Introduction

My Liberian authorities continue to persevere with sound macroeconomic policies while deepening critical structural reforms, in spite of the difficult external environment and daunting challenges of post-conflict reconstruction. They remain unrelenting in their efforts to transform the economy through increased investment in both infrastructure and social sectors with a view to sustaining growth, creating job opportunities and reducing poverty. Accordingly, efforts to enhance domestic revenue mobilization continue to be strengthened in the face of accelerated development spending. Implementation of their development agenda is, however, severely challenged by dwindling external financing and fiscal space.

My Liberian authorities value the constructive engagement with the IMF and thank staff for their candid policy dialogue and advice under the program. They broadly share the thrust of the staff report as it presents a balanced assessment of recent macroeconomic developments, prospects and policy challenges going forward.

Program performance

My authorities have demonstrated consistent impressive performance in implementing the economic program supported under the Extended Credit Facility (ECF) arrangement since its inception. Program targets have been mostly attained and far-reaching structural measures, ranging from the areas of public financial management, tax administration and policy, debt management to economic governance, have been instituted. The attainment of completion point under the Enhanced HIPC Initiative created some fiscal space for implementing the authorities' development agenda and addressing pervasive poverty.

The authorities remain steadfast in pursuing prudent macroeconomic and structural policies as reflected in the fulfillment of the end-December 2011 program targets. All quantitative performance criteria and indicative targets were met and implementation of the structural reform agenda has broadly remained on course. However, as acknowledged by staff, delays have been experienced in instituting key administrative reforms as a result of the 2011 Presidential and Legislative elections and the formation of a new cabinet early this year. All effort is being made to keep the reform program on track, including fast-tracking the operationalization of the financial oversight unit for state-owned enterprises. In view of the strong performance under the program, the authorities request Directors' support for the completion of eighth and final program review.

Recent economic developments

Following a protracted period of economic contraction on account of the civil conflict exacerbated by a succession of exogenous shocks, the Liberian economy has reverted to a high growth trajectory. To sustain the growth momentum, the authorities have focused their efforts at unleashing the potential of key growth-enhancing sectors of the economy. The rubber sector has been revitalized and foreign direct investment in the mining sector substantially increased.

In view of these developments, the economy is estimated to have expanded by 6.9 percent in 2011 led by the agricultural sector through increased rubber production and the first post-war iron ore export towards the end of 2011.

The global food and fuel price shocks heightened inflationary pressures in 2011. Inflation averaged 8.5 percent in 2011, a percentage point above the preceding year's outturn, reflecting higher prices of imported food items and limited domestic food supply. The exchange rate of the Liberian dollar vis-à-vis the US dollar remained broadly stable and gross international reserves increased. However, the trade deficit widened over the period reflecting the broad-based growth of imports to meet the increased domestic demand as the economy expands.

Medium-term outlook and policies

As the economic recovery entrenches and risks from a double-dip global financial crisis gradually abate, my authorities’ policy focus has shifted towards maintaining growth at high and sustainable levels while pursuing a results-oriented development strategy, albeit within a stable macroeconomic environment. Increased investment in infrastructure and institutions, improved delivery of basic social services, and greater employment opportunities especially for the youths and under-privileged will form centerpiece of this strategy, in line with the authorities’ “Vision 2030 Liberia Rising” expected to transform the country to middle income status. An immediate policy focus will be on expanding electricity generation in order to support manufacturing industries and promote private sector development with a view to sustaining growth. Medium-term macroeconomic policies will be anchored on the second poverty reduction strategy (PRS2) currently being subjected to public consultations. Against this backdrop, the medium-term economic outlook is expected to be favorable, with growth projected at 9.5 percent in real terms in 2012 while averaging 6.5 percent over the horizon. Inflation is expected to remain in single digits around 7 percent in 2012, declining to 4 percent by 2014. Gross official reserves are projected to fall to around 2.5 months of imports of goods and services by the end of 2014, with the exchange rate maintaining its relative stability over the period.

Fiscal policy

My authorities remain committed to strengthening fiscal management with a view to creating the fiscal space needed to implement the country's development agenda. To that end, the upcoming 2012/13 budget is being prepared within the context of a Medium-Term Expenditure Framework (MTFF) that seeks to better align policy and development priorities with the resource envelope. The budget is expected to be predicated on fiscal rules that guide domestic and external public borrowing and the allocation of resources. Containing discretionary current spending and growth of the public payroll will constitute a critical part of the fiscal strategy going forward. In addition, efforts will be made to further strengthen public financial management through the introduction of a Public Expenditure Tracking System (PETS). On the revenue side, far-reaching tax policy and administration reforms will be instituted aimed at improving efficiency in revenue collection.

Monetary policy

Over the medium term, monetary policy will continue to focus on achieving broad exchange rate stability with the ultimate goal of maintaining price stability. Given the extensive dollarization of the economy, the Central Bank of Liberia (CBL) will, in the near term, continue to use the foreign exchange auction as the primary policy instrument to influence domestic monetary conditions. Going forward, efforts will be made to broaden the array of monetary policy instruments at the Bank's disposal to help enhance the efficacy of monetary policy. With the operational framework for treasury securities trading already developed, operationalization of the treasury bills market will be a strategic objective of the CBL aimed at improving domestic liquidity management.

Financial sector policy

The financial sector will continue to serve as a conduit through which the overarching objectives of sustained economic growth, broad-based development, and poverty reduction will be achieved. Importantly, the authorities will seek to examine how best the financial sector can support development. To help preserve the stability of the sector, the CBL will further strengthen its supervisory capacity, including through the rollout of risk-based supervision to the entire banking system. Efforts will be made to minimize the huge portfolio of non-performing loans (NPLs) which have undermined bank profitability and constrained private sector lending. In addition to the establishment of a special court to ensure timely adjudication of commercial contracts, on-site credit examinations will be stepped up and banks' risk management systems further reinforced. In keeping with its commitment to enhance and promote financial inclusion in Liberia, the CBL will continue to encourage increased competition and expansion in bank branches across the country to support access to banking services and products. Furthermore, to enhance the efficient functioning of the financial system, the CBL will strengthen its collaboration with the West African Monetary Zone to modernize the national payment system in line with international standards.

Debt management policy

In this post HIPC era, my authorities are determined to judiciously manage new borrowing in order to maintain a sustainable debt profile while, at the same time, responding to the country’s urgent development financing needs. In view of this, the authorities plan to abide by the fiscal rules guiding borrowing, by ensuring that all borrowing are undertaken for the purpose of investment, consistent with the public sector investment plan; total debt stock must not exceed 60 percent of the given year’s GDP as contained in the Public Financial Management regulation; and that prior to undertaking new borrowing, a debt sustainability analysis is carried out and presented to the debt management committee to ensure debt rules are not breached. The authorities will continue to strengthen debt management capacity, while seeking external support for developing a robust medium-term public debt strategy. In the meantime, all efforts will be made to ensure that loans contracted are mostly highly concessional consistent with the Fund's concessionality threshold.

Conclusion

The authorities appreciate the critical role of the ECF program in providing policy guidance in rebuilding technical capacity and state institutions, strengthening economic governance, and helping the economy revert to a high growth trajectory. They remain steadfast in implementing sound policies geared towards maintaining a stable macroeconomic environment and creating conditions conducive to fostering inclusive growth and poverty reduction. To this end, they are committed to maintaining their policy engagement with the Fund to help strengthen domestic revenue mobilization while catalyzing external financial resources in support of the country's development agenda. My authorities are considering a successor ECF program and are already in discussion with staff.

My authorities consider the Fund’s and other development partners' policy advice and financial assistance crucial to actualizing the country's Vision 2030 and improving the living conditions of all Liberians. It is against this backdrop that they solicit the Executive Board’s support in completing the eighth and final review of the current ECF arrangement.