I. Context and Background

1. Our Liberian authorities appreciate the candid discussions during the recent 2019 Article IV Consultations. They value the Fund’s policy advice and look forward to continued collaboration and engagement to restore macroeconomic stability and achieve sustainable and inclusive economic growth.

2. Liberia is facing major economic challenges emanating from the decline in commodity prices, significant drop in external grants, the lingering effects of the Ebola epidemic, and a massive scale down in the operations of the United Nations Mission in Liberia (UNMIL). To address these challenges, the new administration launched a medium-term national development plan, the Pro-poor Agenda for Prosperity and Development (PAPD 2019–23) in October 2018. The PAPD aims to give power to the people through macroeconomic empowerment and job creation; promotion of a cohesive society; provision of basic social services; creation of an enabling environment to foster peace and security; enforcement of the rule of law; and promotion of the private sector as the driver of growth.

II. Recent Economic Developments and Outlook

3. Economic activity slowed down from 2.5 percent in 2017 to 1.2 percent in 2018, owing to subdued demand for primary products in the export market, namely rubber and iron ore. Meanwhile, gold production improved due to a slight increase in global prices. Inflation accelerated from 13.9 percent in 2017 to 28 percent end 2018, triggered by a 27 percent depreciation of the Liberian dollar.

4. Despite improvements in gold exports, the current account deficit remained high at 23 percent of GDP in 2018. Improvements in the trade balance were also offset by declines in current transfers mainly from lower aid flows and the withdrawal of the UNMIL. Foreign exchange reserves are projected to decline to 2.1 months of import cover by end 2019, from 3 months of imports at end 2018.

5. In the short to medium term, the authorities are taking steps to accelerate economic growth beyond the 2 percent projected by staff for 2020, through the implementation of prudent fiscal, monetary and structural policies. In addition, they are committed to mobilizing additional fiscal resources, cutting non-productive recurrent spending, eliminating borrowing from the Central Bank, and avoiding reliance on high-cost external financing. These efforts will be complemented by support from the international community.

III. Fiscal Policy and Debt Management

6. To achieve fiscal sustainability, the authorities have initiated a fiscal reform program anchored on increased revenue collection and expenditure efficiency, including management of the wage bill. In this respect, the authorities have launched a Domestic Revenue Mobilization Strategy aimed at raising revenue by 3 percent of GDP over the medium term, starting with a 0.25 percent increase in the next fiscal year. At the same time, new measures have been introduced to improve revenue collection and administration as well as broaden the tax base. Such measures include a new excise law, passed by the National Legislature in December 2018; introduction of electronic tax filing; and establishment of a platform for payment of taxes via mobile money. In addition, the authorities are also taking steps to simplify the tax code, improve the collection of property taxes, strengthen tax compliance and risk management, improve the integrity of the taxpayer’s registry, and improve the system for the processing of customs declarations.

7. Despite the challenges in the implementation of the FY 18/19 budget, the authorities have instituted across the board cuts on goods and services including subsidies, while preserving health, education, and security expenditure. More significantly, the authorities continued to rationalize salaries of public servants in the high-income bracket, including those in the SOE sector, and introduced a hiring freeze. Further, they initiated work on payroll reforms with a view to harmonize wages and remove the discretionary management of allowances. They have also requested technical assistance (TA) from the Fund to evaluate the social impact of these reform measures. In addition, the authorities are reforming the management of public investments with the aim to enhance the implementation of donor-supported projects and align them to the government’s national development plan. In this respect, a donor database has been developed, based on the PIMA recommendations.

8. Going forward, the authorities have prioritized preparation of a realistic and credible budget for FY 19/20. To this end, the FY19/20 revenue estimates will be based on the previous year’s outturn, reflecting macroeconomic fundamentals. The authorities have also intensified consultations among the three branches of government, as part of the preparations for the FY 19/20 draft budget, with a view to achieve consensus.

9. The authorities remain committed to implementing public financial management (PFM) reforms. In this context, they are working with development partners to ensure that the successor PFM project, IPFMRP II, addresses the core PFM challenges facing the country, including building human and institutional capacity in public procurement, investment in tax IT infrastructure, and improving cash management. Amendments to the PFM Law, aimed at strengthening budget execution and arrears management as well as transparency and accountability across government, have been submitted to the National Legislature.

10. The authorities are committed to maintaining debt on a sustainable level and preserving a moderate risk of debt distress. In this respect, all new development projects will be financed on using grants or concessional financing. These policies will be anchored in the new debt management strategy to be developed with TA support. Meanwhile, the authorities plan to cancel two loans that would have led to debt sustainability breaches.

IV. Monetary Policy

11. The Central Bank of Liberia (CBL) is fully committed to tightening monetary policy, as necessary, to ensure price and exchange rate stability while safeguarding foreign exchange reserves. In this regard, the fiscal and monetary authorities have agreed on a policy coordination framework to facilitate implementation of the recommendations of the last safeguards assessment, including the promotion of the integrity of the CBL. The authorities have also committed to strengthening internal controls and improving budget effectiveness and efficiency at the CBL. They are stepping up efforts to address Government obligations to the CBL, with recapitalization of the Central Bank being a priority. In addition, the authorities are strengthening the work of the Liquidity Working Group (LWG) to improve the liquidity forecasting and management framework.

12. As part of an effort to modernize the monetary policy framework and deepen the financial sector, the CBL recently launched new monetary instruments, including a Standing Credit Facility (SCF), a Standing Deposit Facility (SDF), an Intra-day Facility (IDF) and CBL bills. Together, these facilities are expected to help in the management of monetary conditions and pave the way for a move towards an interest-based monetary framework.

13. To strengthen the governance and operational independence of the CBL, and consistent with Fund TA advice, the authorities completed the drafting of amendments to the CBL Act. The final draft includes provisions for a monetary policy committee, expansion of the Bank’s mandate, restriction of CBL lending to government, a currency regime and assignment of the right to print the currency solely to the CBL. The plan is to submit the amended Act to the National Legislature for passage into law before the Legislature goes into recess in August 2019.

14. The authorities view the FX surrender requirement as a temporary measure, to be removed as soon as foreign exchange inflows improve. In order to mitigate the negative impact of the remittance split policy, the authorities will ensure that recipients get the fair value of their Liberian dollar receipts based on the market exchange rate.

V. Financial Sector Policies

15. The financial sector remains adequately capitalized, with all banks operating above the 10 percent capital adequacy ratio (CARs), except one bank which remains below the minimum capital requirement of US$10 million. The CBL is working with the undercapitalized bank to resolve the breach in an orderly and timely manner. Meanwhile, the ratio of non-performing loans (NPLs) to total loans declined from 14.7 percent in 2017 to 13.8 percent in 2018. To address NPLs, the authorities have stepped up recovery efforts, and banks have written-off a number of bad loans based on the write-off policy of the CBL. At the same time, the credit reference system is being upgraded. Further, the Bank is working with the fiscal authorities to resolve all direct and indirect GOL obligations to commercial banks, through the issuance of 7-year bonds.

16. In line with FATF’s recommendations, a draft AML/CFT Act has been completed and will be validated by stakeholders, shortly. When passed into law, the Act will address concerns raised by FATF and regional bodies, through the establishment of an appropriate legal framework for the timely access to beneficial ownership and control of trust information and non-profit organizations. Further, the CBL has conducted an AML/CFT risk assessment of the financial sector and developed an AML/CFT on-site examination manual, with TA from the IMF. In addition, the CBL with Fund TA is working on the revision of the Financial Institutions Act (FIA), which should further strengthen the CBL’s legal framework for banking regulation and supervision. The Bank has also taken measures to enhance transparency and disclosure standards in the banking system through the implementation of the International Financial Reporting Standards (IFRS).

VI. Structural Policies

17. The authorities are committed to implementing a range of structural reform measures to improve the business climate and deliver broad-based inclusive growth. They have set up a Business Climate Working Group (BCWG) comprising the private sector, donor community, and government representatives, to identify binding constraints to private investment and provide concrete proposals for the improvement of the business climate. To this end, the authorities have issued an Executive Order aimed to reduce administrative and processing requirements for businesses, concessionaries, and real property owners. They have also abolished the import permit declaration system (IPD), which was viewed as a hindrance to business competition and costly to importers. Further, a new Land Rights Act has been passed and will provide certainty of ownership to agricultural concessionaires. As part of an effort to address corruption, the authorities have drafted amendments to the anti-corruption legislation in line with the PAPD objective to strengthen integrity of institutions, including the Judiciary.

VII. Conclusion

18. The authorities remain committed to achieving the key objectives of the PAPD and enhancing sustainable and inclusive growth. To anchor the reform agenda and address the short to medium term macroeconomic challenges, the authorities have signaled a desire to negotiate an extended credit facility (ECF) arrangement with the Fund. They look forward to continued Fund engagement to address the macroeconomic challenges facing the country and achieving sustainable and inclusive growth.