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.
I. Introduction
The Liberian authorities appreciate the continued engagement and support from the Fund in the effort to address the extensive socio-economic challenges related to the Ebola Disease Virus (EVD) outbreak. The ongoing Ebola epidemic has taken a heavy toll on the Liberian population and economic activity. The epidemic has disrupted the agricultural sector causing food insecurity and exacerbating poverty. Despite the significant progress in containment of the disease, the World Health Organization (WHO) warns that under-reporting of new Ebola cases and deaths persists. However, recent data indicates a sharp decrease of new infections and schools are now partially opened.
Economic growth is estimated to contract in 2015 and recover in 2016 with a rebound in services sector. The current account deficit is expected to widen driven by a decline in exports and high imports needs, while the reserves coverage could decline by end December 2015, in the absence of additional financing. The situation is also being compounded by the decline in international iron ore prices. The authorities, in collaboration with international community, are working to eradicate the disease in order to rejuvenate economic activity and restore macroeconomic stability. Against this backdrop, they are requesting for disbursement under the Rapid Credit Facility (RCF) and Debt Relief under the Catastrophe Containment and Relief (CCR) Trust to bridge the enormous financing gap resulting from the Ebola outbreak.
II. Request for RCF and Debt Relief under CCR Trust
Despite the difficult environment, the authorities are still committed to implementing the ECF program in line with its post Ebola Economic Stabilizing and Recovery plan. The indicative targets and performance criteria were broadly met despite the deteriorated implementation capacity. On the structural front, notwithstanding the limited functioning of the public sector, some key structural reforms were completed, including the establishment of the Liberia Revenue Authority (LRA), installation of the Civil Service Management module, approval of the Insurance Act, and merging the Ministries of Planning and Economic Affairs.
However, due to lack of a comprehensive review on a regular basis owing to the difficult environment, normal disbursements under the ECF program have stalled. Thus, the disbursement under the Rapid Credit Facility (RCF) and debt relief under the Catastrophe Containment and Relief trust (CCR) will help the authorities to cope albeit partially with urgent budgetary and balance of payment needs. Moreover, in the highly dollarized financial system, these resources will strengthen the CBL’s capacity to respond to potential liquidity needs.
III. Macroeconomic Policies and Outlook
Fiscal policy
Fiscal performance has been constrained by the revenue shortfall, reflecting the decline in economic activity. However, the central government’s FY2014 fiscal deficit remained broadly unchanged at about 1.2 percent of GDP compared with FY 2013 due to significant under-execution of public investment and the impact of the payroll cleanup on the wage bill. Although, the FY2015 budget deficit is set to expand significantly in response to the Ebola crisis, the revenue performance in the first half of FY2015 is broadly in line with the revised budget.
In response to the Ebola outbreak, the authorities remain committed to pursuing an accommodative fiscal policy while avoiding a rapid increase in debt burden. To mitigate the revenue shortfalls owing to the weak economic activity, the authorities are strengthening tax administration and compliance toward Liberia Revenue Authority (LRA) to boost tax collection even after the economy bounces back. While the authorities are ready to support safety net spending to protect the poorest households, they are also convinced that for a strong inclusive growth it is important to continue implementing the public investment program to build the capacity for economic activity. In addition, the authorities will continue to strengthen public financial management and budget process. To this end, they are committed to swiftly finalizing the audit of the off-budget road contracts at the Ministry of Public Works and enhancing public procurement. In addition, the authorities have launched a process to recruit an international accounting firm to assist the government with the financial management of the Ebola Trust Fund.
Monetary and Financial Sector Policies
Maintaining price stability is a key objective of monetary policy. In this regard, while the declining international oil prices have mitigated inflation pressures, the Central Bank of Liberia (CBL) is improving liquidity management to rein in inflation. Further, the authorities are committed to maintaining a flexible exchange rate policy. However, at the onset of the Ebola crisis, exchange rate pressures have prompted the CBL to intervene to stabilize the market.
Financial sector stability has been threatened by the weak economic activity. Given the uncertainties, real private sector credit growth dropped to 19.6 percent in November 2014 from 40.4 percent at end November 2013. Non-performing Loans (NPLs) reached 18.2 percent in November 2014 compared to 14.8 percent in December 2013.
Cognizant of the important role of the financial sector in boosting economic activity, the CBL announced policy measures in late December 2014 to mitigate the impact of the Ebola outbreak on commercial banks to ensure stability in the financial system. In this regard, the CBL will effect various measures including exercising dispensation on specific regulations in order to reduce the provisioning burden on NPLs associated to the Ebola crisis, waiving default charges and interest accrual on delinquent facilities. The policy decisions of the CBL are restricted to a defined period classified as “Ebola Crisis Period” from around July 2014 to June 2015.
IV. Conclusion
The Liberian authorities are committed to swiftly tackling the Ebola outbreak to boost economic growth and reduce poverty. While they continue to implement the ECF program, they are aware that the program will need adjustments to take into account different shocks stemming from the Ebola crisis. Under the normalized conditions, we urge staff to seize the opportunity to ensure that there is comprehensive review of the ECF. Meanwhile, given the urgent budgetary and balance of payments needs, the authorities are requesting the Executive Board to approve the disbursement under the Rapid Credit Facility (RCF) and debt relief under the Catastrophe Containment and Relief Trust (CCR). Though these resources represent one third of the financial needs, the authorities expect that RCF and CCR will play a catalytic role and foster donor support to the country and help the Government to implement current and post-Ebola programs and support the achievement of broad based growth, and sustainable development.