Introduction

My Liberian authorities are appreciative of the IMF’s continuous engagement and value the support under the Extended Credit Facility (ECF) arrangement. They also appreciate the candid exchange of views with staff during the mission on the sixth review of the ECF arrangement. My Liberian Authorities agree broadly with the staff report. It is in this regard that my authorities solicit the Executive Board’s support in completing the sixth review under the ECF arrangement, and request an extension of the arrangement and augmentation of access.

Recent Economic Developments

Implementation of sound macroeconomic policies, structural reforms and the promotion of business and investment have resulted in an impressive improvement in Liberia’s economic performance in recent years. Real GDP growth in 2010 is estimated at 5.6 percent, up from 4.5 percent in 2009 and attributed largely to strong performance in the agriculture and services sectors. Consumer price developments show a relatively stable inflationary environment as the quarterly average inflation rate rose marginally by 0.5 percent to 6.2 percent at end-March 2011, due mainly to the re-emergence of the global food and fuel price increases. The broad exchange rate stability experienced in 2010 continued in the first five months of 2011, reflecting interventions by the Central Bank of Liberia (CBL) and the growth in US dollar remittances. The country’s gross international reserves increased to 3.4 months of imports of goods and services in 2010 from 3.2 months in 2009.

Program Performance

My Liberian authorities have continued their strong commitment to implementing the policies outlined in the ECF-supported program, amidst some daunting exogenous shocks. All performance criteria through end-December 2010 were met. However, implementation of the remaining three structural benchmarks (relating to publication of national accounts statistics, extension of the ASYCUDA system and financial reporting of state enterprises) through end-march 2011 was slower than expected. Accordingly, my authorities are making efforts to publish provisional national accounts data after consultation with data users. Similarly, the ASYCUDA system in Customs will be extended to the international airport once funding is secured. Also, the delay in regular financial reporting by state-owned enterprises to the Ministry of Finance will be regularized in the coming months.

Outlook

The overriding policy objective of my Liberian authorities in 2011 and beyond is to strengthen macroeconomic policy, deepen structural reforms and improve the business environment to enhance growth, employment creation and poverty reduction. Against this backdrop, growth over the medium term is expected to remain strong with the economy expanding on average about 8 percent over the next five years. This robust growth is expected to be aided by the enclave sector, especially iron ore and potentially petroleum as well as agriculture and forestry. Increasing fuel and food prices will accelerate inflation during 2011, though it is expected to remain below the average rates seen during the 2008 fuel and food price hikes with broad exchange rate stability. The gross international reserves of the CBL in terms of months of import cover is estimated to decrease from 3.4 percent in 2010 to 2.7 percent and 2.1 percent in 2011 and 2012 respectively, due mainly to the higher import costs of fuel and food coupled with the expected high growth and development-related imports.

Fiscal Policy

The overarching fiscal policy of my Liberian authorities is to remain consistent with the Public Financial Law of 2009. To attain this objective, a Budget Framework Paper (BFP) has been prepared outlining some of the main macroeconomic assumptions of the financing plans for the financial year (FY) 2011/2012 budget. Among these is the debt strategy that restricts deficit financing to a maximum of 3 percent of GDP. The BFP also highlights the potential risks to the budget particularly in these times of rising price volatility.

The FY 2011/2012 budget will be implemented in accordance with the following key considerations: (1) align the budget more closely to national policy objective, especially targeting the unfinished PRS deliverables; (2) effective programming and expenditure planning to avoid painful streamlining of expenditure; (3) promote government investment; (4) carefully manage the post-HIPC public debt portfolio; and (5) prepare for emergency expenditures. These will pave the way for the launching of the Medium Term Expenditure Framework (MTEF) in FY 2012/2013 as required by law and in conformity with international best practice.

Monetary and Exchange Rate Policies

The maintenance of broad exchange rate stability and low inflation continues to be the focus of monetary policy by the CBL. Given the limited tools for monetary policy, the required reserve ratio and the weekly foreign exchange auction remain the key instruments used to influence the level of domestic liquidity. The probable introduction of a treasury bills market in 2011 will broaden the scope of policy instruments available to the CBL for the conduct of monetary policy.

The CBL will continue to intervene in the foreign exchange market in order to maintain broad exchange rate stability. In this regard, a liquidity monitoring framework has been developed to inform decision making relative to the level of intervention in the foreign exchange market. This framework also provides the basis for liquidity forecasting. Accordingly, continued efforts will be made by the CBL towards improving its forecasting capability.

Financial Sector Policy

The banking industry in Liberia continues to exhibit signs of resilience to the effects of the financial crisis evidenced by the growth in assets, capital and reserves. Furthermore, there were positive developments with respect to ensuring stability and protecting the integrity of the banking sector through more robust regulation and supervision; enhancing the operating environment; and improving transparency and disclosure of financial information. However, non-performing loans (NPLs) as a ratio of gross loans continued to increase and stood at 28.5 percent at end-February 2011. The growth in NPLs remains one of the key challenges in the banking sector, impeding on the profitability of the industry and posing a potential threat to continued lending to the private sector. In view of these, the CBL has intensified on-site credit examinations and has encouraged commercial banks to improve risk management systems. This, coupled with the establishment of a special commercial court to ensure timely adjudication of commercial contracts and the new commercial code, will improve the credit environment and culture in Liberia.

The CBL has amended its existing directive on display of interest rates and computation of lending rates to promote greater disclosure by commercial banks to protect customers. This requirement is intended for banks to display lending and deposit rates at conspicuous locations within their premises in order to provide customers with adequate information to enable them to make the right decision on the cost of borrowing and savings.

Finally, to promote the provision of financial lease services in Liberia, the CBL in collaboration with the International Finance Corporation (IFC), hosted two workshops in February and March, 2011 with the objective to develop the skills required by commercial banks’ staff and CBL to carry out finance lease activities. Against this development, the CBL promulgated a finance lease regulation to provide the general framework for banks to engage in this activity. This type of lending will allow banks to directly finance the purchase of needed equipment and working capital critical to the development of the SME sector and help support the country’s reconstruction.

Debt Management Policy

Though the attainment of HIPC completion point presents borrowing opportunities for Liberia, the authorities recognize that it comes with the responsibility to maintain the path of sustainable debt and fiscal prudence. Accordingly, my authorities are mindful that borrowing, and borrowed funds are used principally for critical investment in infrastructure projects that will have a knock on effect of aiding economic growth. Moreover, 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 DMS. In this regard, new debt management software, the Commonwealth Secretariat Debt Recording management system (CSDRMS), will be used to ensure that public debt remains within the acceptable post-HIPC completion debt sustainability threshold.

Structural Reforms

In order to ensure effective implementation of the national budget as well as enhance macroeconomic stability and growth in post-HIPC Liberia, my authorities plan to extend some aspects of the PFM framework to local governments consistent with the PFM action plan and the government’s commitment to future fiscal decentralization. Furthermore, to deepen and broaden the expedited disbursement procedure, the authorities intend to use a data base management system known as Payment Reassurance Real Time Information System (PARIS), to shorten the time between issuance of checks and encashment. PARIS will also connect the Ministry of Finance with CBL and commercial banks to expedite the check clearing process. Additionally, in order to effectively manage risk associated with budget execution with widely fluctuating cash balances, the authorities will commence the full implementation of cash management and liquidity forecasting with the establishment of a Cash Forecasting Unit (CFU) within the Ministry of Finance. The CFU will monitor and report on current balances, project short-and medium-term cash flows and provide forward estimates of the potential demand for cash.

In the financial sector, the CBL has developed a reform agenda for foreign exchange activities in Liberia following a series of consultative meetings with the leadership and members of the Foreign Exchange Bureau Association and other interested parties. The objective is to modernize the activities of the foreign exchange bureau. Part of the reform is the now-completed restructuring of the foreign exchange bureau association to make it more robust and viable. The reform agenda also include: (1) upgrading the existing guidelines for regulating and supervising foreign exchange business; (2) re-licensing of all existing bureau in keeping with the new guidelines and requirements effective May 1, 2011; and (3) the classification of foreign exchange operators into two categories based on minimum deposit requirements and incentive packages. These reforms will be implemented in stages within specified timeframes up to end-January 2012. In addition, the FIRST Initiative has approved a technical assistance package to develop a regulatory and supervisory framework for non-bank financial institutions in Liberia. The assistance will also include hands-on training of CBL staff as well as the development of a capital market.

Conclusion

In conclusion, I wish to reiterate my Liberian authorities’ unwavering commitment to the continuous implementation of prudent economic policies that have led to macroeconomic stability and non-volatile growth, increased FDI flows and debt cancellation. They appreciate the support from the IMF and the international community and count on the continuation of such support to lift Liberia to middle-income status by 2030.