Liberia: Third Review Under the Extended Credit Facility Arrangement and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria
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International Monetary Fund. African Dept.
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Publication Date:
11 Jul 2014
eISBN:
9781498354660
Language:
English
Keywords:
ISCR; CR; debt; real GDP; GDP; loan; revenue shortfall; government US$; CBL official; budget data; US$ million; Imports; Public investment spending
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This paper focuses on Liberia’s Third Review Under the Extended Credit Facility (ECF) Arrangement and Request for Waiver of Nonobservance of Performance Criterion (PC) and Modification of Performance Criteria. Real GDP grew at 8.7 percent in 2013 and is projected to decline to 5.9 percent in 2014 as mining production decelerates. Most end-December 2013 PCs and indicative targets (ITs) were met, except for the PC on government revenue and the IT on external borrowing. Four out of five structural benchmarks were met on time. The IMF staff supports the completion of the third ECF review.

Abstract

This paper focuses on Liberia’s Third Review Under the Extended Credit Facility (ECF) Arrangement and Request for Waiver of Nonobservance of Performance Criterion (PC) and Modification of Performance Criteria. Real GDP grew at 8.7 percent in 2013 and is projected to decline to 5.9 percent in 2014 as mining production decelerates. Most end-December 2013 PCs and indicative targets (ITs) were met, except for the PC on government revenue and the IT on external borrowing. Four out of five structural benchmarks were met on time. The IMF staff supports the completion of the third ECF review.

Recent Developments

1. Liberia’s achievements since the end of the conflict are impressive, although significant challenges remain. Notably, over the past decade, peace has been maintained and institutions re-built, iron-ore exports have resumed, and the rehabilitation of key infrastructure is under way. Although admittedly starting from a low base, Liberia shows the largest improvement in its CPIA rating among fragile sub-Saharan African countries (Text Chart 1). Nonetheless, Liberia remains a fragile country with significant capacity constraints and governance challenges. Pushing ahead with ongoing reforms is imperative to consolidate past gains and improve resilience.

Text Chart 1.
Text Chart 1.

Liberia: Improvement in Policy and Institutional Capacity

(Changes in average CPIA score from 1992-2001 to 2009-2012)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: World Bank and IMF staff calculations.

2. Security risks remain contained, but politics increasingly weigh in on economic policy. The UNMIL drawdown is proceeding as planned though the buildup in local police presence has been slow owing to budgetary constraints. Disputes among parliamentarians over the budget’s composition ahead of the October’s legislative elections could delay its approval. Recent amendments to the Central Bank of Liberia (CBL) Act prevent CBL officials to run for office for three years after stepping down and remove the CBL’s delegated authority to issue currency, which could interfere with its ability to conduct monetary policy.

3. Output continues to expand (Table 1). Economic growth reached 8.7 percent in 2013 owing to larger iron-ore production, while weak activity in the rubber and forestry sectors dampened non-mining growth. Inflation increased to 9.8 percent at end-April 2014, reflecting the pass-through from the 20.7 percent currency depreciation since December 2012. The real effective exchange rate depreciated by 6.6 percent in 2013, only partly reversing the previous years’ strong appreciation trend.

Table 1.

Liberia: Selected Economic and Financial Indicators, 2012–17

article image
Sources: Liberian authorities and IMF staff estimates and projections.

In months of next year’s imports excluding imports related to UNMIL operations and FDI projects such as iron-ore concessions.

Budget data expressed as fiscal year ending in June on a cash basis, i.e., 2012 = FY2011/12.

4. Revenue shortfalls have constrained budget execution. As of end-March 2014, current and on-budget capital spending have remained contained to cover previous years’ spending overruns and address a 0.7 percent of GDP revenue shortfall. Credit-financed investment increased, mostly reflecting the start of the hydro-power plant rehabilitation (Text table 1).

Text Table 1.

Liberia: Central Government Operations

(Percent of GDP)

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Source: Ministry of Finance and IMF staff

5. The current account deficit widened in 2013 (Table 2). Although lower capital goods imports contributed to tighten the trade balance, the contraction in remittances and net income led to a widening of the current account deficit. Reserves coverage declined to 2.7 months of essential imports.

Table 2.

Liberia: Balance of Payments, 2012–17

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: Liberian authorities and IMF staff estimates and projections.

Includes SDR holdings.

Recorded in fiscal years.

In months of next year’s imports excluding imports related to UNMIL operations and FDI projects such as iron-ore concessions.

6. Private credit expanded but bank profitability remains low (Tables 3 and 4). Private sector credit grew by 28 percent at end-March (y/y) (Text Chart 2).1 Although liquidity declined in line with credit growth, banks remain adequately capitalized and liquid. Nonperforming loans declined to 14.5 percent, owing to increased debt collection efforts, but high operational costs continue to depress bank profitability. Banking supervision is being strengthened, notably with the introduction of risk-based supervision.

Table 3.

Liberia: Monetary Survey, 2012–15

(Millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Liberian authorities and IMF staff estimates and projections.

Net foreign exchange position is evaluated at the program exchange rates, instead of the current market exchange rates, and therefore, valuation adjusments are shown separately.

Table 4.

Liberia: Financial Soundness Indicators, 2011–March 2014

(Percent)

article image
Sources: Liberian authorities and IMF staff estimates.

There is a structural break in this data series in December 2012, due to the reclassification of some accounts.

Text Chart 2.
Text Chart 2.

Credit to the Private Sector

(12 month percent changes, unless specified otherwise)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Central Bankof Liberia and IMF staff calculations.

7. Most third review PCs and ITs have been met, and progress is being made towards the fourth review targets (MEFP, Tables 1, 2, 3).

  • Six out of ten indicative targets for end-September 2013 were met. The missed ITs include the floor on revenue collection of the central government and the floor on CBL’s net foreign exchange position.

  • Regarding end-December 2013 targets, the floor on central government revenue was missed by US$15.8 million (0.7 percent of GDP) due to changes in the income tax reporting base from presumptive to actual, legal issues in the forestry sector and lower imports. In response, the authorities reversed the income tax measure in October 2013 (which became effective in January 2014 due to quarterly reporting) and launched a plan to tackle tax evasion and smuggling.

  • The ceiling on gross external borrowing by the public sector was missed by US$32.7 million reflecting newly-ratified loans for priority infrastructure projects. As the terms of the new borrowing are highly concessional, debt sustainability would not be compromised.

  • External budget support fell short by US$22.2 million, due in part to late ratification by the Legislature of a budget support loan and delays in meeting disbursement benchmarks by the Ministry of Education. This triggered the program adjustor for the PCs on CBL’s net reserves and direct financing to the government, though the authorities met the unadjusted reserves target. Budget support grants are projected to materialize by June 2014.

  • Four out of five SBs were met on time. The daily sweeping of government accounts at CBL (remaining SB) became effective on February 2014 (MEFP, Table 2).

  • As of end-March 2014, seven out of the ten ITs have been met, including the floor on CBL’s net foreign exchange position reflecting the return to the CBL of maturing placements (MEFP, Table 1).

  • The end-March 2014 SB on the payroll cleanup was met, allowing the removal of 4,000 ghost workers. However, the insurance law has yet to be submitted to Parliament (end-March benchmark). Remaining end-June benchmarks appear on track to be met, with the exception of the publication of revised national accounts.2

Policy Discussions

A. Outlook and Risks

8. The economic outlook is favorable, but with significant downside risks (Text Table 2). Growth is projected to decline to 5.9 percent in 2014 as mining production decelerates, but should average 8 percent over the medium term provided iron-ore projects progress as planned and non-mining activities—agriculture, construction and services—pick up. On the upside, new iron-ore production coming on stream earlier than anticipated could boost medium-term growth. The authorities also indicated that the outlook for 2014 and beyond could be more favorable owing to recent measures to expand agricultural production and address bottlenecks in the forestry sector. The main downside risks to the outlook stem from (i) the October legislative elections which could delay approval of the FY2015 budget; (ii) delays in public investment reflecting a tighter budget; and (iii) further declines in rubber and iron-ore prices (MEFP ¶2).

Text Table 2.

Liberia: Medium-Term Outlook, 2012–17

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Sources: Liberian authorities and IMF staff estimates and projections.

Budget data expressed as fiscal year ending in June on a cash basis, i.e., 2012 = FY2011/12.

Excludes UNMIL service and iron-ore concessions related imports, but includes IMF disbursements under the requested ECF.

B. Addressing Fiscal Challenges

9. Substantial revenue shortfalls and off-budget commitments compromise the credibility of the budget and the authorities’ ability to implement their development agenda. Significant progress towards building sound fiscal institutions has been made so far. Recent achievements include closer monitoring of State-Owned Enterprises’ performance, the establishment of a Treasury Single Account (in its final stages), and the payroll cleanup, which is expected to yield medium-term savings amounting to about 0.5 percent of GDP on the wage bill. However, remaining capacity constraints and institutional weaknesses hamper effective tax administration and public financial management, and threaten hard-won macroeconomic stability gains. In this context, fiscal policy discussions focused on measures to strengthen tax and expenditure controls, as well as oversight of the public investment program, which would be supported by targeted Fund technical assistance.

10. The authorities agreed that additional measures would be necessary to address the revenue shortfalls. The administrative measures implemented earlier in the year to tackle tax evasion and smuggling helped improve collection but did not suffice to compensate for the revenue loss. Weak tax compliance by foreign concession companies and state entities has led to further underperformance. As a result, staff’s revised projections indicate that end-June revenue (excluding grants) could fall short of the US$492 million revenue floor by as much as US$20–30 million (1–1½ percent of GDP). The authorities emphasized that they were committed to improve revenue performance. They agreed with staff that strictly enforcing provisions in existing concession agreements and collecting all fees and dividends owed by state entities could yield about US$11.5 million or 0.6 percent of GDP in one-off additional revenue (MEFP ¶8). Staff also highlighted that ensuring the integrity of the taxpayer registry and the implementation of tax controls would be an important objective for the new Liberia Revenue Authority (LRA). In that regard, staff urged the authorities to ensure an on-time start of LRA operations on July 1st.

11. Recently-uncovered unfunded government liabilities underscore weaknesses in budget planning and monitoring, as well as low compliance with the public financial management and procurement laws. The authorities recently identified unfunded spending commitments on road projects awarded to private construction companies totaling US$73.9 million (3.8 percent of GDP). These commitments correspond to a list of 51 ongoing projects, amounting to US$146.5 million (7.5 percent of GDP), which were initiated between FY2010 and FY2013. The authorities indicated that most of these projects were initiated on-budget, and that they made partial payments for completed works in previous fiscal years. However, weak budgeting capacity and inadequate coordination, both within the Ministry of Finance and the Ministry of Public Works (MPW), partly account for the failure to adequately budget for multi-year projects. It also appears that some projects were initiated outside the budget, on the basis of “Letters to Proceed” signed by former MPW officials. Most of these projects did not comply with all the required procurement procedures (MEFP ¶9).3

12. The authorities are implementing strong corrective actions to address these shortcomings. The President mandated the General Auditing Commission (GAC) to conduct an external financial audit of these contracts, which has been initiated, and to review contracting practices in key line ministries (prior action). The GAC is finalizing its regular audit of MPW for FY2010–12 and will communicate its findings to Fund staff. The authorities concurred with staff that no further payments would be made until the legality of remaining claims had been verified by these audits. In parallel, the Office of the President is putting together a technical commission to look into the legal, financial and technical aspects of selected road projects and propose remedial measures.4 The Minister of Finance has issued a statement reminding state entities and the public of the legal requirements for government contracts to avoid the recurrence of unfunded liabilities. Pending the completion of the financial and technical audits, the authorities have included a provision of US$17 million for ongoing road projects and road maintenance in the FY2015 budget. If the provision proves to be insufficient, the authorities plan to identify additional savings on non-priority spending to accommodate additional road payments and submit a supplementary budget to parliament. Once verified, amounts outstanding will be brought on budget in subsequent years as the projects are being completed (MEFP ¶10).

13. The revenue shortfalls and extra-budgetary demands further compress an already-tight spending envelope. Consistently with the available financing envelope, the authorities are reducing spending beyond the savings needed to cover last year’s overruns. The payroll clean-up, together with cuts in special allowances and non-priority transfers to government agencies, will help generate additional savings (of up to 1½ percent of GDP) and keep the end-June fiscal deficit at 3.8 percent of GDP as envisaged at the time of the second ECF review (MEFP ¶7).

14. The draft FY2015 budget prioritizes ongoing infrastructure projects in line with the Agenda for Transformation. Staff welcomed the inclusion in the budget, for the first time, of externally-financed projects, which will facilitate the monitoring of the overall public investment program. Core revenues are projected to increase by 6 percent in nominal terms compared with the estimated outturn for FY2014. The fiscal deficit will widen to 7.1 percent of GDP, financed by higher external disbursements for priority infrastructure projects (Box 1). The authorities agreed that key challenges will be to avoid the budget’s capture by political interests ahead of the October legislative elections and to ensure its timely approval by the Legislature (MEFP ¶13).

15. Additional structural measures to strengthen public financial management are being implemented, supported by Fund technical assistance. The authorities are strengthening oversight of investment projects. A database of all investment projects will be prepared by end-December 2014 and, starting with the FY2016 budget, a list of all ongoing projects for which multi-year allocations are required will be included in the draft budget to ensure adequate funding (new end-December structural benchmarks) (MEFP ¶11, Table 4). The budget planning process will allow more time for consultations with Ministries and Agencies (new end-June structural benchmark) (MEFP ¶12, Table 3).

Liberia’s FY2015 Budget

The draft FY2015 budget envelope seeks to contain current spending, while larger external financing is utilized for priority public infrastructure projects.

  • Core revenue estimates (tax and non-tax) have been revised downwards compared with the 2nd review in light of this year’s underperformance.

  • Lower grants reflect a shift from budget support grants to loans by multilateral development banks.

  • Current spending is reduced in real terms. The lower wage bill is the result of the payroll clean up and a salary freeze. Non-priority spending on goods and services, including on foreign travel, has been reduced.

  • Capital spending would increase to 12.3 percent of GDP, most of which is externally-financed.

  • Priority sectors include transport, energy, and agriculture. Resources for the security sector are increased in line with the UNMIL drawdown.

  • Significant external concessional financing (6.7 percent of GDP) will allow the deficit to expand. Higher disbursements are mostly associated with the hydro-power plant rehabilitation and other infrastructure projects.

  • Domestic financing is gradually increasing in line with the authorities’ debt management strategy.

  • Risks. Pressures from extra-budgetary commitments could re-surface as the US$17 million (0.8 percent of GDP) provision to cover extra-budgetary commitments on road projects may prove insufficient once the financial audit is completed. Deep cuts in operational funding for ministries and agencies may not prove sustainable.

Box 1 Table1.

Liberia: FY2015 Budget

(Percent of GDP)

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Sources: Liberians authorities and IMF staff calculations.

C. Strengthening the Monetary and Exchange Rate Policy Framework

16. The recent depreciation pressures reflect a widening current account deficit and weak Liberian dollar liquidity management. Staff and the authorities agreed that the depreciation is mainly driven by a widening current account deficit in the context of the scaling up of public investment and the development of large mining projects. However, weak coordination between fiscal and monetary policy, including significant net injections of Liberian dollars in the earlier part of 2013 and reduced foreign exchange sales in the second half of the year, may have exacerbated the depreciation pressures (Figure 3). In turn, the exchange rate depreciation has led to higher inflation. Staff estimates that the pass-through ranges from 46 to 76 percent after one year (Appendix II, MEFP ¶16).

Figure 1.
Figure 1.

Liberia: Recent Economic Developments

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Liberian authorities and IMF staff estimates and projections.
Figure 2.
Figure 2.

Liberia: External Sector Developments

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Liberian authorities, World Economic Forum, and IMF staff estimates and calculations.
Figure 3.
Figure 3.

Liberia: Foreign Exchange Developments

(US$ Millions, unless otherwise indicated)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Liberian authorities and IMF staff estimates and projections.

17. Further strengthening liquidity management would help mitigate depreciation pressures and contain inflation. The authorities agreed to enhance coordination between the Ministry of Finance (MoF) and CBL, through regular meetings of the Liquidity Monitoring Committee to better control the Liberian dollar money supply (MEFP ¶17). The authorities also agreed to pursue ongoing efforts to collect more revenue in Liberian dollars (Text Chart 3). The CBL reduced the reserve requirements for U.S. dollar deposits from 22 to 15 percent at end-April, which temporarily alleviated depreciation pressures. Staff urged the authorities to unify the requirements for both Liberian and U.S. dollar deposits as soon as possible while sterilizing the impact on the Liberian dollar money supply (MEFP ¶18). Finally, staff and the authorities agreed that it would be important to continue to develop monetary policy instruments. In this regard, staff welcomed the CBL’s plans to establish a discount window by mid-2014 to develop an inter-bank market. Once money markets are more developed, staff noted that the objective would be to use exclusively T-bills for raising fiscal resources, as well as for liquidity management operations of the CBL, including through securitizing part of the government’s debt at the CBL.

Text Chart 3.
Text Chart 3.

Revenue and Expenditure in Local Currency

(US$ millions, Quarterly)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Liberian authorities and IMF staff calculations.

18. The authorities remain committed to maintaining an adequate reserve buffer. The CBL has refrained from financing new credit stimulus initiatives, and funds from maturing placements have been returned to reserves.5 A significant increase in CBL’s foreign exchange intervention in January was scaled back shortly to preserve net foreign reserves. Staff and the authorities agreed that intervention should be limited to smoothing excessive exchange rate volatility. At the same time, staff agreed with the authorities that a more gradual pace of reserves accumulation than envisaged previously, in line with the projected government’s U.S. dollar sales, would be more realistic and remain consistent with the end-December program target of 2.8 months of imports (MEFP ¶18).

19. The authorities continue to implement measures to improve access to finance. A revised commercial code, which provides a framework for bankruptcy and debt settlement and will strengthen the commercial court’s effectiveness, has been submitted to parliament. Other measures include ongoing progress with the credit reference system and a collateral registry, and the payments system reform. The CBL is also actively promoting mobile banking and rural finance (MEFP ¶19).

D. Addressing Development Needs While Maintaining Debt Sustainability

20. The pace of new borrowing has accelerated over the past year. Ratified loans since July 2012 reached US$377 million as of end-December 2013, with another US$228 million pending ratification and a US$60 million package under negotiation for the rehabilitation of the international airport’s runway (MEFP, Text Table 3). As the terms of the new borrowing are highly concessional, the average annual present value of newly-contracted debt would rise from 4 percent of GDP as envisaged under the program to 5.3 percent of GDP over 2012–15. Disbursements have been slow, however, owing to the long ratification process and project implementation bottlenecks.

21. The DSA update indicates that debt would remain sustainable. The risk of debt distress remains low, even under the assumption that all the available financing, including about US$416 million included in the multilateral development banks’ pipeline, is disbursed within the next 8 years. Therefore, staff’s view is that the increase in external borrowing, focused on infrastructure projects critical to addressing the country’s binding growth constraints, remains consistent with debt sustainability. However, maintaining the same pace of borrowing over 2016–18 would tilt the risk of debt distress from “low” to “medium”.

22. New financing operations ought to carefully balance development needs and medium-term debt sustainability. Staff and the authorities concurred that the current project portfolio should have high economic and social returns as it targets binding growth constraints. However, staff highlighted that the fast borrowing pace cannot be the norm for the medium term, and urged the authorities to conduct rigorous cost-benefit analysis of new projects and ensure their prioritization and sequencing. The recently-adopted medium-term debt management strategy (MTDS) indicates that all new borrowing should be exclusively dedicated to fund priority investments, and that highly concessional terms should be sought to minimize associated costs and risks.

23. Natural resources revenue could open up additional fiscal space to address Liberia’s development challenges, provided that they are sustainably managed. Mining revenue is projected to amount to about 2 percent of GDP or 8 percent of revenue over the medium term, but with strong upside potential from new mining projects and, potentially, oil production if commercially-viable deposits are found. Staff supports the authorities’ plans to set up a legal framework to manage resource wealth and noted that a fiscal rule could help smooth spending while addressing uncertain and volatile mining revenue.

Program Monitoring and Risks

24. Staff supports the authorities’ request for a waiver of nonobservance and modifications of program targets. Regarding the missed revenue PC, the authorities have implemented prompt corrective actions to strengthen revenue collection and tax compliance has improved, though the income tax loss could not be recovered. Staff also supports the authorities’ requests to (i) lower the floor on net foreign exchange position for end-June from US$253 to US$245 million to smooth the reserve accumulation path; and (ii) increase the IT on gross external borrowing of the public sector for FY2014 to US$265 million to accommodate the most pressing infrastructure needs while maintaining debt sustainability. The limit for FY2015 is requested to be set at US$153.2 million. In addition, staff supports the modification of the definition of gross central bank financing to the government, whereby an overdraft would no longer be defined on an account-by-account basis but, rather, on an overall balance basis in light of the ongoing progress towards a Treasury Single Account. Staff and the authorities have also reached understandings on adopting the unified discount rate of 5 percent to assess the concessionality of external borrowing.

25. The authorities have adopted strong corrective measures to strengthen public financial management (PFM) and enhance the credibility of the budget. The financial audits of MPW and of the road contracts should allow proper vetting of future payments on these contracts. The broader review of contracting procedures in line Ministries would help identify and address remaining weaknesses in the procurement process. The authorities are also committed to strengthening the budget process and, in particular, oversight of the public investment program. Staff will closely monitor progress with those measures, in particular the completion of the audits and follow-up on their recommendations.

26. Program risks have increased. Budget execution challenges combined with rising inflation could jeopardize macroeconomic stability and social cohesion. The proposed measures to strengthen the budget process and domestic liquidity management would help mitigate these risks, provided they are forcefully implemented.

Staff Appraisal

27. Liberia’s economy grew strongly in 2013 and the outlook is positive, but not without risks. Higher public investment and new mining projects will drive medium-term growth. Downside risks include further declines in iron ore and rubber prices, and delays in budget approval associated with the October legislative elections, which would also delay public investment projects.

28. Program performance remains mixed. Significant revenue shortfalls and extra-budgetary commitments underscore serious capacity constraints and institutional weaknesses that ought to be decisively addressed to preserve the credibility of the budget and the ability of the authorities to deliver on their development agenda.

29. Tax administration ought to be strengthened to address poor compliance, including by public entities. Enforcing tax controls and collecting fees and dividends owed by state entities should be pursued resolutely. Staff urges the authorities to ensure an on-time start of LRA operations, which would be essential to begin addressing weak compliance and strengthen revenue administration.

30. The authorities are taking resolute steps to improve public financial management. Once completed, the financial audit of extra-budgetary commitments and review of contracting procedures in key Ministries should help prevent the recurrence of unfunded spending liabilities. Staff urges the authorities to ensure that the audits are promptly completed, their results published and their recommendations implemented. Other measures aiming at ensuring strict enforcement of the public financial management and procurement laws, as well as enhanced oversight of the public investment program, should also be forcefully executed.

31. The realistic revenue envelope of the draft FY2015 budget should facilitate its implementation. Contained current spending and larger external financing support priority public infrastructure projects which, once completed, would have transformative impacts on the economy. However, timely approval of the budget will be critical to ensure its effective implementation. Staff welcomes the authorities’ commitment to transparently address fiscal risks stemming from the off-budget liabilities.

32. More effective liquidity management would help contain inflation. Changing fundamentals, including a widening current account deficit, have contributed to the exchange rate depreciation. Nonetheless, enhanced coordination between the Ministry of Finance and the CBL is needed to better control the Liberian dollar money supply. While the recent reduction of reserve requirements for U.S. dollar deposits is welcome, staff urges the authorities to unify the requirements for both Liberian and U.S. dollar deposits as soon as possible. Staff supports the authorities’ plans to further develop domestic monetary policy instruments.

33. Balancing development needs with absorptive capacity is critical to maintaining debt sustainability. The recent fast pace of debt accumulation needs to moderate to ensure that debt remains sustainable. The authorities should prioritize financing on the most concessional terms and conduct cost-benefit analysis of new projects to ensure proper prioritization and in line with absorptive capacity. Staff welcomes the adoption of the new medium-term debt management strategy, which will help guide borrowing decisions.

34. Staff supports the completion of the third ECF review given the program performance and the strength of the authorities’ policy commitments. Staff recommends approval of the waiver and modification of program targets as requested by the authorities.

Figure 4.
Figure 4.

Liberia: Monetary and Financial Developments

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Liberian authorities and IMF staff estimates and projections.
Figure 5.
Figure 5.

Liberia: Medium-Term Outlook, 2012–19

(Percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Liberian authorities and IMF staff estimates and projections.
Figure 6.
Figure 6.

Liberia: Medium-Term Fiscal Outlook, FY2012–19

(Percent of GDP)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Liberian authorities and IMF staff estimates and projections.
Table 5.

Liberia: Medium-Term Outlook, 2012–19

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Sources: Liberian authorities and IMF staff estimates and projections.

Chained weighted sectoral average growth rate.

In months of next year’s imports excluding imports related to UNMIL operations and FDI projects such as iron-ore concessions.

Table 6a.

Liberia: Fiscal Operations of the Central Government, FY2012–171

(Millions of U.S. dollars)

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Sources: Liberian authorities and IMF staff estimates and projections.

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

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget, grant-financed expenditure.

Includes debt to IMF.

Includes central government debt to the Central Bank of Liberia (which is excluded from domestic debt in the debt sustainability analysis).

Basic balance is defined as (total revenue and grants minus project grants) minus (total expenditure minus foreign and domestically financed investment spending).

Table 6b.

Liberia: Fiscal Operations of the Central Government, FY2012–171

(Percent of GDP)

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Sources: Liberian authorities and IMF staff estimates and projections.

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

Approximately 50 percent of on-budget loan-financed capital expenditure substitutes for hitherto off-budget, grant-financed expenditure.

Includes debt to IMF.

Includes central government debt to the Central Bank of Liberia (which is excluded from domestic debt in the debt sustainability analysis).

Basic balance is defined as (total revenue and grants minus project grants) minus (total expenditure minus foreign and domestically financed investment spending).

Table 7.

Liberia: Schedule of Disbursements Under the ECF Arrangements, 2012–15

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Source: IMF staff estimates.

With respect to completed review, the date indicated refers to the date of the Executive Board meeting.

In addition to the conditions that normally apply to an ECF arrangement.

Appendix I. Letter of Intent

Monrovia, June 17, 2014

Madame Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C.

Dear Madame Lagarde,

The attached Memorandum of Economic and Financial Policies (MEFP) outlines the implementation of Liberia’s economic program supported by the Extended Credit Facility (ECF) through March 31, 2014, and summarizes recent economic and financial policy actions and the government of Liberia’s commitment for the rest of 2014 and for 2015. The government remains fully committed to meeting the objectives of the program, as well as the specific targets set out in the MEFP.

Liberia continues to make good progress in implementing its ECF-supported economic program aimed at supporting prudent macroeconomic policies and structural reforms that underlie the government’s Agenda for Transformation and Liberia Rising 2030. Economic growth was strong in 2013 and the outlook for 2014 is positive. We are confident that the benefits of our economic strategy will become increasingly evident over time, as a more stable macroeconomic environment, well-developed fiscal institutions, and improved business climate will attract new investments and result in durable job creation and increased prosperity.

Program performance has improved relative to the last review despite a number of challenges. We met five out of the six performance criteria (PC), and are requesting a waiver for one missed PC—the floor on revenue collection. The revenue floor was missed due to a change in the income tax reporting base, which has since been reversed; the ongoing moratorium in the forestry sector; and the late approval of the budget. To offset these losses, we have put in place an aggressive plan to curb tax evasion. Most indicative targets (IT) have been met, with the exception of the IT on external borrowing as we were able to secure additional concessional financing for priority infrastructure projects. We met four out of five structural benchmarks (SB) for the third review, implementing with a minor delay the daily sweeping of government accounts. We are making solid progress towards the end-June 2014 SBs and have already completed the cleanup of the payroll, which allowed us to remove 4,000 ghost workers from the payroll.

Fiscal performance through end-December 2013 has been broadly in line with program objectives. Current and on-budget capital spending has been contained owing to fiscal consolidation measures adopted by the government to cover the previous years’ expenditure overruns and revenue shortfalls. We have implemented additional measures to improve revenue collection, including by collecting fees and dividends owed by state entities and ensuring tax compliance by concession companies. Our budget for FY2015 focuses on reducing current spending to prioritize transformative public investments in key areas including energy, roads, ports, security, technology, health, and education.

We remain committed to continue to strengthen the budget process and improve public financial management. During the course of the fiscal year it became apparent that the Ministry of Public Works (MPW) had committed to a number of road contracts with vendors without there being the necessary budgetary allocations. The Ministry of Finance is now working with MPW, the General Auditing Commission (GAC) as well as a technical committee that was instituted by the President, to investigate the issue and, where appropriate, make payments to vendors.

In particular, the President has authorized the GAC to conduct a full financial audit of the extra-budgetary commitments for road projects at the Ministry of Public Works, and the GAC has initiated its audit (prior action). The GAC is finalizing a full financial audit of the MPW for FY2010–FY2012, and its recommendations will be communicated to Fund staff. No further payments will be made on any road contracts until both these audits are completed. The Minister of Finance has also mandated the GAC to review contracting and procurement practices in other key Ministries (prior action). The technical committee established by the President will comprise a group of civil engineers reporting to the chairman of the Senate’s Public Works Committee, and will verify that the work performed was in accordance with the contract terms.

To avoid the recurrence of unfunded liabilities, we have published an official release from the Minister of Finance reminding all stakeholders that all government contracts ought to comply with the Public Finance Management Law and its accompanying Regulations, as well as with the Public Procurement and Concession Act and must have corresponding budgetary appropriations.

To improve coordination with Ministries and Agencies (M&As) during the budget process, we will ensure that, each year, all ongoing projects are reviewed by the Project Management Office (PMO) to advise on the performance of the projects and justification for continued funding. New projects will only be funded after adequate allocations are made for existing projects. By end-June 2014, we will publish the FY2016 budget calendar which will, inter alia, ensure that discussions of the strategic orientations of the budget between the Ministry of Finance and M&As take place before the end of December 2014 (end-June 2014 structural benchmark). The PMO will establish a database of all existing government investments which clearly identifies ongoing projects (end-December 2014 benchmark).

On the basis of the performance registered in implementing the economic program and of the strength of our future policy commitments we request that the third review under the ECF arrangement be completed and the fourth disbursement in the amount of SDR 7.382 million be approved. In completing the third review, we are requesting a waiver for the nonobservance of the PC on the floor on total revenue collection of the central government, on the basis of the strong corrective measures implemented to boost revenue collection. In addition, the government would like to request modification and approval of PCs and new SBs that have been agreed with Fund’s staff for end-June and end-December 2014. In particular, we request modifications of the floor on foreign reserves for end-June and end-December, the definition of gross central bank financing of the government, and Indicative Target on external borrowing to accommodate additional concessional financing for priority infrastructure projects. Understandings have also been reached regarding changes to the TMU in order to introduce the new uniform discount rate for assessing the concessionality of external borrowing and correct other definitional issues.

We believe that the economic and financial policies set forth in the attached MEFP provide an adequate basis for achieving the objectives and targets of our program, but we will take any additional measures that may become necessary for this purpose in close consultation with IMF staff on the adoption of such measures, and in advance of any revisions to the policies contained in the MEFP. We will provide the Fund with all information necessary to monitor implementation of the program supported by the ECF in a timely manner as outlined in the TMU.

We consent to the publication on the IMF website of this letter, the accompanying MEFP, TMU, and the related staff report for the third review under the ECF.

Sincerely yours,

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Attachments: Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Attachment 1. Memorandum of Economic and Financial Policies of the Government of Liberia for FY2014 and FY2015

Introduction

1. The Government of Liberia remains committed to achieving sustainable and inclusive economic growth and consolidating the country’s macroeconomic stability. This Memorandum of Economic and Financial Policies (MEFP) reviews recent economic developments since the second review and performance under the Extended Credit Facility (ECF) arrangement approved by the IMF Board on November 19, 2012. It also updates macroeconomic policies and targets for the remaining of FY2014 (through June 2014) and for FY2015 (July 2014 to June 2015).

Recent Economic Developments and Outlook

2. Recent economic developments are broadly in line with the program and the short-term outlook is positive.

  • Real GDP growth is estimated at 8.7 percent in 2013. CPI inflation increased to 9.8 percent as of end-April (year-on-year) reflecting the pass-through of a 20.7 percent depreciation of the Liberian dollar since December 2012. GDP growth is projected to decline to 5.9 percent in 2014, as mining production levels off temporarily. However, non-mining GDP is projected to grow by 6.1 percent, driven mainly by increased activity in the construction sector. Inflation is expected to moderate somewhat to 7.7 percent in 2014 as international food and fuel prices decline.

  • Fiscal performance through end-December 2013 has been broadly in line with program objectives, in spite of shortfalls in revenue collection totaling 0.7 percent of GDP. Current and on-budget capital spending remained subdued owing to fiscal consolidation measures adopted by the government to cover the previous years’ expenditure overruns and revenue shortfalls. The overall fiscal deficit is projected to widen to 3.8 percent of GDP in FY2014 as envisaged at the time of the 2nd ECF review.

  • The current account deficit is projected to have widened to 34.7 percent of GDP in 2013 (28 percent in 2012). Capital goods imports slowed down in the second half of 2013 reflecting delays in public investment, but are expected to recover in 2014 as implementation of some large projects continues (e.g., hydro and HFO power-plants). Gross foreign reserves reached 2.7 months of essential imports cover.

  • Monetary and financial conditions remain favorable. Credit to the private sector grew by 28 percent at end-March 2014 (y/y) while nonperforming loans declined to 14.5 percent (from 19.1 percent in September 2013) due to increased efforts for debt recollection. Bank profitability improved gradually but remained low reflecting high operational costs.

  • The main risks to the outlook stem from (i) the October mid-term legislative elections which could complicate discussions of the FY2015 budget; (ii) delays in public investment reflecting a tighter-than-anticipated budget envelope and continued low implementation capacity; and (iii) further declines in international rubber and iron ore prices.

Program Performance

3. Program performance has improved relative to the last review. Five out of the six quantitative performance criteria (PC) and three out of the four indicative targets (IT) under the program through end-December 2013 were met (Table 1).

  • External budget support fell short of programmed amounts by US$22.2 million, due in part to late ratification by the Legislature of a budget support loan, triggering the program adjustor for the PCs on reserves and central bank financing of the government. Nonetheless, we reached the (unadjusted) reserves target without resorting to additional central bank financing, owing to the return to the central bank of maturing term placements in local banks, higher U.S. dollar sales by the government, and lower foreign exchange intervention.

  • The PC on the floor on revenue collection of the central government (core revenues, i.e., excluding contingent revenue and grants), was missed by US$15.8 million or 0.7 percent of GDP. The shortfall was due to a change in the income tax reporting base from presumptive to actual, ongoing legal issues in the forestry sector, and slower than expected domestic economic activity as a result of NGOs’ and UNMIL’s drawdown. In response, we have reversed the income tax measure and launched an aggressive plan aimed at tackling tax evasion and smuggling.

  • The indicative ceiling on gross external borrowing by the public sector was missed by US$32.7 million as the new external borrowing agreements for priority infrastructure projects ratified by the Legislature in the first half of FY2014 amounted to US$150 million. Given that the terms of the new borrowing are favorable, public debt remains on a sustainable path.

  • Six out of ten indicative targets for end-September 2013 were met. The missed ITs include the floor on revenue collection of the central government and the floor on CBL’s net foreign exchange position. As of end-March 2014, seven out of the ten IT have been met, including the floor on the CBL’s net foreign exchange position (Table 1).

Table 1.

Liberia: Quantitative Performance Criteria and Indicative Targets, 2013–14

(Millions of U.S. dollars, unless otherwise indicated)

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Sources: Liberian authorities and IMF staff estimates and projections.

Test dates for performance criteria at end-June 2013, end-December 2013, end-June 2014, and end-December 2014 otherwise indicative targets.

Fiscal targets are cumulative within each fiscal year (July 1-June 30).

Total central government revenue collection includes all tax and non-tax receipt but excludes all contingent revenues and budget support grants.

Includes issuance of treasury bills, domestic loans, advances, and any government debt instrument such as long-term securities issued in the domestic market.

Includes SDR holdings net of ECF liabilities. SDR holdings converted at program exchage rate of 1 SDR=1.5844 US dollar.

The program ceilings for CBL gross credit to government and CBL net domestic assets will be adjusted upward and the program floor on the net foreign exchange position of the CBL will be adjusted downward, by the amount of the difference between actual and programmed external budget support grants and committed budgeted external loan disbursements up to a maximum of US$20 million.

This nominal target is set based on a three-year average annual ceiling in NPV terms.

Includes spending on education, health care, social development services, and energy.

The modification of this PC was requested to include US $14.2 million loan which was signed between the authorities and the Kuwaiti Development Fund for the rehabilitation of Port Greenville. At the time of the First Review the loan did not come into effect. The grant element of the loan is 34 percent (1 percent below the concessionality threshold).

The PC excludes the grants for Mount Coffee executed by the Liberian Electricity Company.

The targets established prior to the 2nd Review.

The targets established at the time of the 2nd Review.

The actual targets based on the automatic adjustors.

4. We have continued to make strides in implementation of our structural reform agenda. Four out of five structural benchmarks (SB) were met on time, and the daily sweeping of the government accounts was implemented with a minor delay (Table 2). We are also making good progress toward the end-June 2014 benchmarks (Table 3):

  • The payroll clean-up process was completed by end-March 2014. About 4,000 ghost workers were permanently removed from the payroll, which will allow for significant savings on the public sector wage bill starting in FY2015.

  • The migration of credit-financed projects onto the government’s Integrated Financial Management Information System (IFMIS) has already commenced, with remaining technical issues expected to be resolved by June 2014.

  • The success of the daily sweeping means that the launch of the pilot phase of the Treasury Single Account (TSA) for the seven largest ministries will be possible for the CBL-based accounts. We have already closed 76 dormant accounts and plan to continue to consolidate accounts with small balances. The government is producing on a monthly basis a report reconciling the government’s financial information with the government’s bank accounts at the CBL, with a view to expanding this to also include accounts held at commercial banks by end-June 2014.

  • We also expect to have published national accounts for the period 2008 to 2013 by end-June 2014, based on the National Accounts Annual Survey.

  • The CBL has prepared and submitted the draft Insurance Act to the Office of the President for onward submission to the Legislature for enactment into law in early January 2014. Efforts are being made to ensure that the Act is submitted to the Legislature in a timely manner.

Table 2.

Liberia: Structural Benchmarks for the Third Review, End-December 2013

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Target dates are indicative only.

Table 3.

Liberia: Structural Benchmarks for the Fourth Review, End-June 2014

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Target dates are indicative only.

Objectives and Economic and Financial Policies for 2014–15

5. The medium term outlook remains favorable, with broadly balanced risks. We estimate that the economy could grow at an annual average of 8 percent over the medium term reflecting the increase in iron-ore activity as new production comes on stream. The scaling-up of production at the Bong and Yekepa mines is now scheduled to start in 2017 and onward, while other iron-ore mining projects could also start production at a similar time. In parallel, non-mining activity is projected to accelerate further in 2015–17, as public investment picks up, the forestry sector recovers, and agricultural productivity increases. The current account deficit is projected to gradually narrow over the medium term reflecting the increase in iron-ore exports and the expected unwinding of the public investment program.

6. The Government has taken decisive measures to remove remaining bottlenecks in the forestry sector and to boost agricultural productivity to support inclusive growth in the non-mining sector. In particular, we have signed memorandums with forestry companies, authorizing them to rehabilitate primary roads in exchange for clearance of their tax arrears. This has allowed forestry companies to commence logging activities and is expected to boost economic activity and revenue collection. A one-stop shop at the Forestry Development Authority (FDA) has been created to reduce export processing time. In addition, about US$36 million in recently-ratified credits are being invested to boost agricultural productivity. Palm oil concessionaires are also expanding their activity, creating thousands of new jobs. The Ministry of Agriculture is working with concessionaires and civil society partners to operationalize out-grower schemes, which will provide training and financing to independent farmers.

A. Fiscal Policy

7. Fiscal policy continues to focus on creating fiscal space for implementation of our Agenda for Transformation (AfT). For the remainder of FY2014, we will continue to contain current spending, through savings in wages and salaries and compression of spending on goods and services. In addition, we will aggressively pursue efforts to compensate for part of the revenue shortfall, including by enforcing collection of taxes and fees owed by individual taxpayers and concession companies. As the result, the overall fiscal deficit for end-June 2014 is projected to remain in line with our initial target of about 3.8 percent of GDP (Text Table 1).

Text Table 1.

Government Sources and Uses of Funds

(million U.S. dollars)

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Source: Ministry of Finance and IMF staff estimates.

8. Additional revenue measures are expected to yield about US$12 million (0.6 percent of GDP) by the end of the fiscal year. We plan to recover an amount of about US$11.5 million in back taxes from the forestry sector, enforcement of concession agreements in the petroleum sector and collection of fees and dividends owed by state entities (Text Table 2). In February 2014, we also adopted a series of measures to enhance tax compliance and reduce smuggling, including:

  • Spot verification of taxpayers to validate their payments. With this action, we expect improvement in collection of taxes on income, goods and services.

  • A major crackdown on delinquent taxpayers, including publishing the list of persons, businesses and public institutions with outstanding tax obligations; and initiating legal proceedings against them to recover taxes;

  • Strengthening enforcement of internal controls at the systems level;

  • Undertaking an anti-smuggling operation, on the customs side, by monitoring of transshipment through the border, and conducting rigorous post clearance audits to close revenue leakages resulting from dishonesty among some tax payers.

Text Table 2.

Measures to Increase Revenues

(million U.S. dollars and percentage of GDP)

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Sources: Ministry of Finance and IMF staff calculations.

Requires collecting US$5 million from back taxes (US$33 million).

Requires enforcing concession agreements with petroleum companies.

Requires information verification.

Requires ensuring M&As transfer fees on a timely basis.

9. We remain committed to continue to strengthen the budget process and to ensure full implementation of the Public Financial Management (PFM) and Procurement and Concessions Acts. During the course of the fiscal year it became apparent that the Ministry of Public Works (MPW) had committed to a number of road contracts with vendors without there being the necessary budgetary allocations. An initial thorough review has identified a list of 43 contracts totaling US$121.8 million, dated between 2010 and 2013, and for which payments of US$72.5 million have already been made out of the current and previous years’ budgets. Out of the total amount outstanding of US$49.2 million, claims on the FY2014 budget for works already completed and verified by the Ministry of Public Works amount to US$19 million. Eight (8) additional civil works road projects totaling US$24.7 million have been identified by the Ministry of Public Works as potential “off-budget exposure” to the Government of Liberia, bringing the total outstanding amount to US$73.9 million.

10. The Government is taking decisive actions to verify outstanding claims and ensure that commitments outside of the budget process do not occur again. In particular:

  1. The public officials responsible for signing some of these contracts at the Ministry of Public Works have been dismissed. The Ministry of Finance is now working with MPW, and General Auditing Commission (GAC) as well as a committee that was instituted by the President, to investigate the issue and, where appropriate, make payments to vendors. The President has authorized the GAC to conduct a full financial audit of the extra-budgetary commitments for road projects at the Ministry of Public Works, and the GAC has initiated its audit (prior action). The GAC is finalizing a full financial audit of the MPW for FY2010–FY2012 and its main recommendations will be communicated to Fund staff. No further payments will be made on any road contracts until both audits are completed.

  2. Similarly, the Minister of Finance has requested the GAC to review contracting practices in other key Ministries, including the Ministry of Education, Ministry of Health, Ministry of Agriculture, Ministry of Lands, Mines, and Energy, and the Ministry of Commerce (prior action). That review will be conducted in the context of the FY2013 audit of these entities and will help us identify the required course of action to ensure and uphold the integrity of our national budget.

  3. The technical committee established by the President will comprise a group of civil engineers reporting to the chairman of the Senate’s Public Works Committee, and will verify that the work performed was in accordance with the contract terms. We have communicated the finalized terms of reference for the technical investigation to Fund staff. However, work on the technical investigation is expected to be delayed as some members of the technical committee are believed to be former employees of MPW and clients of some of the contractors in question. The President is expected to replace them shortly with independent individuals.

  4. In the mid-year fiscal outturn report published on March 27, 2014 and submitted to the Legislature, we have communicated the challenges posed by these extra-budgetary pressures as well as the revenue shortfall and the steps taken by the government to mitigate these pressures. Pending the results of the external evaluations, we have included in the draft FY2015 budget a provision for up to US$17 million to cover payments due under these road projects. If the provision proves to be insufficient, we will identify savings on non-priority spending and submit a supplementary budget to the Legislature. Once verified, remaining amounts outstanding will be brought on budget in subsequent fiscal years as the projects are being completed.

  5. Following discussion with other Ministers, commercial banks and vendors, we published on May 28, 2014 an official release from the Minister of Finance indicating that no contract will constitute a government commitment unless signed by the Minister of Finance, the Minister or head of the relevant agency, and countersigned by the Minister of Justice, as required under the PPCC Act. The letter indicates that any Ministry or Agency, vendor or commercial bank that issues or accepts an invalid contract will be subject to sanctions under section 47 of the PFM Act.

11. We will continue to strengthen the oversight of investment projects and the role of the Project Management Office (PMO). Insufficient time allocated for consultation between Ministries and Agencies (M&As) and the Ministry of Finance has resulted in inadequate budgetary allocations for ongoing projects in the FY2014 budget. To remedy this situation, we will ensure that, each year, all ongoing national priority and sector projects are reviewed by the PMO, in conjunction with the Liberian Development Alliance (LDA) monitoring and evaluation team, to advise on the performance of the projects, any variations in project cost, emerging and potential issues to be addressed, and justification for continued funding. In order to maintain budget discipline, funding for new projects will only be made available after existing projects are allocated sufficiently. Starting with the FY2016 budget, we will attach to the draft budget submitted to the Legislature a list of all ongoing projects for which multi-year allocations will be required to ensure adequate funding for these projects.

12. We are taking first steps to improve the planning environment for the FY2016 budget. By end-June 2014, we will (i) publish the FY2016 budget calendar which will, inter alia, ensure that discussions of the strategic orientations of the budget between the Ministry of Finance and M&As take place before the end of December 2014 (end-June 2014 structural benchmark); and (ii) the PMO, in conjunction with the LDA, will establish a database of all existing government and donor investment which clearly identifies ongoing projects by December 2014 (new structural benchmark).

13. The draft Budget for FY2015 remains fully aligned with our Agenda for Transformation. The resource envelope for the FY2015 budget is estimated at US$694 million which includes a conservative estimate of US$499 million in government core revenue. We plan to reduce current spending, by up to 1.3 percent of GDP, in order to create fiscal space for priority infrastructure projects initiated in FY2014, as well as additional expenditure on the security sector in order to compensate for UNMIL drawdown. For the first time the resource envelope includes the earmarked loans that were previously treated as “off-budget”, i.e., it brings them “on-budget”. Including them as part of the budget PSIP expenditure provides a more accurate fiscal picture, in line with international standards, and better reflects the government’s efforts and resources raised to address development needs (see Text Table 1). To ensure prompt execution, the government will require all M&As to submit cash and procurement plans by the start of the fiscal year for both recurrent and PSIP expenditure (structural benchmark). The Ministry of Finance will release allotments on a quarterly basis once the budget is approved by the Legislature to ensure that the budget can be executed expediently.

B. Structural Fiscal Reforms Agenda

14. We are committed to continue strengthening public financial management. In particular:

  • We will continue to strengthen the budget process with the implementation of the third Medium-Term Expenditure Framework (MTEF) as part of the FY2015 budget. As a result of lessons learned from the first two MTEF budgets, internal coordination in the Ministry of Finance has been improved, with the establishment of a budget working group and prioritization of expenditure items has been enhanced through earlier budget discussions at Cabinet level and the vetting of sector projects by the Project Management Office. In addition, the government will work with the legislature to discuss the priorities for FY2015 in advance of the submission of the draft budget in order to facilitate its timely passage.

  • IFMIS is now operational in 19 M&As, and will be rolled out and operational within 17 additional M&As by end-September 2014, with M&As able to use the system to generate budget execution reports. Government will be financing the rollout and has received PPCC clearance for the contract.

  • The successful implementation of first monthly and now daily sweeping of balances in government accounts at the Central Bank of Liberia (CBL) for key ministries and agencies brings us closer to the effective operation of the Treasury Single Account approach with zero-balance accounts for all ministries and agencies at the Central Bank of Liberia (structural benchmark). The Ministry of Finance and CBL are now meeting on a weekly basis at a technical level to discuss liquidity management and will also commence senior bilateral meetings on a monthly basis (structural benchmark).

  • The government is producing on a monthly basis a report reconciling the government’s financial information with the government’s 5 main bank accounts at the CBL, with a view to expanding this over time to include all government accounts at the CBL and government accounts held at commercial banks.

  • The legislation merging the Ministry of Finance with the Ministry of Planning and Economic Affairs to create the Ministry of Development Planning has been passed by the legislature and the new ministry will be operational from 01 July 2014. Work to establish the skills and competencies needed by staff is ongoing, with redundancy and severance packages to be made available where appropriate.

  • The public sector modernization project, financed jointly by SIDA, the World Bank and USAID, will improve pay and performance management in a number of ministries and strengthen payroll management across the civil service, with a view to retaining well-trained, professional staff, improving organizational productivity, improving payroll control and helping to constrain the wage bill.

  • The Public Accounts Committee commenced the review of a backlog of some 85 audit reports. To date, three public hearings have been performed. The GAC has now commissioned 55 audits in total, of which 9 were audits of the counties, and issued 2 audit reports of ministries and agencies to the legislature and the executive branches of government.

  • The State Owned Enterprises (SOE) Unit has received annual performance reports from all SOEs, including the 8 largest SOEs, for the period up to December 2013. Guidelines for SOEs reporting & accounting standards have been communicated by the Finance Minister and adopted, along with a corporate social responsibility framework. A training program is being developed by the SOE Unit for finance managers of all active SOEs.

15. We will continue to modernize tax administration.

  • Good progress is being made towards the launch of the new Liberia Revenue Authority (LRA). The Commissioner-General, two deputy Commissioners-General, and the Board of the LRA have been recently appointed. The human resource management component of the LRA implementation is also progressing well which will create and promote a professional and accountable institution. Despite some delays in the procurement of furniture and equipment, we expect the LRA to be operational by July 1, 2014.

  • The Petroleum and Mining Acts have undergone broad consultation with the public. Following the passage of the Petroleum Act by the senate, the House subsequently engaged in additional consultations across the country; this process has now concluded. A draft of the proposed Mining Act has been completed, with consultation ongoing.

  • The Natural Resource Tax Unit has continued to build its capacity and is now providing technical support on concession issues. Training has been conducted on transfer pricing, petroleum financial modeling and contract negotiation. The Unit has been able to support negotiations as part of the Inter-Ministerial Technical Committee on Concessions and revenue collection through support to auditors in the Department of Revenue on concession-specific issues. The Unit will be part of the Liberian Revenue Authority as of July 1, where it will continue to provide technical expertise.

  • Over the medium term, we will continue to make progress towards automating the tax payment system. Ongoing efforts include the deployment of a Standardized Integrated Tax Administration System (SIGTAS) which will help to strengthen tax compliance with the issuance of Tax Identification Numbers and calculation of withholding and corporate income tax liabilities. Further automation will involve real estate tax, motor vehicle registrations, and the integration of SIGTAS with IFMIS, as well as the roll-out of SIGTAS to rural collectorates. We are also progressing towards the introduction of the Value Added Tax (VAT) which will help to broaden the tax base. In this context, we have developed a Policy Framework Paper to facilitate its technical discussion and analysis.

C. Monetary and Exchange Rate Policies and Financial System

16. Monetary and exchange rate policy will remain focused on containing inflation to low single digits. In our view, the 19 percent exchange rate depreciation between December 2012 and its peak in the 3rd week of January 2014 was mainly caused by a combination of structural factors such as a reduction in the amount of U.S. dollars in circulation due to the ongoing UNMIL drawdown and other domestic policy changes. These included a 16.3 percent increase in government spending in Liberian dollars and reduced amounts of U.S. dollars offered in the foreign exchange auction in order to rebuild our foreign reserves buffer. Given the high pass-through to inflation in the context of Liberia’s highly dollarized economy, we will aim to contain excessive fluctuations in the Liberian-U.S. dollar exchange rate, while allowing the exchange rate to adjust to changing external conditions and fundamentals.

17. On the domestic front, joint coordination between the CBL and the Ministry of Finance on liquidity management to better control the supply of Liberian dollars will be strengthened. Recently, meetings were held between the CBL and the MoF to enhance coordination in the areas of liquidity management and policy harmonization, among others; aimed at ensuring a stable macroeconomic environment. Going forward, this coordination will be institutionalized through regular meetings of the Liquidity Management Committee, which aims at improving liquidity monitoring and forecasting, intended to inform the basis for CBL’s intervention in the foreign exchange auction and the sterilization of Liberian dollar liquidity through the issuance of Treasury and CBL bills (end-December 2014 structural benchmark). Also, a technical working group composed of MoF and CBL staff will be set up to prepare a proposal as to timing and possible terms of conversion of part of Central Government debt held by the CBL (end-December 2014 structural benchmark). The Policy Statement, issued yearly by the CBL, remains the main vehicle to communicate the monetary and exchange rate policy stance of the Bank to the public.

18. We remain committed to maintaining an adequate reserves buffer. The projected net foreign exchange positions for end-June and end-December, 2014 are US$245.6 million and US$253.9 million, respectively; driven mainly by CBL’s budget performance, intervention in the foreign exchange market projected at US$0.75 million per week, repayment on bridge loan facilities with the government (US$4 million expected in June 2014, following a repayment of US$4 million in December 2013), and expected additional purchases of U.S. dollars from the government in the amount of US$3 million, in addition to the regular monthly purchases of US$3.25 million. As a short-term intervention and to immediately relieve some of the exchange rate pressures while preserving foreign reserves, we will gradually implement the reduction in the reserve requirement from 22 to 15 percent on both U.S. and Liberian dollar deposits. As a result, commercial banks’ liquid U.S. dollar assets will increase by about US$36 million, while Liberian dollar liquidity would increase by the equivalent of US$5 million, which we would absorb by issuing CBL notes. The increase in U.S. dollars resources available to the commercial banks should also help to support investment in the domestic economy to strengthen the real sector. In addition, we will continue with our policy of issuance of CBL bills in order to absorb the excess Liberian dollar liquidity.

19. We are making steady progress with other reforms aimed at strengthening financial sector regulation and infrastructure. Our main policy objectives are to build a strong and viable financial system that will support the private sector development, build an inclusive financial system in the achievement of the Government’s Agenda for Transformation and support the establishment of the necessary financial infrastructure to ensure a viable and sustainable financial system.

  • The commercial court has begun hearing cases and taking actions against non-compliant borrowers, including foreclosure and seizure of property. However, a review of the Commercial Code will be necessary to enhance the effectiveness of the court, given the experience so far since the court started operation 3 years ago.

  • The implementation of the Collateral Registry project is ongoing and modalities are underway for the procurement of the hardware components. A Registrar has been appointed since last year and office space for the registry identified at the new CBL building. Staff for the Registry has been identified and there are plans to recruit new staff in the future. The CBL has also facilitated several stakeholder consultative workshops/meetings on the prototype of the software and to create the necessary public sensitization about the establishment of the Collateral Registry. A public education campaign will commence in March 2014.

  • Also, efforts have been made to improve/upgrade the current credit reference system to meet the increasing needs of the commercial banks and to make the system more efficient.

  • Regarding the payments system, active implementation has commenced with the infrastructure upgrade, which is substantially complete. As at 2013 ending, service providers for the RTGS, ACH, and SWIFT visited the country and met with the stakeholders. Discussions are underway to begin implementation following completion of the infrastructure upgrade which is set for end-March, 2014.

  • On the Security Market Act, a regional experience sharing visit is expected to be conducted to finalize the drafting of the Act for submission to the Legislature for enactment into law.

  • The CBL is reviewing the existing mobile money guidelines to promote outreach and allow more players in the money mobile space. The revised regulations will allow the establishment of specialized non-bank financial institutions that will focus on providing mobile money services. This reform also intends to bring in other non-bank financial institutions, such as credit unions, Village Savings and Loan Associations, and foreign exchange bureaus into the agent network of mobile money operations.

D. Debt Management, Resolution and External Policies

20. The government’s medium term debt management strategy (MTDS) was finalized at end-December 2013 and adopted by the National Debt Management Committee in March 2014. The MTDS sets out the government’s broad objectives and approach to debt management for the period 2014–16, and will be revised and updated each year, as necessary, as part of the budget cycle. We remain committed to ensuring that all the new borrowing envisaged is consistent with maintaining medium-term debt sustainability and the objectives set out in the MTDS. In particular, we will ensure that projects are carefully prioritized and sequenced, in line with absorption capacity, and that the new borrowing is on the most favorable terms.

21. The Debt Management Unit (DMU) has continued to benefit from training and technical assistance. Most recently this has included technical assistance from the World Bank on the MTDS and WAIFEM training on the development of the domestic bond market, with further training on the debt management software, CS-DRMS, expected to take place in September 2014. To consolidate the improvements made to the administration and capacity of the Unit, the DMU is now completing a Debt Management Procedure Manual, which will cover all practical aspects of the debt management process, from negotiation, to contracting, to day to day control over disbursements and debt service.

22. Considering the recent additional concessional financing secured for priority infrastructure projects, total external debt commitments now amount to US$605 million by December 2013. This is composed of US$377 million of existing ratified agreements, and signed contracts for another US$228 million, including US$38.3 million from the African Development Bank for the CSLG power systems redevelopment project, and US$144 million from India Eximbank for energy transmission and distribution.

23. The government has also agreed a US$19.6 million letter of credit with Ecobank Liberia for the financing of an HFO power plant. The letter of credit guarantees payment of the HFO equipment to the foreign supplier, with US$7.5 million already paid by the government to Ecobank in November 2013 to cover the cash collateral requirement. If the government doesn’t make timely payments thereafter, this letter of credit will have to be repaid over 4 quarters and will thus constitute an import-related short-term external liability. The letter of credit has been accepted by the supplier’s bank and, in line with the payment agreement, shipment is expected by September 2014. The HFO plant is expected to be operational by early 2015.

24. The government is seeking additional concessional financing for priority infrastructure projects, including the rehabilitation of the Roberts International Airport runway. The total loan amount for the runway of around US$60 million would be disbursed over a short time period if approved, which would increase the fiscal deficit but would not pose a significant risk to fiscal sustainability due to the generous nature of the expected terms. In addition, the AfDB and World Bank country strategies include a pipeline of about US$415 million in concessional loans.

Text Table 3.

Loans Ratified During FY2013 and FY2014 and Loans Pending Ratification by April 15, 2014

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25. The Government of Liberia, through the Central Bank of Liberia, began the issuance of Treasury Bills (T-Bills) in early May 2013. This is part of the process to manage revenue volatility in the short run and, in the medium to longer run, expand the money market and further provide an additional policy instrument to manage Liberian dollar liquidity. The T-Bills auction is limited to financial institutions and currently there is one bill type with a maturity of 91 days. As of December 5, 2013, 8 auctions have been conducted, totaling LD$1.1 billion, with an average discount rate over the period of 2.1 percent. The stock of T-Bills totaled L$320.5 million (US$4 million at the issued exchange rate). As of end-March 2014 US$3 million at face value was outstanding. The current strategy of redemption and re-issuance (rollover) is expected to continue in the short-term, with the possibility of additional net issuance of longer maturities over the course of FY2015 and FY2016, as set out in the Medium Term Debt Management Strategy.

26. The government has completed the restructuring of pre-HIPC external debt with EIB/EU, ECOWAS, BADEA, OFID, Kuwait, Saudi Arabia, ABD-NTF and France. Overall, the terms are less favorable than previously assumed. As a result, the updated external debt stock (excluding the outstanding purchases and loans from the IMF and Taiwan) at the end of June 2013 is now about US$26 million higher at US$123 million, compared to US$97 million envisaged at the time of the second ECF review. There has been no progress on the negotiation with Taiwan on the restructuring of pre-HIPC external debt.

E. Improving National Accounts Statistics

27. We are continuing to make progress towards improving national accounts statistics.

  • The Household Income Expenditure Survey (HIES) was rolled out at end-January 2014 following a successful pilot phase. Data collection is on track, with over 15 percent of anticipated total data collected. Data collection will end on January 25 2015. Data cleaning and analysis will follow; with updated national accounts available by December 2015.

  • The establishment survey data has now been cleaned and LISGIS is in the process of putting together the final report. The National Annual Accounts Surveys (performed in 2009 and 2011) will be used to compile preliminary GDP estimates for 2008–13 by end-June 2014 (structural benchmark); in the absence of the HIES they will contain limited information on the household and informal sector.

Program Monitoring

28. Program implementation will be monitored by quantitative performance criteria (PCs) and structural benchmarks (Tables 1, 3, and 4), and semi-annual reviews. Definitions of key concepts and indicators, as well as reporting requirements, are set out in the accompanying Technical Memorandum of Understanding. The fourth review is expected to be completed on or after November 15, 2014 based on end-June 2014 and other relevant PCs and the fifth review is expected to be completed on or after May 15, 2015 based on end-December 2014 and other relevant PCs.

Table 4.

Liberia: Structural Benchmarks for the Fifth Review, End-December 2014

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Target dates are indicative only.

Attachment 2. Technical Memorandum of Understanding

This memorandum sets out the understandings between the Liberian authorities and the International Monetary Fund (IMF) regarding the definitions of the quantitative and structural performance criteria and benchmarks for the three-year Extended Credit Facility (ECF), as well as the reporting requirements. The definitions are valid at the start of the program but may need to be revisited during the program reviews to ensure that the memorandum continues to reflect the best understanding of the Liberian authorities and the IMF staff in monitoring the program.

Quantitative Performance Criteria and Benchmarks
A. Test Dates

1. Quantitative performance criteria have been set for end-December 2014 and indicative quantitative performance benchmarks have been set for end-September 2014.

B. Definitions and Computation

2. For the purposes of the program, the Government is defined as the Central Government of Liberia (GoL). This definition excludes legally autonomous state-owned enterprises whose budgets are not included in the central government budget. The operations of the central government will be presented in U.S. dollars with all revenues and expenditures that are denominated in Liberian dollars converted at the end of period exchange rate. The public sector comprises the central government, the Central Bank of Liberia (CBL), and public enterprises (enterprises and agencies in which the government holds a controlling stake—typically owns more than 50 percent of the shares, but which are not consolidated in the budget).

3. Total Central Government revenue collection includes all tax and nontax receipts (excluding contingent revenues) transferred into the GoL Revenue accounts at the CBL, including income and transfers from state-owned enterprises and public institutions (excluding external loans and grants). The GoL accounts at the CBL include the GoL Revenue Accounts in U.S. dollars, the Revenue Accounts in Liberian dollars, the Civil Servants Payroll Accounts in Liberian dollars, the General Operations Accounts in U.S. dollars, the General Operations Accounts in Liberian dollars, the GoL Special Rice Fund, and all Ministries and Agencies operational and other accounts. Any new accounts opened by the GoL at the CBL or at any other local financial agency shall be reported to the IMF as well. For the purposes of the program, the revenues of the GoL are measured on the basis of cash deposits in the Revenue Account in U.S. dollars, the Revenue Account in Liberian dollars, and the GOL Special Rice Fund converted to U.S. dollars using the end of period exchange rate.

4. For end-June 2014 and end-December 2014, social spending is defined as education, health, social development services, and energy sector spending from the FY2014 and FY2015 budgets of the units listed below (payment vouchers approved by the Ministry of Finance) excluding contingent expenditure. It is evaluated as a share of total expenditure (payment vouchers approved by the Ministry of Finance), where total expenditure excludes contingent expenditure tied to contingent revenues and off budget expenditure tied to off-budget credit financed projects.

Total Education, Health, Social Development Services, and Energy Spending

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5. Social and other priority spending will be adjusted downward by the undisbursed amounts from budgeted external financing (grants and borrowing) allocated to projects in the energy sector within the public sector investment program.

6. New domestic borrowing of the Central Government is defined as new domestic claims by residents on the central government since the start of the program. It will be measured by the change in the stock of all outstanding claims on the central government (domestic loans; advances; government guarantees; and contingent financial liabilities as stipulated in paragraph 7; and any government debt instruments, such as treasury bills and long-term government securities issued in the domestic market) by the banking system. The definition also includes the issuance of debt instruments by the GoL to the nonbank sector. For the purposes of measurement, claims in Liberian dollars will be converted at the end of period exchange rate.

7. Contingent financial liabilities of the central government (external and internal) include but are not limited to (i) any guarantee, direct or implicit, of the performance or payment obligations of any private or public entity; (ii) any agreement, including any indemnification agreement, to hold another private or public entity harmless or to provide insurance or similar protection against risk of loss; (iii) any guarantee of economic return to another public or private entity including any guarantee of profit, income or rates of return; (iv) any agreement to provide financial support to another private or public entity in connection with specified activities of such other entity; and (v) any other agreement as provided by regulations under Liberia’s Public Financial Management Act.

8. Gross external borrowing by the public sector is defined as cumulated new public sector external debt as defined in paragraph 9 from July 1, 2012, excluding borrowing for reserve management purposes by the CBL.

9. The definition of external debt (both concessional and nonconcessional) by the public sector, for the purposes of the program, refers to the debt owed to non-residents, and it applies not only to the meaning set forth in point No. 9 of the “Guidelines on Performance Criteria with Respect to External Debt” (Executive Board Decisions No. 6230-(79/140) August 3, 1979, as amended and effective December 1, 2009 attached in Annex I), but also to commitments contracted or guaranteed for which value has not been received.

10. A debt is defined as concessional if, on the date of signature, the ratio between the present value of debt and the face value of the debt is less than 65 percent (equivalent to a grant element of at least 35 percent). The discount rate used for this purpose is 5 percent for all the loans signed after July 3, 2014. For all the loans signed before July 3, 2014, the discount rate will be determined on the basis of the commercial interest reference rates published by the Organization for Economic Cooperation and Development (OECD) on the date of signature.

11. The ceiling for contracting and guaranteeing non-concessional external debt by the public sector will be set at US$14.2 million continuously throughout the program period unless modified. The ceiling for contracting and guaranteeing nonconcessional debt excludes short-term (debt contracted for a period of less than one year) import-related credits, rescheduling arrangements, and borrowing from the Fund.

12. The government undertakes not to incur payments arrears on external debt that it owes or guarantees, with the exception of external payments arrears arising from government debt that is being renegotiated with creditors, including Paris Club creditors. Arrears on external debt are defined as any unpaid obligation on the contractual due date. In cases where a creditor has granted a grace period after the contractual due date, arrears are incurred following the expiration of the grace period.

13. New domestic arrears/payables of the government are calculated as the difference between government payment commitments and the actual payments made on such commitments, providing for a processing period of no more than 15 days from the date of commitment. Actual payments are defined as having taken place on the date of issuance of the checks by the Ministry of Finance. Government payment commitments include all expenditure for which commitment vouchers have been approved by the Expenditure Department, and expenditures that are now automatically approved, namely, wages and salaries, pensions, debt payments to the CBL and commercial banks, CBL bank charges, and transfers of ECOWAS levies into the ECOWAS account.

14. CBL gross direct credit to central government is defined as the sum of claims on central government, including loans, advances, guarantees and contingent financial liabilities as defined in paragraph 7, accounts receivable, bridge financing, overdrafts, and any government debt instrument as defined in the monetary survey template excluding CBL purchases of treasury bills in the secondary market. An overdraft is defined as a negative outstanding balance of the consolidated government account at the CBL (i.e., the sum of the GoL Revenue Accounts in U.S. dollars; the Revenue Accounts in Liberian dollars; the Civil Servants Payroll Accounts in Liberian dollars; the General Operations Accounts in U.S. dollars; and the General Operations Accounts in Liberian dollars). The gross credit to the government is expressed in U.S. dollars. Claims denominated in Liberian dollars are valued at the end-of-period exchange rate.

15. The net foreign exchange position of the CBL is defined as the difference between (a) the CBL’s gross foreign reserves including SDR holdings; and (b) the sum of its gross foreign liquid liabilities, ECF arrangement liabilities, and liquid liabilities denominated in U.S. dollars. The net foreign exchange position of the CBL is presented in U.S. dollars. Assets and liabilities denominated in SDRs are valued at a fixed rate of the U.S. dollar against SDR, 1.5844. Other currencies are valued at cross-rates against the U.S. dollar as of end-June, 2012.

16. The net domestic assets of the CBL are defined as base money minus the net foreign assets of the CBL converted into United States dollars at program exchange rates as defined in paragraph 14. Base money is defined as the stock of Liberian dollars in circulation plus reserve deposits of commercial banks in Liberian dollars at the CBL, plus sight deposits of commercial banks in Liberian dollars at the CBL and plus vault cash of commercial banks in Liberian dollars. The net foreign assets of the CBL are defined as foreign assets minus foreign liabilities of the CBL balance sheet.

17. External financing adjustor. The program ceilings for CBL gross credit to government and CBL net domestic assets will be adjusted upward and the program floor on the net foreign exchange position of the CBL will be adjusted downward, by the amount of the difference between actual and programmed external budget support grants and committed budgeted external loan disbursements up to a maximum of US$20 million. The adjuster will be calculated on a cumulative basis from the start of the financial year (July 1).

Cumulative Program External Budget Support and Committed Budgeted External Loan Disbursements

(Millions of U.S. dollars)

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Program Monitoring
A. Data Reporting to the IMF

18. To allow monitoring of developments under the program, the Ministry of Finance will coordinate and regularly report the following information to the staff of the IMF:

  • Monthly fiscal reconciliation reports, where cash revenue and expenditure with spending commitments are reconciled (monthly, within three weeks after the end of the month);

  • Detailed reports on monthly core and contingent revenue and expenditure on both a cash and a commitment basis by budget line and a completed summary table on central government operations (monthly, within three weeks after the end of the month);

  • Outstanding appropriations, allotments and commitments, and disbursements for line ministries and agencies (monthly, within three weeks after the end of the month);

  • A detailed report on disbursements of budget support grants and budgeted and off-budget loans, by donor and by project (monthly, within three weeks after the end of the month);

  • Monthly sweeping reports showing the end of the month balances of the GoL accounts at the CBL and of all operations and other accounts at the CBL of the M&As (monthly, within three weeks after the end of the month). End-of-month balances of all operating and other accounts at the CBL of the line ministries and agencies receiving budgetary appropriations (monthly within three weeks after the end of the month);

  • End-of-month balances of all operating and other accounts at the CBL of all other public institutions (monthly within three weeks after the end of the month);

  • A table providing the end-of-period stock of domestic arrears accumulated and payments made on arrears during the program period, by budget category (wages, goods and services, etc.), including payment and stock of existing arrears from the previous ECF Arrangement (monthly, within three weeks after the end of the month);

  • The amount of new external debt contracted or guaranteed by the public sector (monthly, within three weeks after the end of the month);

  • The amount of new domestic debt contracted or guaranteed by the public sector (monthly, within three weeks after the end of the month);

  • A detailed report on monthly payments on external debt by category and creditors and the stock of external debt (monthly, within three weeks after the end of the month);

  • A detailed report on monthly payments on domestic debt by category and the domestic debt stock (monthly, within three weeks after the end of the month);

  • The balance sheet of the CBL in the monthly monetary survey (monthly, within three weeks after the end of the month);

  • The full monthly monetary survey of the monetary sector (monthly, within three weeks after the end of the month);

  • The detailed table of commercial banks’ loans and advances by sector (monthly, within three week after the end of month);

  • The core set of financial soundness indicators for the banking system, including the overall profitability of the banking sector (quarterly, within three weeks after the end of the quarter);

  • The report on the results of foreign exchange sales/purchases by the CBL through foreign exchange auctions held by the CBL (weekly) and other currency exchange facilities;

  • A report on the results of T-bills and CBL bills issuances (monthly, within three week after the end of month);

  • Regular sale of U.S. dollars by the Ministry of Finance to the CBL, including amount date, and rate of exchange (monthly, within three weeks after the end of the month);

  • Indicators of overall economic trends, including but not limited to:

    • ➢ detailed tables of the monthly harmonized consumer price index (within three weeks after the end of the month);

    • ➢ daily foreign exchange rates (monthly);

    • ➢ export volumes and values by major commodity, import values by standard international trade classification (SITC), import volumes of rice (by commercial and noncommercial use) and petroleum products (monthly, within three weeks after the end of the month);

    • ➢ interest rates and commercial bank remittance inflows and outflows (monthly, within three weeks after the end of the month); and

    • ➢ production data in value and volume (monthly, within six weeks after the end of the month);

  • Quarterly reports of state owned enterprise financial operations submitted to the Ministry of Finance within 45 days after the end of the quarter;

  • A detailed report on liquidity forecasting up to 6 months ahead, including: (i) projected government’s cash flows (revenue, expenditure, repayments and disbursements of loans including T-bills) by currency; (ii) projected flows to the CBL’s net exchange position, including but not limited to planned U.S. dollar sales in the foreign exchange auction, and planned foreign exchange transactions with the Government; and (iii) projected flows of Liberian dollar liquidity, including but not limited to planned CBL Notes issuance (monthly, within six weeks after the end of month);

  • The report on the status of implementation of the performance criteria and structural benchmarks specified in Tables 1, 3, and 4 of the MEFP (monthly, within three weeks after the end of the month).

19. The above data and reports will be provided in hard copies and electronically to the IMF Resident Representative to Liberia, with copies to the local IMF economist, Mr. Deline (adeline@imf.org) for further transfer to the African Department of the IMF in Washington, D.C.

20. Moreover, we will provide the Fund with such information as the Fund requests in connection with the progress in implementing the policies and reaching the objectives of the program.

Annex. Guidelines on Performance Criteria with Respect to External Debt

Excerpt from Executive Board Decision No. 6230-(79/140) August 3, 1979, as amended in 2009

  • (a) The term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    • (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    • (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

    • (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. The debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.

  • (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

Appendix II. Exchange Rate Developments and Policy Responses1

Recent exchange rate movements and pass-through

1. The Liberian dollar depreciated by 21 percent against the U.S. dollar between December 2012 and April 2014. The exchange rate had remained broadly stable since 2010 but started to depreciate in the second half of 2013. In mid-January 2014, the Central Bank of Liberia (CBL) intervened heavily, offering a total US$9.2 million in sales in three weekly auctions, and issuing 6-month Liberian-dollar-denominated CBL bills equivalent to US$10.4 million. As a result, the exchange rate temporarily appreciated back to its October 2013 level, before resuming its downward move.

2. The depreciation pressures mainly reflect a widening current account deficit. The current account deficit widened from 28 to 35 percent of GDP from 2012 to 2013, reflecting lower net remittances and income, in spite of a temporary tightening of the trade balance. The current account deficit is projected to widen further to 46.6 percent of GDP in 2014 owing to higher capital goods imports related to mining and public infrastructure investments. The UNMIL drawdown, with a net reduction of about 1,600 Liberia-based foreign personnel in 2013, could also be associated with the lower U.S. dollars supply. Another 2,200 UN soldiers are planned to leave Liberia in 2014 and 2015. As post-conflict relief operations wind down, a number of NGOs are also downsizing their operations.

3. Weak Liberian-dollar liquidity management has likely accentuated exchange rate movements. Insufficient coordination between fiscal and monetary policies has led to domestic currency imbalances. The government increased Liberian-dollar spending by 16 percent in 2013, while sterilization was not sufficient to absorb excess Liberian-dollar liquidity. In parallel, demand for U.S. dollars in the foreign exchange auctions increased throughout the year. Demand pressures were exacerbated as the CBL limited its foreign exchange intervention in the second half of 2013, in an effort to rebuild foreign reserves. Starting in August 2013, the U.S. dollars sold at the auctions declined from US$2.25 million per week to US$0.75 million (Staff Report, Figure 2).

4. The exchange rate depreciation has led to higher inflation. CPI inflation in Liberian dollars was contained in single digits (8.5 percent) in 2013, reflecting low international food and fuel prices, but rose to 9.8 percent in April 2014. Staff’s analysis indicates that the short-run exchange rate pass-through to inflation ranges from 46 to 76 percent after one year. A vector error correction model is estimated using monthly data from March 2004 to March 2014 of overall Liberian-dollar denominated CPI, the nominal exchange rate against the U.S. dollar, and an international price index of imported goods (Chart 1). The estimated short-run pass-through is 46 percent after one year in the baseline and 76 percent when the international price index is kept constant (Chart 2). The estimated pass-through is relatively high compared to cross-country estimates in the literature (Ca’Zorzi, Hahn, and Sánchez, 2007; Frankel, Parsley, and Wei, 2012).

Chart 1.
Chart 1.

CPI, The Exchange Rate, and International Prices of Imported Goods

(Natural log of indices, monthly)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Sources: Central Bank of Liberia and IMF staff estimates and calculations.
Chart 2.
Chart 2.

Impulse Responses To One Percent Change in the Exchange Rate

(Basis point, monthly)

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A001

Medium-term competitiveness

5. The real effective exchange rate remains broadly in line with fundamentals (Text Table 1). The recent 6.6 real effective exchange depreciation follows a 17 percent real appreciation since 2008. The macro-balance (MB) approach indicates a smaller current account norm than projected in the medium run, mainly due to the high real GDP growth and a large negative net foreign assets position, and hence some real overvaluation. The external sustainability (ES) approach and the equilibrium real exchange rate (ERER) approach indicate that the real effective exchange rate is somewhat undervalued.

Text Table 1.

Liberia: Medium Term Exchange Rate Assessment1

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The results are subject to low data quality. Elasticity is estimated by following the method in Hakura and Billmeier (2008).

Underlying CA deficit = Projected CA deficit - temporary fluctuations of iron-ore related imports.

The ES approach calibrates the medium-term NFA to match the estimated NFA in 2013.

6. In the long run, the high current account deficit indicates the need to implement policies to boost competitiveness. Part of the deficit is sustainably financed by aid and FDI flows, and increasing iron ore exports will help to gradually improve the current account balance. However, the development of non-mining activity will require improving both infrastructure and the business environment (Staff Report, Figure 2). Addressing the infrastructure gaps in particular will reduce production costs and help enhance competitiveness.

Policy recommendations

7. The authorities ought to strengthen policy coordination to smooth exchange rate volatility while allowing the exchange rate to adjust to changing fundamentals. Staff’s analysis suggests that the depreciation trend is in line with a widening current account deficit. However, greater and more regular cooperation between the Ministry of Finance and the CBL on liquidity management will be required to avoid excessive exchange rate fluctuations. Further developing domestic monetary policy instruments would help enhance monetary policy effectiveness. Specific measures include:

  • Matching Liberian dollar government spending and revenue collection. The Minister of Finance ought to continue to encourage the payment of taxes in Liberian dollars, including taxes on international transactions.

  • Lowering the high reserve requirements. The CBL is implementing a reduction in the reserve requirement on both Liberian and U.S. dollar deposits from 22 percent to 15 percent, which would temporarily alleviate pressures on the foreign exchange auction.

  • Actively sterilizing Liberian dollar liquidity. Increasing issuances of T-bills and, in particular, CBL bills would mop up Liberian dollar liquidity. The CBL should consider moving towards shorter-maturity notes for more flexible Liberian dollar liquidity management.

  • Continuing to maintain an adequate reserves buffer of about 3 months of essential imports is important given the direct impact of external shocks on domestic consumption. The path of reserve accumulation should also provide room for intervention to smooth excessive exchange rate volatility.

References

  • Ca’Zorzi, M., E. Hahn, and M. Sánchez, 2007, Exchange Rate Pass-through in Emerging Markets, Working Paper Series, No.739, March, European Central Bank.

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  • Frankel, J., D. Parsley, and S. Wei, 2012, “Slow Pass-through Around the World: A New Import for Developing Countries?,” Open Economies Review, 23, 213–251.

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  • Hakura, D. S., and A. Billmeier, 2008, Trade Elasticities in the Middle East and Central Asia: What is the Role of Oil?, IMF Working Paper 08/216, September.

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1

Private credit growth excluding loans to public road construction projects is 17 percent at end-March (y/y).

2

This measure is supported by Fund technical assistance. The Statistics Institute has already prepared a set of national accounts, but the experts who will verify and validate these data are only available in July.

3

The authorities disbursed US$14.6 million in January 2014, mainly to alleviate liquidity problems in some banks. Some construction companies had used the contracts as collateral to obtain financing from domestic banks and, as the government has frozen payments on outstanding claims, have not been able to repay their loans. Remaining bank exposures after the January payment appear manageable and do not pose a threat to financial stability.

4

The technical commission will be composed of civil engineers and will review compliance of physical works with the contract terms. It will also assess whether the government received adequate value for money.

5

The government also repaid US$4 million in bridge financing to Central Bank of Liberia in December 2013 and will pay the outstanding US$4 million by June 2014.

1

Prepared by Si Guo (SPR) and Futoshi Narita (AFR).

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Cover IMF Staff Country Reports
Liberia: Third Review Under the Extended Credit Facility Arrangement and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance Criteria
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2014: Issue 197
Publisher:
International Monetary Fund
ISBN:
9781498354660
ISSN:
1934-7685
Pages:
96
DOI:
https://doi.org/10.5089/9781498354660.002
  • Text Chart 1.
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    Text Chart 1.

    Liberia: Improvement in Policy and Institutional Capacity

    (Changes in average CPIA score from 1992-2001 to 2009-2012)

  • Text Chart 2.
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    Text Chart 2.

    Credit to the Private Sector

    (12 month percent changes, unless specified otherwise)

  • Figure 1.
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    Figure 1.

    Liberia: Recent Economic Developments

  • Figure 2.
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    Figure 2.

    Liberia: External Sector Developments

  • Figure 3.
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    Figure 3.

    Liberia: Foreign Exchange Developments

    (US$ Millions, unless otherwise indicated)

  • Text Chart 3.
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    Text Chart 3.

    Revenue and Expenditure in Local Currency

    (US$ millions, Quarterly)

  • Figure 4.
    View in gallery
    Figure 4.

    Liberia: Monetary and Financial Developments

  • Figure 5.
    View in gallery
    Figure 5.

    Liberia: Medium-Term Outlook, 2012–19

    (Percent of GDP, unless otherwise indicated)

  • Figure 6.
    View in gallery
    Figure 6.

    Liberia: Medium-Term Fiscal Outlook, FY2012–19

    (Percent of GDP)

  • Chart 1.
    View in gallery
    Chart 1.

    CPI, The Exchange Rate, and International Prices of Imported Goods

    (Natural log of indices, monthly)

  • Chart 2.
    View in gallery
    Chart 2.

    Impulse Responses To One Percent Change in the Exchange Rate

    (Basis point, monthly)

Text Chart 1.

Liberia: Improvement in Policy and Institutional Capacity

(Changes in average CPIA score from 1992-2001 to 2009-2012)
Text Chart 2.

Credit to the Private Sector

(12 month percent changes, unless specified otherwise)
Figure 1.

Liberia: Recent Economic Developments
Figure 2.

Liberia: External Sector Developments
Figure 3.

Liberia: Foreign Exchange Developments

(US$ Millions, unless otherwise indicated)
Text Chart 3.

Revenue and Expenditure in Local Currency

(US$ millions, Quarterly)
Figure 4.

Liberia: Monetary and Financial Developments
Figure 5.

Liberia: Medium-Term Outlook, 2012–19

(Percent of GDP, unless otherwise indicated)
Figure 6.

Liberia: Medium-Term Fiscal Outlook, FY2012–19

(Percent of GDP)
Chart 1.

CPI, The Exchange Rate, and International Prices of Imported Goods

(Natural log of indices, monthly)
Chart 2.

Impulse Responses To One Percent Change in the Exchange Rate

(Basis point, monthly)