Liberia: Request for Disbursement Under the Rapid Credit Facility and Debt Relief Under the Catastrophe Containment and Relief Trust

This paper discusses Liberia’s Request for Disbursement Under the Rapid Credit Facility (RCF) and Debt Relief Under the Catastrophe Containment and Relief (CCR) Trust. Economic activity has declined significantly, and fiscal and external financing needs are more pronounced than envisaged at the time of the Extended Credit Facility (ECF) augmentation. The authorities remain committed to the broad objectives of the ECF program. The IMF staff recommends approval of the authorities’ requests for a disbursement under the RCF and debt relief under the CCR Trust given the extensive economic damage caused by the Ebola outbreak and based on the authorities’ updated policy intentions and commitments.

Abstract

This paper discusses Liberia’s Request for Disbursement Under the Rapid Credit Facility (RCF) and Debt Relief Under the Catastrophe Containment and Relief (CCR) Trust. Economic activity has declined significantly, and fiscal and external financing needs are more pronounced than envisaged at the time of the Extended Credit Facility (ECF) augmentation. The authorities remain committed to the broad objectives of the ECF program. The IMF staff recommends approval of the authorities’ requests for a disbursement under the RCF and debt relief under the CCR Trust given the extensive economic damage caused by the Ebola outbreak and based on the authorities’ updated policy intentions and commitments.

Background and Recent Developments

1. The recent slowdown in the rate of new Ebola infections is positive news, but sustained efforts will be needed to preserve these gains. In recent months, the government’s strong efforts, including promoting safer burial practices and a vigorous campaign to educate the public on how to avoid infection have translated into a slower rate of new infections at the national level. Still, the World Health Organization (WHO) warns that under-reporting of new Ebola Virus Disease (EVD) cases and deaths persist. The total cumulative number of cases through January 25, 2015 stood at 8,577 with 3,694 deaths (Text Figure 1).1

Text Figure 1.
Text Figure 1.

Liberia: Number of Cases

(Week 58, Jan. 18-Jan. 25)

Citation: IMF Staff Country Reports 2015, 049; 10.5089/9781498365383.002.A001

Source: Country authorities. and IMF staff estimates.

2. Food insecurity is rising in the wake of the Ebola outbreak. The World Food Program and the Food and Agriculture Organization estimate that the 2014 harvest would be about 8 percent lower than in 2013. As of November 2014, a total of 630,000 people (14 percent of the population) are facing severe food insecurity, of which 170,000 due to the outbreak. These numbers could grow to 750,000 and 290,000, respectively, by March 2015, if measures to scale up safety nets are not implemented promptly. Government and international assistance would also be needed to cover an estimated additional 90,000 tons gap in rice imports in 2015.2

3. The ruling party’s poor performance in the mid-term senatorial elections could compromise implementation of the president’s legislative agenda through the remainder of her term. The delayed election to replenish half of the Senate’s seats took place on December 20, 2014 amid low voter turnout. The ruling party’s majority in the Senate shrunk to 8 seats (from 10 in 2011), as incumbent senators including key allies of the President lost their seats.

4. Available data point to a more severe and broad-ranging impact of the outbreak than previously anticipated (Box 1). The global commodity price shock is further exacerbating balance of payments pressures and weakening growth prospects.

  • Real GDP is now projected to have expanded by only 0.5 percent in 2014, compared with a 2.5 percent expansion expected at the time of the ECF augmentation, reflecting further declines in most sectors (Figure 1). Monthly production of iron ore, cement and beverages in third quarter was estimated at about 20 to 50 percent of the average in the first half of 2014, when those categories registered strong growth (Box Figure 1).

  • Inflation pressures stemming from food price increases are being mitigated by the drop in world oil prices. Inflation increased from 8.5 percent (y/y) at the end of 2013 to 13.5 percent (y/y) in September, but declined to 7.7 percent in December 2014 (y/y), much lower than the 13.1 percent (y/y) anticipated at the time of the ECF augmentation (Box Figure 1 and Figure 1).

  • Following a 9 percent depreciation in the first half of the year, by December 2014 the exchange rate had appreciated closer to its December 2013 level. Additional intervention of US$12.9 million by the Central Bank of Liberia (CBL) between July and November 2014, issuance of CBL notes and increased availability of U.S. dollars contributed to stem exchange rate pressures. Net foreign reserves declined from US$235.8 million in June to US$227.9 million at end-December 2014 (Figure 2).

  • The central government’s FY2014 (ending in June 2014) fiscal deficit remained broadly unchanged at about 1.2 percent of GDP compared with FY2013 (Figure 1), owing to significant under-execution of public investment and the impact of the payroll cleanup on the wage bill. The revenue perfomance in the first half of FY2015 is broadly in line with the revised budget.

  • The current account deficit is estimated to widen in 2014, partially driven by a decline in exports (Figure 1). Exports of iron ore have dropped by about 30 percent since June, owing to both price and volume effects.

  • Weak economic activity weighed heavily on commercial banks’ operations. Supply uncertainties led to bank deposit withdrawals (Figure 2). Real private sector credit growth dropped to 19.5 percent in November 2014 from 40.4 percent at end-November 2013 owing to stalling activity and banks’ risk aversion. Nonperforming loans (NPLs) as a proportion of total loans reached 18.2 percent in November 2014 compared to 14.8 percent in December 2013 (Table 5). Stress tests simulations point to difficulties for 5 commercial banks in complying with capital requirements, should the NPL ratio exceed 25 percent.

Figure 1.
Figure 1.

Liberia: Recent Economic Developments

Citation: IMF Staff Country Reports 2015, 049; 10.5089/9781498365383.002.A001

Sources: Liberian authorities and IMF staff estimations.
Box Figure 1.
Box Figure 1.

Liberia: Economic Impact of the Ebola Epidemic

Citation: IMF Staff Country Reports 2015, 049; 10.5089/9781498365383.002.A001

Sources: Liberian authorities and IMF staff estimations.
Figure 2.
Figure 2.

Liberia: Monetary and Financial Developments

Citation: IMF Staff Country Reports 2015, 049; 10.5089/9781498365383.002.A001

Sources: Liberian authorities and IMF staff estimations.
Table 1.

Liberia: Selected Economic and Financial Indicators, 2013–16

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Sources: Liberian authorities and IMF staff estimates and projections.

Chained-weighted sectoral average growth rate.

In 2014, excludes about 14 percent of GDP in one-off imports for mining projects which will not materialize as projected, based on available information. These imports are financed by private flows which have been adjusted by the same amount. Comparison between the adjusted current account and the current projection more precisely reflects the emerging financing gap due to the Ebola outbreak.

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

Absent additional financing, gross reserves would decline to 1.3 months of imports in 2015.

Table 2.

Liberia: Balance of Payments, 2013–16

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

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Sources: Liberian authorities and IMF staff estimates and projections.

Includes SDR holdings.

In 2014, excludes about 14 percent of GDP in one-off imports for mining projects which will not materialize as projected, based on available information. These imports are financed by private flows which have been adjusted by the same amount. Comparison between the adjusted current account and the current projection more precisely reflects the emerging financing gap due to the Ebola outbreak.

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.

Absent additional financing, gross reserves would decline to 1.3 months of imports in 2015.

Table 3a.

Liberia: Fiscal Operations of the Central Government, FY2013–161

(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).

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 3b.

Liberia: Fiscal Operations of the Central Government, FY2013–161

(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).

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 4.

Liberia: Monetary Survey, 2013–16

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

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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 5.

Liberia: Financial Soundness Indicators, 2012–September 2014

(Percent)

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Sources: Liberian authorities and IMF staff estimates.

Performance Under the ECF Program

5. Program implementation capacity has deteriorated since the beginning of the crisis, leading to delays (Table 7).

  • Final performance against end-June targets was somewhat better than envisaged at the time of the ECF augmentation. Priority social spending for June 2014 as a share of total spending was revised upward and exceeded the indicative floor, so that only the revenue performance criterion (PC) and one indicative target (IT), the ceiling on net domestic assets, were missed.

  • The government missed three out of ten end-September indicative targets as a result of the Ebola outbreak. The revenue and the foreign exchange reserve floors were missed by US$12.7 million and US$34.8 million, respectively. The floor on social spending was only narrowly missed.

Table 6.

Liberia: External Financing Requirements and Sources, 2013–16

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

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Sources: Liberian authorities and IMF staff estimates and projections.

Assuming that all the financing gap is filled by the expected donor financing and possible ECF augmentation.

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

Table 7.

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.

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).

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

The actual targets based on the automatic adjustors.

The end-December 2014 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 full amount of the ECF augmentation of 25 percent of quota at the prevailing market SDR rate and the program SDR rate, respectively.

6. Structural reforms have been hampered by the limited functioning of the public sector due to the Ebola outbreak, although some notable milestones were achieved (Table 8).

  • The Ministry of Planning and Economic Affairs was merged with the Ministry of Finance to become the Ministry of Finance and Development Planning (MFDP), as of July 1, 2014.

  • The government established the autonomous Liberia Revenue Authority (LRA), which also became operational on July 1, 2014. Revenue collection has so far been good, with most of the decline in revenue being linked to weaker economic activity.

  • The Civil Service Management module of the IFMIS was installed. IFMIS was rolled out to 15 additional Ministries and Agencies (for a total of 23) and 5 donor-financed projects were brought onto IFMIS (the latter being a structural benchmark for the fifth ECF review).

  • The Insurance Act was approved by the Legislature on November 20, 2014. The Act provides progressive use of enforcement measures to strengthen the oversight of the growing insurance sector (structural benchmark for the fourth ECF review).

Table 8.

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

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Target dates are indicative only.

Policy Challenges

A. Macroeconomic Outlook and Risks

7. The macroeconomic situation remains very difficult. The economy is projected to stagnate in 2014 and contract in 2015, due to the impact of the epidemic on all sectors through at least the middle of 2015, and in particular lower investment in mining and infrastructure. At the same time, the sharp drop in global iron ore prices is projected to contribute to a further decline in exports, tax revenue, and value-added in the mining sector. Headline inflation is estimated to remain in single digits in 2014 and to gradually decline in 2015, aided by the decline in world oil prices. Donor financing is expected to nearly cover the residual fiscal and external financing gaps in 2014. However, reserves coverage could decline to approximately 1.3 months of imports in 2015 in the absence of additional financing. A gradual recovery is projected to take hold in 2016, led by a rebound in services (Text Table 1).

Text Table 1.

Liberia: Selected Economic Indicators, 2014–16

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Sources: Liberian authorities and IMF staff estimates and projections.

8. This outlook is however subject to considerable uncertainty and significant downside risks. The baseline projections assume that the recent epidemiologic trend will continue, with the disease being eradicated by mid-2015. However, a weakening of efforts to fight the disease could lead to a surge in new cases. The difficulty to reach those infected in remote rural areas could also cause the disease to become entrenched, with lasting damage to private investment. Rising poverty and food insecurity, if not addressed by deploying safety nets, could lead to social unrest. The risks associated with the Ebola epidemic are compounded by the seemingly permanent slump in iron ore prices, which could also contribute to dent medium-term growth prospects.

B. Fiscal Policy Response to the Ebola Outbreak

9. The FY2015 budget deficit is set to expand significantly in response to the crisis. The FY2015 budget was signed into law on November 27, 2014. Compared with the draft budget presented to Parliament in June 2014, the domestic revenue envelope is lower by US$87 million (4 percent of GDP), reflecting the decline in economic activity (Text Table 2). Current expenditure would increase by US$65 million (3 percent of GDP) due to direct and indirect Ebola-related spending, mostly support for health, education, agriculture and small and medium enterprises (SMEs). In spite of stalled project implementation in the first half of the fiscal year, the budget also aims at maintaining total capital spending envisaged in the draft budget at US$97 million. This includes an allocation of US$34 million for road projects, compared with US$17 million in the original budget.3 As a result, the budgeted fiscal deficit excluding grants increases sharply to 9 percent of GDP from 1½ percent of GDP in the pre-Ebola draft budget. An additional amount of US$41.2 million in Ebola-related donor financing was channeled off-budget, mostly to finance health workers’ salaries and hazard pay. Including off-budget activities, the FY2015 overall deficit excluding Ebola-related grants is projected to expand to 13 percent of GDP, compared with 7 percent envisaged at the time of the third ECF review (Tables 3a and 3b).

Text Table 2:

Liberia: FY2015 Budget

(Millions of U.S. dollars)

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Sources: Liberian authorities and IMF staff estimates.

IMF ECF augmentation of US$47.9 million was provided to the Government of Liberia via the Central Bank of Liberia.