties. The audit revealed that there were some 3,247 personnel on the MoE payroll who could not be verified and were recommended for removal, including 2,138 classified as “ghosts” and 357 pensioners. Acting on the audit, the Ministry of Finance has deleted these personnel from the MoE payroll as recommended by the GAC. The Ministry of Education now has a clean payroll. All salary arrears have been cleared and personnel on the payroll are being paid on a regular monthly cycle, mostly through direct deposits but a few in the more remote Counties through check payments.

25. Since the decision point in March 2008, the Government has made substantial progress in the delivery of health services, and the Basic Package of Health Services is now being delivered in 47 percent of all health facilities nationwide. A national health policy, which focuses on rolling out the Basic Package of Health Services (BPHS) in 70 percent of all functional clinics by December 2010, is currently under implementation. Since the end of the war, health indicators have steadily improved as a result of wider access to health facilities brought about by reconstruction/rehabilitation of health facilities and improved efforts to deploy and retain health workers. Infant and under-five mortality rates have almost halved to 71 and 110 per 1,000 births respectively over the last 20 years due largely to the restoration of a few key maternal and child health services, such as immunization. However, other indicators, such as child malnutrition and maternal mortality rates, remain high.

26. The suspension of user fees is reported to have increased access and utilization of services, but provision of many health services is still inadequate and inequitable with a concentration of resources in the capital city. The capacity of the Ministry of Health and Social Welfare (MOHSW) to implement the health policy is improving, partly as a result of significant external technical assistance, including from the Global Fund and DFID.

27. The IDA and IMF staffs consider that that the harmonization and regularization of the Ministry of Education payroll have been completed; and that Liberia has succeeded in ensuring that basic health service package is delivered in at least 40 percent of the health facilities nationwide.

E. Debt Management

28. Since the decision point, debt management has improved substantially. The completion point triggers required the Government to develop a debt management strategy and record and publish data on external and domestic public and publicly-guaranteed debt.

29. The Government developed a Debt Management Strategy (DMS) in June 2008, with updates and revisions in July 2009 and June 2010. The strategy document was comprehensive and sets three main objectives, namely: (i) to complete external debt restructuring and make progress on domestic debt resolution; (ii) to strengthen institutional and professional capacity for debt management; and (iii) to establish detailed guidelines for future borrowing on concessional terms. The authorities also intend to develop a domestic debt market initially through sale of treasury bills. Until the achievement of the HIPC Initiative’s completion point, the authorities have observed a balanced budget and “no borrowing” policy. The June 2010 update of the debt management strategy anticipated the HIPC completion point being achieved by end of FY2009/10 (June 2010). The update concentrated on laying out strategic guidelines to ensure that the resumption of borrowing—set to begin in FY 2010/11—is carried out in a manner fully consistent with maintaining a sustainable debt position.

30. A Debt Management Unit (DMU) has been fully staffed and operational in the Ministry of Finance since 2008. Reports on outstanding central government external and domestic debt stock disaggregated by major creditor groups are posted on the Ministry of Finance (MOF) and the Central Bank of Liberia (CBL) websites. Quarterly fiscal outturn reports also provide an update on main debt management activities during the previous quarter.

31. A new debt management recording and reporting system (CS-DRMS) was installed in May 2010 in the DMU. This system allows all data from domestic and external borrowing and issuance of guarantees of the public sector (central government, public enterprises and other official entities) to be centralized into a single database and will substantially improve the data handling and storage environment. Prior to the installment of the reporting system (CS-DMRS), the DMU had electronic data files on external debt stocks by creditor.

32. Despite the significant progress achieved, the efficiency of debt management functions, which cover the central government and state-owned enterprises, still needs to be strengthened. Specific responsibilities for debt management functions need to be further clarified and formalized, particularly the relation between the Debt Management Committee, the DMU, and the Donor Coordination and the Macro-Fiscal Units of the Ministry of Finance. Coordination and information sharing should be further streamlined. The DMU staff needs training to effectively use the new debt data recording and reporting system, and to enhance the analytical capacity to regularly update and develop forward-looking debt management strategy.

33. The IMF and IDA staffs conclude that the trigger on debt management has been fully implemented.

F. Governance

34. Liberia’s progress on its governance agenda since the decision point in March 2008 has been notable. Its resolve to improve governance has been marked by key policy and institutional actions despite generally weak technical and financial capacity as well as a challenging political environment. The Government has revised the investment code, established an effective Liberia Extractive Industry Transparency Initiative (LEITI) secretariat, and an independent Liberia Anti-Corruption Commission (LACC). These actions along with others, including the establishment of the Land Commission, are crucial for building the governance framework to help Liberia transition from post-conflict recovery to long-term development.

35. The Government has made significant progress on its EITI initiative since the establishment in May 2008 of the Liberia Extractive Industry Transparency Initiative (LEITI), with membership from the Government, civil society, the private sector and donors. LEITI is helping to ensure transparency and accountability in the mineral, agriculture and forestry sectors. The LEITI Secretariat’s first full audited report of receipts and payments from the extractive industries was published in February 2009. Liberia was designated an EITI compliant country on October 14, 2009 becoming the first country in Africa, and the second country in the world to be validated. The 2nd EITI Report, covering the period July 1, 2009-June 30, 2009 and involving seventy-one (71) companies and five (5) agencies of Government was published on February 2010. The report covers companies operating in the following four sectors: mining, oil, forestry, and agriculture.

36. The Government now intends to build on the EITI efforts to implement an EITI++ or ‘value chain’ approach to concessions management in three key sectors, namely mining, agriculture and forestry. The EITI++ strategy that the Government plans to develop will help to ensure the implementation of good policies and practices along the entire value chain, from how access is granted to resources, to monitoring operations, to collecting taxes, to sound macroeconomic management and distribution of revenues, and to spending of resources for sustainable growth and poverty reduction.

37. In December 2008, the Government established an independent Anti-Corruption Commission consistent with its Anti-Corruption Act which was approved by the Parliament in 2008. In December 2008, the Commission was given an interim budget of US$0.3 million to allow it to begin operations, and subsequently an allocation of US$1.3 million was approved in the context of the FY09/10 budget. The Commission is organized into three operational divisions covering Administration, Enforcement and Prevention, and Education. Since its establishment, the Commission has forged a number of partnerships including with the Center for Transparency and Accountability in Liberia (CENTAL), Press Union of Liberia (PUL) the General Auditing Commission (GAC), and a number of donors. In August 2009, the LACC launched an asset declaration campaign for senior public officials. It has also built up a commendable case load of investigations for possible submission to the Ministry of Justice. The efforts of the LACC are in part reflected in Liberia’s ranking on Transparency International’s 2009 Corruption Perception Index, which has improved remarkably over the past two years. In 2009, Liberia reached 97th position out of 180 countries with a score of 3.1 out of 10, compared to a ranking of 150th out of 179 countries in 2007 with a score of 2.1 out of 10. In 2009, Liberia also ranked 13th out of the 47 Sub-Saharan countries, a substantial improvement on its ranking of 30th out of 47 Sub-Saharan countries in 2008.

38. In April 2010, the Investment Act and the Investment Commission Act were approved by the Government and signed by the President. The new Investment Act repealed and replaced the previous Investment Incentives Act of 1973. It simplifies and streamlines non-fiscal incentives for new investments mainly by eliminating any discriminatory and discretionary measures. Fiscal incentives are removed from the Investment Act and now provided for, on a non-discretionary basis, in the Liberia Revenue Code as amended. The National Investment Commission Act of 1979 was also amended and replaced. The new Investment Commission, which comprises a number of Ministers (Finance, Planning, Justice, Commerce and State for Economic affairs), will provide advice to the Government on investment policy, identify projects, evaluate concession awards, and assist investors in complying with laws and regulations.

39. The IDA and IMF staffs conclude that the trigger on governance has been fully implemented.

III. Updated Debt Relief and Debt Sustainability Analysis

40. The stock of HIPC-eligible external debt in PV terms at end-June 2007 was revised downward following the debt reconciliation exercise. The staffs of IDA and the IMF, together with the Liberian authorities, reviewed the end-June 2007 stock of debt data that was presented at the decision point document against recent creditor information. As a result, the nominal stock of debt has decreased by US$333.6 million to US$4,398.7 million, and the PV of debt after traditional debt relief has been revised downward by US$106 million to US$3,038.4 million (Table 1). Most of the downward revision is attributable to changes in commercial debt.

  • Multilateral creditors. The total multilateral debt stock as of end-June 2007 has increased by US$0.7 million due to a reduction by US$0.25 million of interest in arrears to IDA and an increase of US$0.95 million of principal amount in arrears to IFAD.

  • Paris Club creditors. The PV of debt to Paris Club creditors at end-June 2007 after traditional debt relief has been revised upward from US$947 million to US$952 million. This increase by US$4.7 million is attributable to the revisions of debt data in accordance with the updated information received from creditors.8

  • Other official bilateral creditors. The nominal value of the stock of debt owed to other official bilateral creditors has not changed, but the PV of debt after application of traditional debt relief mechanism has been marginally revised assuming a treatment of post-cutoff date debt comparable to the Paris Club.9 Consistent with the decision point data, the debt stock includes cancelled Chinese claims of US$12.2 million (equivalent to US$7.3 million in PV values after traditional debt relief). This amount was reinstated into the decision point database to account for creditor’s debt relief efforts made before the decision point in the form of outright debt cancellations.10

  • Commercial creditors. Most of the downward revision to the total outstanding debt stock is attributable to changes in commercial claims. The decrease in the stock of outstanding commercial debt at end-June 2007 by US$340.7 million reflects the net effect of upward revision of the total commercial debt stock by US$111.4 million11 and the exclusion of claims estimated at US$ 452.1 million. These revisions reflect the final results of the reconciliation exercise completed in November 2008 by the legal and financial advisors of the Government of Liberia in preparation of the IDA commercial debt buy-back operation supported by IDA’s Debt Reduction Facility.12

Table 1.

Liberia: Nominal Stock and Present Value of Debt as of end-June 2007 by Creditor Groups

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Sources: Liberian authorities; and IMF and World Bank staff estimates.

Includes arrears.

Includes a hypothetical stock-of-debt operation on Naples terms at end-June 2007 (fiscal year ends June 30) and at least comparable action by other official bilateral and commercial creditors on eligible debt (pre-cutoff and non-ODA).

Liberia’s Paris Club cutoff date is 1/1/1983.

41. Exports of goods and services remained unchanged. The estimates of the 2004/05-2006/07 average of exports of goods and services used to evaluate HIPC assistance at the decision point remain at US$199.5 million.13

A. Revision of HIPC Assistance and Status of Creditor Participation

42. The required HIPC assistance at the end-June 2007 PV terms has been revised downward from US$2,845.5 million estimated at the decision point to US$2,739.2 million. As a result, the common reduction factor has marginally decreased from 90.5 percent to 90.2 percent (Table 2).14

Table 2.

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

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

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Sources: Liberian authorities; and IMF and World Bank staff estimates.

The proportional burden sharing approach is described in “HIPC Initiative--Estimated Costs and Burden Sharing Approaches” (EBS/97/127, 7/7/97 and IDA/SEC M 97-306, 7/7/97).

Includes a hypothetical stock-of-debt operation on Naples terms, end-June 2007 (fiscal year ends June 30), and comparable treatment by other official bilateral creditors.

Each creditor’s PV reduction in percent of its exposure at the reference date, end-June 2007, calculated as (A-B)/A. The common reduction factor is applied to debt remaining after traditional mechanisms. For non-concessional bilateral or commercial debt this would imply a total reduction of 97 percent.

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

Table 3.

Liberia: Discount Rates and Exchange Rates

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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 and end-June 2009.

The exchange rates are expressed as U.S. dollar per national currency at end-June 2007 and end-June 2009.

Table 4.

Liberia: Nominal and Present Value of External Debt outstanding at end-June 2009 1/

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

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Source: Liberian authorities; and IMF and World Bank staff estimates and projections.

Figures are based on data as of end-June 2009.

Includes flow relief under Cologne terms (Agreed Minutes of April 17, 2008), beyond HIPC treatment by a number of Paris Club creditors, and debt relief from China.

Assumes full delivery of HIPC assistance as of end-June 2009.

Paris Club creditors deliver their share of assistance as a group. Actual delivery modalities are defined on a case-by-case basis.

Table 5.

Liberia: Present Value of External Debt, 2008/09-29/30

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

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

Represents situation as of end - June 2009. It includes HIPC debt relief provided by IDA and AfDB Group in a way of arrears clearance operation and interim debt relief provided by other multilateral creditors up to the end June - 2009.

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

Assumes the delivery of HIPC assistance at completion point (end-June 2010).

Assumes full delivery of estimated HIPC initiative debt relief as of end-June 2009.

Includes additional debt relief provided on a voluntary basis by the Paris Club creditors beyond the requirements of the enhanced HIPC framework as specified on Table 12.

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

IMF will provide beyond - HIPC debt relief that will equal disbursed amount under the ECF and EFF and will correspond to the stock of arrears at the arrears clearance, which was not already reduced by the HIPC initiative debt relief.

The EU special initiative provides full debt relief on all outstanding EDF special loans remaining after the full applications of the HIPC initiative.

Table 6.

Liberia: External Debt Service, 2009/10-29/30 1/

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

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

All debt indicators refer to public and publicly guaranteed (PPG) debt and are defined after rescheduling, unless otherwise indicated. Fiscal year ends on June 30.

Includes only principal and interest due on debt outstanding as of the reference date (end-June, 2009) and does not include projected penalty interest on arrears.

Reflects debt service payments on ECF and EFF loans that were disbursed by end-June 2009. For projected debt service payments on remaining ECF disbursements (past end-June 2009) see Table 10.

Assumes a hypothetical stock of debt operation on Naples terms and comparable treatment from other bilateral creditors.

Bilateral and commercial creditors are assumed to provide a Cologne flow rescheduling on eligible debt during the interim period and a Cologne stock of debt operation at the completion point. Multilateral creditors are assumed to start providing HIPC debt relief as of the decision point, except for IFAD, which is assumed to provide relief at the completion point.

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

Includes additional debt relief provided on a voluntary basis by the Paris Club creditors beyond the requirements of the enhanced HIPC framework as specified on Table 12.

MDRI assistance applies to the World Bank and to the AFDB Group. The IMF will provide beyond HIPC assistance and the EU will provide special assistance, which in principle are similar to the MDRI type of debt relief. All of these creditors will provide this debt relief starting from July 1, 2010.