Liberia: Third Review Under the Extended Credit Facility Arrangement and Request for Waiver of Nonobservance of Performance Criterion and Modification of Performance criteria—Debt Sustainability Analysis Update

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.

Key Assumptions Under the Baseline Scenario

1. The Debt Sustainability Analysis (DSA) update indicates that Liberia continues to have a low risk of debt distress. Although recent external debt accumulation, on a contractual basis, has been faster than initially envisaged, the pace of disbursements has been slower than anticipated. Compared with the last DSA update, the medium-term external debt profile (2014–17) is somewhat less favorable due to a relatively slower real GDP growth and a larger stock of restructured loans. However, the long-term debt profile is more favorable, with the improvement coming from higher nominal GDP after 2020. External debt would rise to 17.6 percent of GDP in FY2014, from 12.2 percent of GDP in FY2013, and would peak at 32.8 percent of GDP in FY2021, while in the previous update external debt would peak at 34.2 percent of GDP by FY2022. Public sector debt would rise from 13.7 percent of GDP in FY2013 to 20.1 percent of GDP in FY2014, peaking at 34.9 percent of GDP in FY2021 (compared with 39.3 percent in the previous update).

2. The analysis reflects the impact of the following changes compared with the previous DSA update.

  • GDP growth and current account developments. Compared with the December 2013 DSA update, the medium-term real GDP growth forecast has been revised slightly downward, mainly due to delays in mining activity, trends in world iron-ore prices and unresolved issues in the forestry sector. At the same time, higher projected inflation is raising nominal GDP.2 In the long run, the effect of higher inflation on nominal GDP dominates. The current account deficit is projected to only gradually narrow over the projection period, reaching about 15 percent of GDP by 2030. It will continue to be sustainably financed by FDI and private flows associated with mining and forestry concessions.

  • Restructured Loans. The Government of Liberia has completed the restructuring of pre-HIPC external debt with several creditors including EIB/EU, ECOWAS, BADEA,3 OFID, Kuwait, Saudi Arabia, ADB-NTF4 and France. Overall the terms of the restructurings are less favorable than previously assumed. As a result, the end-June 2013 external debt stock (US$123 million, excluding loans from the IMF and Taiwan, Province of China) is US$26 million higher than envisaged in the previous DSA. There has been no progress on the restructuring of the Taiwanese loan.

  • New external loan agreements. After initial delays in securing external financing, the amount of newly-contracted external loan agreements has increased significantly since FY2013. The amount of external post-HIPC loan agreements ratified before the current ECF program (which started in November 2012) is US$142 million. From November 2012 to December 2013, excluding the ECF credit, the sum of ratified loan agreements amounts to US$377 million, with another US$228.3 million signed external loan agreements pending ratification. The amount of loans under negotiation is about US$476 million, of which US$416 million will be from IDA and the AfDB on highly concessional terms. In line with this rapid contracting of external loan agreements, the baseline macro-framework reflects higher borrowing and disbursements (US$3.5 billion, compared with US$2.9 billion in FY2014–FY2033 in the previous DSA update).

  • Despite the rapid increase in contracted external loans, actual disbursements have been slow. Excluding the ECF credit, only US$45 million (out of US$519 million ratified post-HIPC loan contracts) has been disbursed by the end of FY2013. Therefore, in the baseline scenario, although we assume that total disbursements will increase by about 20 percent between FY2014 and FY2033 compared with the amount assumed in the last DSA update, most of the increase is assumed to materialize after FY2023 (total disbursements between FY2014 and FY2022 are now assumed to be close to US$1.5 billion compared with US$1.4 billion in the previous DSA update).

Public and External Debt Sustainability

3. The external debt profile is less favorable than in the previous DSA update in the medium term but more favorable in the long term. Compared with the last DSA update, due to slower real GDP growth and a larger stock of restructured loans, all external public and publicly-guaranteed (PPG) debt indicators (including the debt-to-GDP ratio) are now higher during 2014–17. The public sector debt-to-GDP ratio is also higher during the same period (Figures 1, 2 and Tables 1, 2). In the long term, however, despite the assumption of larger disbursements, the projected higher nominal GDP leads to more favorable external and public debt-to-GDP ratios.

Figure 1.
Figure 1.

Liberia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2014–341

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Terms of borrowing shock; in c. to a Terms of borrowing shock; in d. to a Terms of borrowing shock; in e. to an Exports shock and in figure f. to a One-time depreciation shock. In the alternative scenarios of external DSA, historical average and standard deviation of major variables are calculated by using the data from 2008 due to the structual change of the economy.
Figure 2.
Figure 2.

Liberia: Indicators of Public Debt Under Alternative Scenarios, 2014–341

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.2/ Revenues are defined inclusive of grants.
Table 1.

Liberia: External Debt Sustainability Framework, Baseline Scenario, 2011–34

(Percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Includes private financing flows, including for iron-ore related investment which was included in FDI in the previous DSA

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Liberia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–34

(Percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

It includes the gross debt contracted or guaranteed by the central government, excluding borrowing from the Central Bank of Liberia.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

4. Stress tests indicate that external and public debt would remain sustainable, even under extreme scenarios, although the baseline forecast is subject to significant risks (Figures 1, 2 and Tables 3, 4). On the upside, the baseline scenario only reflects the two mining projects currently under exploitation, although two additional major projects in their developmental phase are expected to come on stream around 2018. Furthermore, there is a potential for an upward revision of the GDP base,5 which would lower debt-to-GDP ratios. On the downside, delays in the coming on stream of new mining projects could also lead to lower growth and government revenues. In the stress test of the new probability approach, Liberia’s external public and publicly-guaranteed (PPG) debt-to-GDP ratio temporarily exceeds the threshold (Figure 4). However, given that other debt distress measures are well below the thresholds, staff’s view is that Liberia’s external risk rating should remain “low”. Public sector debt also continues to be sustainable, although the debt-to-GRP ratio and the debt-to-revenue ratio would increase in the long run under the scenario with a fixed primary balance (Figure 2 and Table 4).

Figure 3.
Figure 3.

Liberia: Indicators of Public and Publicly Guaranteed External Debt Under Sustained Borrowing Scenarios, 2014–341

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Terms of borrowing shock; in c. to a Terms of borrowing shock; in d. to a Terms of borrowing shock; in e. to an Exports shock and in figure f. to a One-time depreciation shock. In the alternative scenarios of external DSA, historical average and standard deviation of major variables are calculated by using the data from 2008 due to the structual change of the economy.
Figure 4.
Figure 4.

Liberia: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014–341

Citation: IMF Staff Country Reports 2014, 197; 10.5089/9781498354660.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Terms of borrowing shock; in c. to a Terms of borrowing shock; in d. to a Terms of borrowing shock; in e. to an Exports shock and in figure f. to a One-time depreciation shock
Table 3.

Liberia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2014–34

(Percent)

article image
article image
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. Historical averages and standard deviations used in external DSA stress tests are derived from post-2008 data due to structural changes of the economy.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 4.

Liberia: Sensitivity Analysis for Key Indicators of Public Debt 2014–34

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

5. While not an immediate concern for debt sustainability, the rapid pace of new borrowing might trigger a change in the external risk rating if it were to be sustained over the medium term. In an alternative scenario, we assume that the government will sign another US$1.1 billion in new loan agreements (which is the same as the total amount of loan agreements that have been signed or in pipeline since the start of the current ECF program) from FY2016 to FY2018 so that the total amount of newly-signed external loans would be US$2.2 billion between FY2013 and FY2018. Whether this “sustained borrowing scenario” will result in a change of external risk rating depends on whether the faster contracting of loans would lead to an increase in total disbursements. In the baseline scenario, we assume that all loans signed before FY2015 will be disbursed before FY2021. Therefore, in the “sustained borrowing scenario” we assume all loans signed between FY2016 and FY2018 will be disbursed before FY2024 and that no other new loans will be signed from FY2019 to FY2024. This implies an increase of total disbursement by US$0.45 billion, compared with the baseline scenario. As shown in Figure 3, this will result in a change in the external risk rating from “low” to “medium”.

6. The authorities agreed with the assessment that external risk rating remains to be low. They also emphasized that the large amount of new borrowings will finance the important infrastructure projects that contribute to addressing the country’s binding growth constraints.

Conclusion

7. The updated DSA shows that Liberia’s debt profile remains sustainable under most scenarios. Under the ECF-supported program, the government’s borrowing plans are consistent with implementation of its poverty reduction strategy, the Agenda for Transformation. In particular, the government is actively seeking financing for strategic projects in the energy and transportation sectors in order to address the main binding constraints to broad-based economic growth. However, it must also be noted that, if the fast borrowing pace continues, a change in the external risk rating might be triggered. This highlights the need for the authorities to prioritize new financing for strategic projects and on highly concessional terms to ensure that public debt remains sustainable. Further strengthening project preparation, procurement, and monitoring would also help ensure that public investment is of high quality.

1

This document is the annual update of the analysis presented at the time of the current ECF request in November 2012 (IMF Country Report No. 12/340).

2

At the time of the 2nd ECF review staff lowered projected inflation over the long-run to reflect the lower utility costs associated with the execution of infrastructure projects in the energy sector. The projected inflation path has been revised upward to take into account real appreciation pressures from higher mining exports and to ensure consistency of long-run U.S. dollar inflation with the growth of the U.S. GDP deflator.

3

BADEA: Arab Bank for Economic Development in Africa.

4

ABD-NTF: African Development Bank-Nigeria Trust Fund.

5

A revised set of national accounts for 2008–13 is expected to be published by the end of 2014.

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.