Abstract
Request for a Four-Year Arrangement Under the Extended Credit Facility-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Liberia
Introduction and Context
1. Our Liberian authorities appreciate the constructive policy dialogue with staff during recent negotiations for an Extended Credit Facility (ECF) arrangement. They broadly concur with the staff appraisal and policy recommendations.
2. Liberia has continued to face significant economic challenges emanating from a rapid decline in aid flows and a series of shocks including the commodity price slump. Widening current account deficits, huge fiscal deficit, growing inflation, the emergence of domestic arrears and a decline in FX reserves have all contributed to a general decline in economic activity. To address these challenges, the authorities developed the Pro-poor Agenda for Prosperity and Development (PAPD 2018–23). The PAPD aims to address poverty and unemployment, the human capital and infrastructure gaps, and promote the private sector as an engine of growth. To complement the PAPD, our authorities request Fund support to implement economic reform measures aimed at restoring macroeconomic stability under an ECF arrangement. The ECF will anchor policy implementation and unlock development finance to support realization of the objectives of the PAPD.
Recent Economic Developments and Outlook
3. Economic growth is expected to decline from 1.2 percent in 2018 to -1.4 percent in 2019, largely driven by slowing demand as reflected by slow credit growth and consumption. Looking ahead, economic growth will rebound to 1.4 percent by end 2020, reaching 5.5 percent by 2024, due to an increase in mining activity and higher agriculture and fisheries production.
4. Inflation increased markedly to 30 percent at end September 2019, from 21 percent recorded during the same period in 2018. The rise in inflation reflects a marked depreciation of the Liberian dollar and significant money supply growth. Going forward, inflation is expected to decline, reaching single digits in the medium term.
5. The external current account is projected to marginally improve from a deficit of 23.4 percent of GDP at end 2018 to 21.1 percent in 2019, reflecting modest expansion in gold and iron ore exports. However, this gain has been affected by a steep decline in remittances inflows. Consequently, reserves declined from 2.4 months of imports in 2018 to 2.1 months in the first half of 2019.
Fiscal Policy, Public Financial and Debt Management
6. To restore fiscal sustainability and bring the primary deficit to debt-stabilizing levels, the authorities are pursuing fiscal consolidation efforts underpinned by both revenue generation and expenditure control measures, as reflected in the FY 2020 budget. In this connection, the Liberia Revenue Authority (LRA) has stepped up enforcement with a view to raise revenue by a minimum of 3 percent of GDP over the medium term, in line with the key objectives of the Domestic Resource Mobilization Strategy (2018–2022). They have instituted targeted audits within key sectors; deployed electronic fiscal devices at major business entities to monitor sales; and migrated to phase 2 of the ECOWAS Common External Tariff (CET), which is expected to increase the average effective tax rate. In addition, they are modifying the revenue sharing ratio with State-Owned Enterprises (SoEs); and plan to increase the Goods and Services Tax (GST) rate and broaden its coverage, while streamlining exemptions.
7. On the expenditure front, the authorities have launched a comprehensive restructuring of the civil service wage system to create space for productive spending. In particular, they have taken steps to harmonize the wage bill across government departments, which is expected to reduce total compensation by 1 percentage point of GDP. This expenditure reduction occurs despite the absorption of over 4,000 health workers on the payroll, whose salaries were previously financed through donor projects. The salary rationalization, together with other ongoing efforts to contain non-productive expenditures including the centralization of civil service hiring, payroll management and record keeping, is expected to unlock resources for much-needed investment and social spending.
8. As part of an effort to restore credibility of the overall budget, the National Legislature passed amendments to the public finance management (PFM) Act in September 2019. To reduce domestic arrears, contain fiscal slippages, and improve reporting, the authorities have fully aligned the budget’s business process with disbursement requirements of spending entities. To smoothen the seasonality of revenue flows and help meet short term cash requirements, they will initiate periodic sales of treasury bills and eliminate central bank financing during the program. Relatedly, a proposal on the establishment of a Treasury Single Account (TSA) will be submitted for Cabinet’s endorsement in March 2020.
9. The authorities remain committed to ensuring long term debt sustainability. They have taken measures to eliminate central bank financing and the accumulation of new arrears. Going forward, they will adhere to the ceiling on non-concessional borrowing, limit contraction of loans on non-concessional terms, refrain from non-transparent collateralized agreements and ensure that new debt is contracted transparently. To contain fiscal risks and associated contingent liabilities, all SoE debt will be subjected to intense scrutiny and approval by the Debt Management Committee.
Monetary and Financial Sector Policies
10. The authorities remain committed to enhance the effectiveness of monetary policy. In this respect, the CBL introduced a new monetary policy framework in September 2019. The framework includes an expanded and modernize policy toolkit of interest-rate based instruments. The new monetary policy framework will help establish a yield curve, support effective financial intermediation and deepen the interbank market and financial markets. Furthermore, reserve requirement ratios for local currency deposits and FX have been harmonized and the amended Required Reserves Regulations to support implementation will be issued in December 2019. Going forward, the authorities will limit foreign exchange interventions to smoothening volatile market conditions, as well as supporting operations aimed at building reserves.
11. To support implementation of the new monetary policy framework and enhance the independence, governance and accountability of the Central Bank of Liberia, the authorities have completed amendments to the Central Banking Act. Building on this, all executive and non-executive Board members have been formally appointed and an Action Plan incorporating the recommendations of the Kroll Report and a recent review of IMF TA on currency management, has been updated for implementation. To strengthen internal controls, the authorities have engaged the services of a reputable audit firm to backstop the central bank’s Internal Audit Department. The CBL has taken steps to develop risked-based approaches to AML/CFT supervision, with support from Fund TA.
12. To reduce the CBL’s operational deficit and enhance its solvency and operational environment, the CBL has adjusted its 2020 budget downwards, including making significant double-digit cuts in wages and operating costs and shifted the currency composition of its spending, including on salaries. They plan to sign an MoU with the Fiscal authorities aggregating all existing debt into an interest-bearing long-term negotiable bond.
13. To ensure financial sector stability, the CBL will enforce compliance with reporting requirements, including for open FX positions and improve data quality. Currently, the CBL is working on a plan to address key recommendations from a recent IMF mission on Financial Soundness Indicators (FSI). They will conduct a detailed assessment of the credit quality of the banking system, underwriting standards and adequacy of provisioning levels by end June 2020. As a follow up exercise, an asset quality review (AQR) of the entire sector will be conducted. Furthermore, additional efforts will be made to address non-performing loans (NPLs) and strengthen guidelines on bank resolution. To strengthen operational guidelines on bank resolution, the authorities are amending the Financial institutions Act, which is expected to be legislated in September 2020.
Structural Policies
14. In furtherance of efforts to strengthen the governance framework on corruption and the need to align the local Penal Code with the United Nations Convention Against Corruption
(UNCAC), the authorities are planning to introduce, by the end of the current fiscal year, legislation that criminalizes bribery of foreign officials and illicit enrichment. To this end, they intend to legislate provisions for the establishment of a special fast-track court to prosecute corruption; amend the AML/CFT framework consistent with FATF recommendations; and strengthen the anti-corruption act in respect of asset declaration.
15. The Government continues to take steps to improve the business environment. In this vein, it has streamlined the business and property registration processes, while a new Customs Code will be enacted by June 2020 to help simplify customs administration. Foreclosures and cases from insolvencies are recording shorter durations for resolution. Furthermore, the authorities have extended the tenures of work permits and residence permits from one (1) to five (5) years, to provide further confidence to investors and other actors in the economy. These efforts complement the Land Rights Act, Whistleblower Protection Act, Freedom of Information Law, and the Power Theft Act, which are already in place. In the meantime, the Business Climate Working Group, launched in October 2018, continues to meet regularly to discuss ways to further improve the business climate.
16. The authorities are reviewing the public procurement space with the aim of strengthening public procurement regulations, while at the same time pursuing the launch of an e-Procurement platform that would facilitate performance monitoring for improved efficiency and transparency as well as engender compliance levels that are consistent with international best practice. They are upgrading the ICT infrastructure to improve interfacing of tax payment platforms, and to enhance data quality.
Conclusion
17. The authorities are convinced that full implementation of transparent and well-conceived policies articulated in the Memorandum of Economic and Financial Policies (MEFP), within the purview of an ECF arrangement, would lead to a positive medium-term outcome. They are committed to a frontloaded and credible fiscal adjustment path, supported by an appropriate monetary stance and a modernized monetary policy framework. These efforts will be complemented by ongoing and planned structural reforms to address governance gaps and improve the business environment. The authorities continue to value the Fund’s policy advice and technical support and look forward to the approval of their request for an ECF by the Executive Board.