Introduction

My Liberian authorities appreciate the IMF Executive Board and Management for their continued engagement and support. They are grateful for the productive policy discussions and counsel proffered by the IMF Mission during the Article IV consultation and Fifth Review under the Extended Credit Facility. The authorities agree broadly with the staff report as it addresses the main challenges to the successful implementation of Liberia’s growth strategy. These challenges include gaining cost competitiveness outside the enclave sectors, infrastructural development, strengthening institutions, and medium-term budgetary planning in the post-HIPC period.

Recent economic developments

The Liberian economy has performed well in recent years. The economy grew on average by 6.8 percent over the last five years in response to the sound macroeconomic policy implementation and far reaching structural reforms. Reconstruction continues to drive robust growth, in spite of the difficult international environment. The global financial crisis had a significant impact on the economy in 2009, impeding major foreign direct investment (FDI) in the mining and forestry sectors. Declining commodity prices for major exports such as rubber, iron ore, and sawn timber also contributed to the slowdown in production and investment, impacting formal employment in the rural areas. As a result, real GDP growth fell to an estimated 4.6 percent in 2009 from 7 percent in the preceding year.

Despite the fall in international agricultural prices, output in the agricultural and forestry sectors remained relatively strong. Inflation in 2009 averaged 7.4 percent, having moderated since its double digit highs in 2008, owing to prudent monetary operations and the relatively steady prices of food and fuel. Decreases in export earnings coupled with the decline in remittances have put pressure on the exchange rate in 2009. However, the current account deficit is expected to be fully financed by FDI and other external inflows. Gross international reserves of the Central Bank of Liberia (CBL) increased in 2009.

Program performance

Against the background of significant challenges, including from the global financial and economic crises, my authorities maintained macroeconomic stability and satisfactorily performed under the ECF-supported program. All quantitative performance criteria under the program through end-June 2010 were met. My authorities also observed three out of four structural benchmarks set for completion in June 2010. Completion of the remaining benchmark, which is to computerize government asset registry, is anticipated to be met by the end of December 2010. However, due to some unexpected constraints, the benchmark on the compilation of national accounts data could not be observed. My authorities plan to finalize the publication of the national accounts at the beginning of 2011.

Outlook

Prospects for a continued recovery of the Liberian economy remain good. Liberia’s low economic base will present many opportunities for reconstruction, maintaining high growth in the medium term. The continued recovery of agriculture and forestry, which accounted for 61.5 percent of the economy in 2009, will be the main impetus to growth. Additionally, the resumption of iron ore mining will enhance growth over the medium term, attracting large investment as well as boosting exports. Accordingly, real GDP growth is projected to remain fairly strong at 6.3 percent in 2010 and around 8.5 percent in 2011. In the medium term, inflation is projected to moderate as import prices and the exchange rate stabilize. The gross international reserves of the CBL in months of import cover is projected to decline from 2.6 in 2010 to 2.0 in 2011, largely attributable to the expected high growth and development-related imports.

Fiscal policy

My authorities’ fiscal strategy continues to aim at limiting debt creation and rationalizing public financial management. In light of this, the authorities have structured the 2010/11 budget in two parts: a core government budget which reflects those revenues that are expected to materialize and grow each year that will be used to pay for spending on core government priorities and recurrent activities; and a project budget based upon one-off and/or uncertain receipt that will finance one-off projects. The core budget will function as planned, without disruption and will contain adequate investment through a capital expenditure minimum rule. Meanwhile, projects will only start when funding has been received. The project budget will also assist target and focus entities spending on key, specific poverty reduction activities. Additionally, my authorities are committed to strengthening the link between policy, medium-term planning and budgeting, and will implement the Medium Term Expenditure Framework (MTEF) over the next two years. As part of the new PRS (National Vision), the development of sector plans aligned to the PRS will ensure that the budget priorities are more closely aligned with poverty reduction objectives. Such sector plans are also necessitated by the MTEF and the Public Sector Investment Program (PSIP). Furthermore, my authorities will ensure that targeted government spending reaches its intended recipients through the new public expenditure 3 survey, which aims to include people from outside of government in monitoring spending. Other methods of ensuring improved monitoring of outputs of government spending includes: activity-based deliverables for the new PRS to be used as measurable objectives for spending entities in the 2010/11 budget; joint monitoring and evaluation by the Ministry of Economic Planning and Economic Affairs and the Ministry of Finance; and PRS deliverables and the reporting of policy outputs from each spending entity in annual and mid-year fiscal outturn.

Monetary and financial sector policies

The monetary policy objective of the CBL remained the attainment of broad exchange rate stability in order to anchor price stability. To achieve this, the CBL continues to use the reserve requirement ratio and the foreign exchange sale auction as the main monetary policy instruments.

In the financial sector, the medium term strategy of the CBL is to produce a significantly changed financial sector, which is stronger, more stable and vibrant, and a vanguard for supporting broad-based economic growth and development. Accordingly, the emphasis of the second phase of the CBL’s reform agenda will focus on improving financial intermediation, building a modern payment system, intensifying work towards the establishment of a capital market, reforming and strengthening the insurance sector as well as reforming the non-bank financial sector including the operation of foreign exchange bureaus. Furthermore, in collaboration with commercial banks, the CBL has established a Banking Institute, developed the commercial code and the legislation for the establishment of a commercial court. CBL is also working with banks and the Liberian Institute of Certified Public Accountants to train the staff of banking institutions as a prelude to the implementation by banks of the International Financial Reporting Standards (IFRS), as required by CBL by end-2012.

Debt management policy

With the attainment of HIPC completion point, the authorities intend to move from a no-borrowing policy as was required under the HIPC arrangement, to the resumption of borrowing in order to finance its national reconstruction and development activities. Such borrowing will be consistent with maintaining a sustainable debt position starting this fiscal year. The development of a domestic debt market through sale and issuance of treasury bills is on the way, coupled with new responsibilities of the Debt Management Unit as required by the PFM law and regulation. As contained in the Debt Management Strategy (DMS), all loans will be approved and monitored by the Debt Management Committee and are to adhere to the reporting requirements set out in the PFM. The authorities will also implement and enforce fiscal rules as contained in the DSM. These rules are: to hold the level of debt stock below 60 percent of GDP and earmark borrowing only for investment purposes to ensure intergenerational fairness in the budget process. Furthermore, the government is committed to fully and vigorously implement its National Debt Management Strategy as well as build the institutional and professional capacity of the Debt Management Unit in the Ministry of Finance.

Structural reforms

In order to consolidate the gains of macroeconomic stability in the post-HIPC period and boost growth, my authorities remain committed to the full implementation of the ongoing structural reforms, to enhance the efficiency of the economy and improve the business climate. My authorities remain steadfast in their efforts to improve PFM, debt management, budget process, tax policy, and tax administration. The direct deposit payment of central government civil servant salaries has markedly expanded and covers the whole city of Monrovia and some rural counties. Plans are on the way to include the remaining sectors of government as well as exploring other means for government employees in the more remote areas. Additionally, efforts to regularize payrolls have expanded to cover 15 ministries, with substantial savings from eliminating fraudulent payments. Furthermore, an integrated financial management information system will be the basis for government accounting, incorporating the new chart of accounts from July 1, 2011.

In the financial sector, various legal and regulatory reforms were carried out to strengthen the sector’s stability, increase intermediation and widen access to financial services. In addition, the legislature also approved a new commercial code to establish a commercial court and changes to the revenue code.

Conclusion

My Liberian authorities remain mindful of the importance of prudent fiscal and monetary policies as well as debt sustainability to achieve and maintain macroeconomic stability and sustain growth. In this respect, they will continue to implement appropriate revenue and expenditure measures that will help enhance the fiscal space as the key to addressing the large infrastructural deficit of the country as well as increasing employment and pro-poor spending. My authorities appreciate the continued support of Management and development partners in realizing their development goals. It is against this background that the authorities solicit the Executive Board’s support in completing the fifth review under the ECF arrangement.