Introduction

We thank staff for the constructive engagement with the Liberian authorities during the recent Article IV Consultations held in Monrovia, and the well-written set of reports. My authorities broadly agree with the staff assessment and find the discussions broadly consistent with the pillars of their medium term economic growth and development strategy, under the Agenda for Transformation (AFT 2012–2017).

Recent Economic Developments and Macroeconomic Outlook

Economic growth in Liberia has been severely weakened by the steep decline in the international prices of Liberia’s two major commodities, iron ore and rubber. The outbreak of Ebola in 2014, further strained the economy, significantly eroding gains made in the areas of poverty reduction and growth. Consequent to the twin shocks, the economy contracted with GDP growth falling from 8.7 percent in 2013 to 0 by 2015.

This notwithstanding, economic activity is expected to rebound to 2.5 percent in 2016, averaging 5.5 percent over the medium term, spurred by the resumption of public investment in transportation and energy. The possible resurgence of Ebola, however, remains a major risk to the recovery process. To strengthen capacity and resilience to combat any outbreak of the disease, the authorities have targeted investment in the health sector and the containment of recent flare ups of the disease allude to the positive returns of this investment. In addition, a Bill has been submitted to the National Legislature for the establishment of a National Health Institute, which will help Liberia increase surveillance, laboratory and outbreak response capacity and efficiency for detection and response to public health threats.

Inflation has remained in single digits benefitting from lower international food and oil prices and the gradual improvement in domestic food production, occasioned by the halt of Ebola as well as the relative stability of the exchange rate. The current account deteriorated in 2015 mainly due to a decline in export earnings. The decline in imports due to lower international oil prices and Ebola-related inflows was more than offset by exports which declined by about 40 percent relative to 2014.

Liberia is scheduled to hold general and presidential elections in October 2017 which are historical as it will be the first time that an elected leader transfers power to another. The authorities remain fully committed to continue to institute policies aimed at achieving economic, political and social stability. In this regard, they have invested in the security sector by recruiting and training additional security personnel. This is also in line with the drawdown of the United Nations Mission in Liberia (UNMIL).

Fiscal Policy and Public Financial Management

The 2016/17 Budget resource envelope declined by 11 percent compared to 2015/16. The Budget is underpinned by stringent fiscal policy measures to provide critical public goods and services as well as deliver on targeted investment projects. These growth-enhancing measures are well anchored in the Medium Term Expenditure Framework. To boost revenue generation, the authorities have submitted to the National Legislature, a number of amendments to the Revenue Code, including measures focused on strengthening indirect taxation, without further depressing economic activity. The authorities are also streamlining recurrent expenditures to reflect national priorities in a manner that safeguards social spending. Capital spending will be limited to ongoing projects under the Public Sector Investment Plan (PSIP).

The current legal and regulatory framework requires that all budgets submitted for approval by the National Legislature to be “balanced”, with no room for deficits. The one-off requirements to support both the 2017 elections and replacement costs in the security sector, compounded by the envisaged revenue shortfall, have made the application of this principle a challenge to the authorities. While the 2016/17 budget has been designed to accommodate these developments, there still remains a case for additional sources of funding including support from development partners and highly concessional financing for critical projects to steer the country on a firm and sustainable growth trajectory.

Significant strides have been made in public financial management reforms. The Integrated Financial Management Information System (IFMIS) roll-out, payroll verification exercises and the introduction of new procurement regulations to guide the conduct of vendor transactions are key steps that have been instituted by the authorities. In addition, steady progress is being made in the implementation of the Treasury Single Account (TSA).

Debt Management

The authorities are cognizant of the prevailing risks that could escalate the debt thresholds from moderate to high risk category and are committed to remain within the confines of the borrowing limits agreed with the Fund. Consultations on a new debt management manual reflecting the authorities’ policy of keeping debt at sustainable levels are ongoing. Grants are high on the scale of preference to support infrastructure development, closely followed by highly concessional options. The authorities are also mindful of the need to maintain borrowing space for future administration’s development agenda.

Monetary and Exchange Rate Policies

Monetary policy stance is to primarily support low inflation and exchange rate stability. As such, foreign exchange market interventions are aimed at smoothening the movement in the exchange rate. The Board of the Central Bank of Liberia (CBL) approved a three-year financial plan in December 2015 that envisages a reduction in the CBL’s operational deficits and prioritizes the accumulation of reserves, targeting gross reserves at about 3 months of prospective imports by end-2016. Policy credibility and efficacy have been reinforced with improved collaboration between the fiscal and monetary authorities including through an institutionalized liquidity management framework.

Further, the government intends to continue discussions with the National Legislature to reverse an amendment to the CBL Act that mandates the issuance of currency to the approval of the Legislature, in order to strengthen central bank autonomy and improve the conduct of monetary policy.

Financial Sector Policies

The authorities are committed to taking bold measures to preserve the stability of the banking sector, which has been negatively impacted by the commodity price shock and Ebola. As a manifestation of this commitment, the CBL has engaged the Fund to assist in setting up a framework for macro prudential supervision of the banking system. In addition, the CBL has launched the Financial Sector Development Implementation Project (FSDIP) as a vehicle for instituting reforms to the existing fundamentals of the system, including capital adequacy regulations and the stress testing frameworks. This would align the central bank’s practices to standards promulgated by the Basel Committee for Banking Supervision.

To address the issue of high percentage of Non-Performing Loans (NPLs), the authorities are strengthening the CBL’s enforcement and supervisory capacities, as well as exploring setting up an Asset Management Company to market distressed assets.

While de-risking is a global problem, there has been a heavy loss of correspondent banking relationships in Liberia for a wide range of reasons, as highlighted in the staff report (selected issues paper). With respect to weaknesses in the AML/CFT Framework, the authorities have committed to fully funding the Financial Intelligence Unit (FIU) in the FY2017 budget, amid broad cuts in a tight fiscal environment and to ensure compliance to standards set by the Financial Action Task force (FATF). In addition, a joint effort between the authorities and the United States Department of Treasury, Office of Technical Assistance (OTA) has also been launched to further strengthen the country’s AML/CFT regime.

With the goal to fostering financial inclusion, the authorities are working to develop the necessary regulatory framework to support additional delivery channels of financial products and services. In this regard, the CBL, working with other stakeholders, has established 11 rural community finance institutions (RCFIs) across the country to boost access to finance in the rural areas.

Structural Reforms

To achieve strong, inclusive growth, the authorities are committed to implement structural reforms to facilitate economic diversification, improve existing infrastructure and the business environment. With agriculture as the anchor of the diversification policy, the authorities, are working on a string of initiatives under the Liberia Agriculture Transformation Agenda. This is expected to spur productivity and diversification of the agricultural sector and related value additions.

Limited access to electricity, due to low generation, has increasingly become a binding constraint to business and investment. The limited power supply has tilted consumption cost north of $0.54 per kilowatt hour, ranking electricity costs among the highest in Africa. To address this predicament, the authorities have intensified investment in the power sector. In this regard, the first Heavy Fuel Oil (HFO) power plant is already operating and two more plants are expected to start over the coming months while the Mount Coffee hydropower project is expected to produce electricity from December 2016. The government has also signed a grant agreement with the Millennium Challenge Corporation (MCC) to boost transmission, distribution and access to electricity.

The accession to World Trade Organization (WTO) protocols was ratified by the Senate in April 2016 and is awaiting concurrence of the House of Representatives. The benefits of conformity, which includes lower cost of imports and access to wider markets, are seen by the authorities as necessary elements to propel growth.

Conclusion

Emerging from fragility has proved to be a challenge in the face of exogenous shocks. In spite of the immediate hurdles, the authorities reaffirm their steadfast commitment to building capacity and instituting prudent policy actions geared towards economic recovery. In close collaboration with development partners, the Liberian authorities have committed to implement macro-critical reforms, both fiscal and monetary aimed at reversing the dire situation and build the foundation for lasting recovery. Additionally, the authorities wish to continue leveraging Fund’s engagement and technical assistance in the implementation of the Ebola Economic Recovery Plan, which is a short term off-shoot to the medium term Agenda for Transformation.