Liberia: Fourth Review Under the Extended Credit Facility Arrangement and Requests for Waivers of Nonobservance of Performance Criteria, Modification of Performance Criteria, and Rephasing and Extension of the Arrangement
Author: International Monetary Fund. African Dept.
Publication Date:
08 Jan 2016
eISBN:
9781513520155
Language:
English
Keywords:
ISCR; CR; debt; Ebola crisis; real GDP; ECF arrangement; position target; government US$; growth prospect; CBL's net foreign exchange position; Ebola; Budget planning and preparation; Global; commodity export
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This paper discusses Liberia's Fourth Review Under the Extended Credit Facility (ECF) Arrangement and Requests for Waivers of Nonobservance of Performance Criteria (PC), Modification of PC, and Rephasing and Extension of the Arrangement. The end-June 2014 quantitative PC on government revenues and central bank net foreign exchange position, and one indicative target on net domestic assets were not met. Only three out of seven structural benchmarks for the fourth review were met. Based on the authorities' corrective actions, the IMF staff supports completion of the delayed fourth ECF review, and the authorities' request for an extension and re-phasing of the program to end-December 2016.

Abstract

This paper discusses Liberia's Fourth Review Under the Extended Credit Facility (ECF) Arrangement and Requests for Waivers of Nonobservance of Performance Criteria (PC), Modification of PC, and Rephasing and Extension of the Arrangement. The end-June 2014 quantitative PC on government revenues and central bank net foreign exchange position, and one indicative target on net domestic assets were not met. Only three out of seven structural benchmarks for the fourth review were met. Based on the authorities' corrective actions, the IMF staff supports completion of the delayed fourth ECF review, and the authorities' request for an extension and re-phasing of the program to end-December 2016.

Post-Ebola Challenges

1. Liberia is moving on from the Ebola epidemic. The country was declared Ebola-free by the World Health Organization (WHO) on September 3, 2015, even though there have been a few new cases in the Monrovia suburbs.1 Since the outbreak began in March 2014 in neighboring Guinea, Liberia experienced 10,675 cases and 4,809 deaths. Strong government leadership, a large international effort and extensive community engagement contributed to the near-eradication of the disease. To fully and permanently eliminate it, prevention and response strategies at the country level and close cross-border coordination with Guinea and Sierra Leone will be needed. Significant resources will also have to be channeled towards strengthening the health and social protection systems, consistent with the authorities’ Economic Stabilization and Recovery Plan (ESRP) which is designed to guide the economy back to the path set by the long-term Agenda for Transformation.

Economic Stabilization and Recovery Plan

The ESRP focuses on three pillars: recovering output and growth, strengthening resilience and reducing vulnerability, and strengthening public finances and ensuring service delivery. It also targets priority interventions for agriculture, basic infrastructure, health, education, social protection, revenue mobilization and public financial management (PFM). The total cost of the ESRP is estimated at about $1.3 billion over three years.

Recovering output and growth (estimated cost: US$305 million)

The ESRP identifies sector-specific policies to revitalize growth to pre-crisis levels with more inclusiveness and job creation. 21 percent of total ESRP costs are allocated toward enhancing access to finance for farmers and restarting key infrastructure projects. This pillar also covers economic diversification and private sector development.

Estimated Cost of ESRP

(Millions of U.S. dollars)

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Source: Liberian authorities.

Strengthening resilience and reducing vulnerability (estimated cost: US$664 million)

The ESRP seeks to improve health; education; water, sanitation, and hygiene (WASH); cash transfers; and security. Health sector investments account for about 35 percent of the ESRP costs, focusing on infrastructure and capacity building. Education policies mainly aim at improving education and training quality. Cash transfers to Ebola virus disease (EVD)-affected households will be established. Finally, the plan calls for US$94 million in priority investment in the security sector ahead of UNMIL’s departure in June 2016.

Strengthening public finances and ensuring service delivery (estimated cost: US$289 million)

Under this pillar, the government will continue its efforts to improve revenue administration, enhance PFM, especially transparency and accountability, and prioritize public expenditures. Furthermore, the government will aim at decentralizing and improving the quality of public services.

2. Poverty and food insecurity remain higher than before the crisis. Survey evidence compiled by the World Bank in March 2015 suggests 40 percent of heads of households who were working at the onset of the Ebola crisis are still out of work (48 percent at the height of the crisis). However, food insecurity has dropped in the rural areas thanks to a strong harvest.

3. On the heels of the outbreak, the commodity price shock is further dampening the economic outlook. After near-stagnation during the epidemic, the economy looks set to experience a U-shaped recovery, with lower growth, exports and revenue paths. The two shocks are also exposing the economy’s limited productive base and heavy dependency on large foreign concessions.

4. The political and security situation is stable. The political system is preparing for the 2016 constitutional referendum, but is also already gearing up to the 2017 general elections, which will choose the new head of state as President Johnson Sirleaf cannot be elected for a third term. The UNMIL contingent’s drawdown will be completed in September 2016 and leave only a small peacekeeping force on the ground.

5. The ECF program was delayed by the Ebola epidemic. After the approval of the ad-hoc review and augmentation of the ECF in September 2014, the authorities continued to consult closely with staff on policies. However, they were not able to make progress on the program, as capacity was severely impacted by the focus on fighting the outbreak. The Fund continued to support Liberia financially with a disbursement under the Rapid Credit Facility and debt relief under the Catastrophe Containment and Relief in February 2015.

A Timid Recovery

6. Economic recovery is taking hold, but only gradually. Real GDP growth is estimated to have expanded by only 0.7 percent in 2014 as all economic sectors were affected by the epidemic. In 2015, GDP growth is projected at 0.3 percent as production and investment are being cut in the commodity exporting sectors, particularly iron ore and rubber, even though services are expected to remain resilient (Figure 1).

Figure 1.
Figure 1.

Liberia: Recent Economic Developments

Citation: IMF Staff Country Reports 2016, 008; 10.5089/9781513520155.002.A001

7. Inflation has declined, while exchange rate pressures appear to have abated. Inflation eased to 6.5 percent (y/y) in September 2015 from a peak of 13.5 percent in September 2014, when the Ebola epidemic had limited the supply of agricultural products. Both food and non-food inflation has been moderating, largely on account of lower international rice and oil prices. The Liberian dollar depreciated by 6.8 percent in the first ten months of 2015, a relatively small amount compared to regional peers partly due to the CBL’s interventions in the foreign exchange market.

8. The current account deficit widened. The current account deficit worsened from about 28 percent of GDP in 2013 to about 31 percent in 2014 mainly because of the sharp decline in exports caused by the Ebola and commodity price shocks, which were only partially offset by higher Ebola-related current transfers. The deficit is projected to rise to 39 percent of GDP in 2015 as commodity exports continue to decline. Gross international reserves have declined from $411 million at end-2014 to US$394 million in September 2015 (about 2.4 months of essential imports or 2.1 months of total imports).

9. Financial sector activity has yet to recover from the crisis. After a period of contraction, credit to the private sector rose by 7.6 percent in real terms in September 2015 (y/y) but nonperforming loans (NPLs) rose from the pre-Ebola 14.5 percent of total loans in March 2014 to 19.3 percent in July 2015.

10. Program performance remains mixed:

  • End-June 2014 performance criteria (PCs) and indicative targets (ITs) (relevant for the fourth review) were met, except the revenue floor (PC), the floor on net foreign exchange position of the CBL (PC), and the ceiling on net domestic assets (NDA) (IT). The revenue floor was missed by US$22 million, owing to shortfalls in tax and non-tax collection. The CBL missed the net foreign exchange position target as it incorrectly counted the March 2014 placement of €47 million with a domestic commercial bank as part of gross reserves.2 The NDA ceiling was missed only narrowly.

  • Of the seven end-March and end-June 2014 structural benchmarks (relevant for the fourth review) only three were met, due to the limited functioning of the public sector (the cleaning up of the payroll, the publication of the FY2016 budget calendar, and the pilot on integration of credit-financed projects into the Integrated Financial Management Information System - IFMIS).

  • End-December 2014 targets (originally PCs set for the fifth review) were all missed except for the targets on non-concessional borrowing and accumulation of external arrears.

  • Of the four end-December 2014 benchmarks (originally set for the fifth review), none was met. Nonetheless, the authorities were able to press ahead with a number of structural reforms, including improving cash management and rolling out IFMIS to 17 additional spending entities.

Policy Discussions

A. Outlook and Risks

11. The macroeconomic outlook remains difficult. Growth is projected to accelerate to 3.9 percent in 2016, with services driving growth given the continued weakness in the natural resource sectors with the exception of gold extraction. Over the medium term, growth is expected to rise to 6–7 percent on average as an improvement in confidence following the elections and a successful security transitions compensates the negative impact of delays in mining and oil exploration projects (Text Table 1, MEFP ¶7). Inflation is projected at around 8 percent in 2015–16 in the context of the rebound in economic activity and import prices.

Text Table 1.

Liberia: Selected Economic Indicators, 2013–18

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Sources: Liberian authorities and IMF staff estimates and projections.

Imports related to UNMIL operations and FDI projects such as iron-ore concessions are excluded.

Budget data expressed as fiscal year ending in June on a cash basis, i.e., 2013 = FY2012/13.

The fiscal data and projection cover not only budget but also off-budget activities.

12. Risks to the outlook are tilted to the downside. Slow growth prospects for emerging markets and China could further depress commodity prices and investment prospects, although low oil prices would help maintain inflation in the single digits. Security risks could increase as UNMIL withdraws in the context of the 2016 constitutional referendum and the 2017 presidential election cycle, which, combined with economic weakness, could exacerbate social tensions (Table 7 and MEFP ¶8). A wider re-emergence of the Ebola virus epidemic is possible, as confirmed by the recent three isolated cases, including through cross-border transmission. Possibly as a result of security and health issues, policy implementation under the program could weaken.

Table 1.

Liberia: Selected Economic and Financial Indicators, 2013–18

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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., 2013 = FY2012/13.

The fiscal data and projection cover not only budget but also off-budget activities.

Table 2.

Liberia: Balance of Payments, 2013–181

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

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Sources: Liberian authorities and IMF staff estimates and projections.

The central bank is currently revising BOP statistics using the custom-based trade data, which would have better data coverage, especially on imports.

The large “private financing” numbers may reflect current transfers that are un-captured by the official statistics, while the central bank is currently updating the BOP statistics to resolve this issue.

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.

Table 3a.

Liberia: Fiscal Operations of the Central Government, FY2013–181

(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).

Non-tax iron sector revenue, including social contribution by the iron companies.

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, FY2013–181

(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).

Non-tax iron sector revenue, including social contribution by the iron companies.

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 adjustments are shown separately.

Table 5.

Liberia: Financial Soundness Indicators, 2012–June 2015

(Percent)

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Sources: Liberian authorities and IMF staff estimates.
Table 6.

Liberia: Medium-Term Outlook, 2013–20

(Percent)

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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.