Liberia: Request for Disbursement Under the Rapid Credit Facility—Press Release; Staff Report; and Statement by the Executive Director for Liberia
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International Monetary Fund. African Dept.
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Publication Date:
12 Jun 2020
eISBN:
9781513547282
ISBN:
9781513547282
Language:
English
Keywords:
ISCR; CR; authority; IMF lending tracker; response plan; U.S. dollar liquidity; development expenditure; revenue shortfall; reform agenda; emergency food aid program; COVID-19; Public and publicly-guaranteed external debt; Loans; Sub-Saharan Africa; Global; financing gap; IMF staff estimate; budget support loan; accounts payable; IMF staff calculation; International reserves; Credit
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Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Liberia

Abstract

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Liberia

Context

1. The COVID-19 pandemic came at a time when a consensus on the need for broad-based reform had finally emerged, but macroeconomic conditions continued to be challenging. The authorities requested a four-year arrangement under the Extended Credit Facility (ECF) in December 2019 to restore macroeconomic stability, build a strong foundation for medium-term growth, and address weaknesses in governance. A broad range of the population has been suffering from the economic slowdown, high inflation, and volatile movements in the exchange rate for over two years.

2. The economic toll and the impact of the pandemic on the population, especially on the poorest, are likely to be high. Policy response to the pandemic was prompt. The first travel advisory, including quarantine requirements, was issued as early as February 28. By March 21, a general lockdown was mandated enforcing severe social distancing, including closure of schools, beaches, mosques, churches, and street markets. The spread of COVID-19 has so far been limited, but the number of cases is rising and carries a high mortality rate. The full scale of its potential spread is unknown, but the health care system is underdeveloped and likely to be overwhelmed should the incidence increase substantially. The general lockdown is taking a further toll on the population living below or near the poverty line with little or no social safety net.

3. Preliminary data suggest that performance under the ECF-supported program has been weak, though the authorities are fully committed to address the weaknesses. Most of the end-December fiscal targets and structural benchmarks were met but the monetary program went off track by a large margin mainly for two reasons: an acute shortage of Liberian dollar (LD) banknotes at a period of high cash demand resulting in higher foreign exchange intervention than programmed, as Liberians shifted from LD to U.S. dollar (USD) deposits to gain access to banknotes; and additional USD liquidity assistance extended to the banking sector. The authorities are addressing these weaknesses—aiming to bring the program back on track in time to complete the first review—but are faced with the challenging task of managing the COVID-19 crisis at the same time.

Impact of the COVID-19 Pandemic

A. Economic Developments Before the Pandemic

4. The pandemic is hitting Liberia at a time when economic activity was already declining. Staff revised the 2019 GDP growth rate down by 1.1 percentage point to -2.5 percent since the program inception as private sector confidence remained weak. Year-on-year imports and credit to the private sector also declined sharply in the second half of 2019.

5. Pressure on the exchange rate and inflation eased due to involuntary monetary contraction. A LD cash shortage at end-2019, a time of high seasonal demand, created LD scarcity that appreciated the exchange rate by 11 percent between October 2019 and January 2020. With high passthrough, inflation fell to 23.6 percent by January 2020.

6. Vulnerability to exogenous shocks remained high as both fiscal and external buffers were low, despite the US$23 million disbursement at the inception of the program. Gross official reserves increased in the fourth quarter of 2019 with the IMF disbursement and an increase in government deposits. However, net international reserves (NIR) declined by US$26.4 million for two main reasons. First, facing an acute shortage of LD banknotes at a period of high cash demand, the CBL sold US$10 million of USD cash to commercial banks to enable the banks to provide customers with cash to meet transactional demands. Second, additional USD liquidity assistance amounting to US$7 million was extended to the banking sector. Both the shortage of LDs and the USD liquidity assistance remain stable but elevated.

7. Economic growth for 2020 was forecast to reach only 0.5 percent before the pandemic. The slowdown in non-mining growth observed in the second half of 2019 was expected to continue into the first of half of 2020. Given the weak demand, inflation was projected to close 2020 at 15 percent.

B. Impact of the Pandemic

8. The full extent of the impact of the pandemic is not known but GDP growth for 2020 is projected at -2.5 percent, a 3 percentage-point revision from the pre-COVID baseline (Text Table 1 and Text Figure 1). Signs of a slowing economy have started to emerge as imports have begun to decline. Non-mining GDP will be affected by a large decline in hotel and transportation services (which make up 16 percent of GDP) due to social distancing measures and restricted cross border travel. Airlines have already cancelled all flights to Liberia until further notice. In 2020, the downward revision of iron ore prices is likely to reduce mining growth as well.

Text Table 1.

Liberia: Selected Economic Indicators, 2019–21

(Percent of GDP; unless otherwise noted)

article image
Source: IMF staff projections.

Fiscal variables are based on fiscal year.

Text Figure 1.
Text Figure 1.

Liberia: Impact of COVID-19, 2017–22

(Percent of GDP; except percent for growth)

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A001

Sources: Liberian Authorities; and IMF staff estimates.

9. The impact of the pandemic opens an urgent balance of payments (BOP) gap of US$150 million (5.1 percent of GDP) in 2020. The terms-of-trade shock is positive as fuel import prices declined much more than those of Liberia’s main export commodities (iron ore, rubber, gold). However, staff projects a deterioration in service receipts, especially in the hotel industry and related services, though the decline will be partly compensated by a fall in associated imports and income repatriation. A decline in net remittance inflows and delays in capital inflows are anticipated as advanced countries’ growth has been markedly revised down.

10. The BOP financing gap arises from fiscal deficits (Text Table 2).1 The fiscal financing gap has been estimated relative to fiscal target set under the ECF-supported program. These higher deficits are mostly due to a tax revenue shortfall, which is projected at US$119 million for 2020.2

Text Table 2.

Liberia: Sources of Financing for COVID-19 Response, 2020

(Million U.S. dollars)

article image
Sources: Liberian authorities; and IMF staff calculations.

In FY2020Q1 $8 million of revenue collected was transferred into the FY2019 revenue account and used to cover FY2019 expenses.

11. A slowing economy will also have an adverse impact on the banking sector. The banking sector is largely stable, but risks are significant, particularly as some banks are already facing U.S. dollar liquidity challenges. Nonperforming loans remain high, reaching 30 percent for some banks, partly due to government arrears to contractors. Bank fragility will likely worsen once the impact of the pandemic permeates the wider economy. Moreover, the regulatory and supervisory framework dates from 2005 and, despite being updated in 2012, it remains inadequate. This results in a system particularly vulnerable to the build-up in undetected risks. In addition, the current bank resolution framework only provides the CBL with limited powers to intervene in distressed banks.

12. The Fund’s debt sustainability analysis (DSA) of Liberia also indicates that the sharp decline in GDP growth will reduce Liberia’s ability to borrow. Two consecutive years of negative growth will reduce the sustainable level of external debt, while the financing need will be rising. Staff estimates that the sustainable level of external borrowing (both concessional and non-concessional borrowing) will be reduced by close to US$150 million over the medium-term. This will impact the medium-term growth potential.

13. The IMF response is expected to trigger higher support from other development partners. The authorities are hoping to finalize a COVID-19 preparedness plan in conjunction with the donor community together with its financing. External support to Liberia in response to COVID-19 is likely to be firmed up once the comprehensive plan has been finalized. Areas of concentration under the plan include support to health care workers, purchase and rehabilitation of health care equipment, procurement of drugs and other medical supplies, and deployment of surge staff to contact tracing activities, border areas, rapid response teams, training of responders, planning, communications and information sharing, staffing and equipping of laboratories, and logistical and supply support. In addition, the authorities intend to request debt relief from the Debt Service Suspension Initiative (DSSI), supported by the G-20 and the Paris Club. The debt relief from DSSI amounts to $1.2M. This debt suspension is incorporated in the macro framework and the DSA. Social support by donors thus far is summarized in Annex I. The COVID-19 response spending and sources of funding thus far are summarized in Text Table 2.

C. Medium-Term Recovery and Risks

14. In the medium term, economic activity is expected to rebound as confidence is regained. The return to growth of non-mining GDP in 2021 is expected to lift the economy to a rebound of 3.5 percent, 2.4 percentage points higher growth than the pre-pandemic estimate as the GDP level does not fully recover to its pre-pandemic trend. These estimates assume that the spread of COVID-19 in Liberia will be contained.

15. Downside risks to the outlook are high. Medium-term growth would suffer from a more prolonged duration of virus-related economic disruptions, a greater impact on the domestic economy, or from a deterioration of terms-of-trade as a result of higher imported food prices or oil price recovery. On the fiscal front, the tight fiscal situation and the looming senatorial elections in late 2020 imply possible slippage from rising spending pressures, while political concerns could delay implementation of needed high-quality revenue measures. Moreover, the possible need to provide additional ELA to the banking sector would threaten NIR levels. Contingency plans include bringing the IMF-supported ECF program back on track.

Policy Discussions

The main objective of the proposed IMF support is to provide funds to cushion the immediate impact of the crisis with the help of development partners and despite a major revenue shortfall. Disbursement under the RCF will therefore be a lifeline. However, the Liberian authorities are also contributing in a significant way, including by: gathering all available domestic resources to the government consolidated account; reallocating non-essential spending to emergency food aid; improving monitoring and control of overall expenditure as well as the emergency response spending; and safeguarding foreign exchange reserves.

A. Gathering All Domestic Resources

16. The pandemic will have an adverse impact on already weak fiscal revenues. Domestic revenue underperformed in the first half of FY2020 due to a sharp decline in imports but also weaknesses in tax administration. The revenue shortfall was particularly acute in border taxes thus far. The total revenue envelope for FY2020 was projected at US$502 million before COVID-19, a shortfall of US$24 million from the approved budget. The FY2020 recast budget was signed into law on March 23 with spending of US$505 million, including US$3 million for additional emergency spending.

17. The authorities are gathering additional domestic resources to respond to this crisis. Liberia’s fuel prices are supposed to be automatically adjusted each month to reflect international prices. However, retail prices in Liberia were not reduced until April 19, whereas world energy prices collapsed earlier in February 2020 (Figure 2). The delay was partly due to fuel shortages. However, as the shortages eased, keeping fuel prices stable resulted in an increase in the margin for fuel importers. To instead garner this rent for the revenue effort, the Legislature recently approved as a COVID-19 response measure the introduction of a 30 cent per gallon excise tax on fuel to be effective immediately (prior action). This tax is expected to yield 1.2 percent of GDP while being neutral with respect to retail prices (Text Table 3). The Legislature also passed a resolution giving approval in principle to the gathering of additional domestic resources to the consolidated account. Under this resolution, all necessary legal arrangements will be put in place so that, by July 1, 2020, 100 percent of all revenues accruing to the Liberian Maritime Authority (LMA) and the Liberian Telecommunications Authority (LTA) from all sources will be collected by, and flow directly to, the Liberian Revenue Authority. Allocations of operating and capital expenses for these two institutions will then be allocated in the FY2021 budget in line with procedures for other parts of the budgetary central government. These changes will help the government preserve much needed revenue base for the post-COVID-19 recovery and ensure debt sustainability.

Figure 1.
Figure 1.

Liberia: Foreign Exchange Developments, 2015–20

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A001

Sources: Central Bank of Liberia; and IMF staff calculations.
Figure 2.
Figure 2.

Liberia: Monetary Developments, 2013–20

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A001

Sources: Central Bank of Liberia, and IMF staff calculations.1 Effective January 2019, Liberian authorities have rebased inflation using the 2016 Household Income and Expenditure Survey which calcualtes the 2004 base year usigna a regional average consumption basket.2 Regional average based on prices in Cote D’Ivoire, Guinea, Liberia and Sierra Leone as of March 20, 2020.3 A significant portion of Liberian credit is expressed in US Dollars, as such, private sector credit growth has been plotted using US dollar values.
Text Table 3.

Liberia: Fuel Price, FY2020–21

(U.S. dollar per gallon; unless otherwise indicated)

article image
Source: Liberian authorities; and IMF Staff projections.

B. Reallocating Non-Essential Spending to Emergency Food Aid

18. On April 8, the President announced stay-at-home restrictions in Montserrado, Margibi, Nimba, and Grand Kru counties. The intension was to expand this to a total lockdown to fight the pandemic. The immediate concern was raised for the food security of the ultra-poor living in these counties. According to the World Food Program (WFP), a trajectory from the Comprehensive Food Security and Nutrition Survey (CFSNS) of March 2018 implies that about 1.4 million (about 280,000 households of 5 people each) people will be food insecure by the total lockdown in Montserrado and Margibi alone.

19. The COVID-19 Household Food Support Program (COHFSP) was conceived in early April. The COHFSP, initially started as a support to the poor during a planned total lockdown, has since evolved into a nation-wide feeding program to provide social protection to those living in poverty and to further food security.3 To make this program inclusive, a Steering Committee (SC) was formed on April 18, composed of political party leaders, civil society, religious leaders, cabinet members, as well as development partners, to oversee the program. The SC weighed need against available resources and decided that the program will cover a total of 2.5 million people, cover all 15 counties, and feed the targeted population for 30 days. The program and its goals have also been endorsed and contributed to by the World Bank. To ensure efficiency, the operational control of this program will be delegated fully to the WFP. The COHFSP will facilitate higher food security and an increase in the overall stocks of food available to the population by purchasing mainly imported commodities. The authorities have agreed, and the Legislature has passed the second recast budget to create the necessary fiscal space for this exercise.

C. Safeguarding External Buffers

20. The authorities are making efforts to reduce Liberia’s vulnerability to external shocks. Plugging the leaks that led to substantial loss of reserves under the ECF program (¶6) is not only key to ensuring the viability of the balance of payments position, but also to bringing the ECF-supported program back on track. In this regard, the authorities have:

  • Hired a firm through competitive tendering, with the support of the USAID, to print local currency. Failure to procure additional local currency before the independence celebration in July not only risks further losses to net international reserves but also the stability of the financial sector. Delivery is expected in the first week of July.

  • Made progress in reaching benchmarks set under the ECF-supported program to ensure that heightened U.S. dollar liquidity needs in the banking sector are addressed promptly.

D. Improving Transparency of Emergency Response Expenses

21. The authorities are determined that timely monitoring and control of spending improves, including to ensure that crisis spending reaches the intended population. Cash management and expenditure control has improved significantly since the program inception. Despite revenue shortfalls in the first half of FY2020, the authorities kept spending within the available resource envelope using appropriate and strong allotment control. However, a central weakness remains—in that some institutions are not required to spend through the Integrated Financial Management and Information System (IFMIS). The Public Finance Management Act (PFMA) requires autonomous agencies and special funds receiving advance funding from the central government to report their monthly spending to the Ministry of Finance each month. The Ministry of Finance’s guidance is that they should report their spending in the IFMIS before the next funding is disbursed. However, some non-compliant institutions continue to receive advances, especially if deemed to provide important social services.

22. The authorities have therefore imposed the requirement, beginning July 1, 2020, that all budgetary spending entities utilize the IFMIS for all their expenditure. Combined with the advances in expenditure monitoring and control made to date and further advances in cash management, this should be sufficient to ensure that all government revenue, commitment spending and cash spending is reconciled with government bank statements and monitorable on a weekly basis. The Ministry of Finance will begin publishing weekly spending reports including non-compliant institutions’ unreconciled spending amount on its website effective immediately (prior action) (Annex II). This measure should help ensure that crisis-mitigation funds are used for their intended purpose.

23. The authorities have committed to the General Audit Commission conducting a post-crisis audit of crisis spending within a year of the date of approval of the RCF disbursement This action will not only ensure that the crisis spending is not wasted, but will also provide lessons that will be needed to further strengthen existing systems—not only to effectively respond to crisis situations, but to improve public sector spending more broadly in the post-crisis period. For transparency, the authorities will publish the results of the audit within two weeks of its finalization. They will also publish on the government’s website all procurement contracts paid from the budget in the remainder of FY2020 and all of FY2021 above a value of US$200,000 for goods, above US$400,000 for public works, and above $100,000 for services along with the names of the companies awarded the contract, their beneficial owners, and validation of delivery of the goods and services specified in the contracts.

E. Preserving a Sound Banking System

24. Measures to maintain adequate capital and liquidity levels are necessary to prevent the build-up of further risks in the banking system during the crisis. The authorities recognize that additional measures to keep capital and liquidity levels above the required minimum are necessary to offset the impact from the additional flexibility granted banks by the CBL to assist illiquid, but otherwise solvent, borrowers.4 In this regard, banks have been required to suspend payment of dividends to shareholders and bonuses to staff within their current financial year. The CBL will assess applications to pay dividends and bonuses on a case-by-case basis after six months. In addition, staff urged the CBL to reinstate appropriate prudential standards for loan classification and provisioning to avoid compromising information on loan quality. In this regard, the CBL has put in place necessary measures to ensure that only facilities affected by COVID-19 that were current prior to the pandemic are covered under the forbearance measures. Staff will continue to work with the authorities to examine requirements for loan reporting, particularly for restructured loans, in order to identify whether additional prudential measures for capital and liquidity buffers are needed to mitigate the additional stress being felt by banks and the financial system. Staff will also encourage the CBL to remain vigilant in monitoring banks’ compliance with other prudential limits, including for the reserve requirements and banks’ FX positions.

25. Staff acknowledges the efforts by the authorities to ensure access and affordability of electronic payment services for retail customers during the pandemic. The shortage of LD banknotes coupled with the lack of confidence in the banking system precludes any meaningful response to the pandemic using monetary policy instruments. But, to ease the use of electronic payments and mobile-money options, the CBL has temporarily suspended fees and charges for transfers, suspended processing fees at point-of-sale outlets used by merchants; and increased allowable limits for transfers.

Modalities of Support

26. The authorities are requesting support equivalent to 14 percent of quota (SDR 36.176 million) under the RCF whose access is provided under the exogenous shock window.

27. Liberia meets the eligibility requirements for support under the RCF:

  • It faces an urgent BOP and fiscal financing need which, if not addressed, would result in immediate and severe economic disruption.

  • It is not feasible to receive timely augmentation of access under the ECF program due to the high degree of uncertainty regarding the duration and scale of the COVID-19 impact, policy slippage, and the practical difficulties of holding comprehensive policy discussions with the authorities in the current no-travel/work-at-home environment, including in Liberia.

  • Liberia is assessed as having sustainable debt and capacity to repay the Fund (Table 7). The most recent DSA, dated December 2019, and the updated DSA attached, find Liberia at moderate risk of external debt distress, especially with the support of the Catastrophe Containment Relief Trust (CCRT).

  • Liberia commits not to introduce any actions or measures that would compound the existing BOP problem and will pursue economic policies appropriate for addressing the impact of the COVID-19 crisis as described above.

28. Liberia has an existing ECF arrangement approved on December 11, 2019, with an access level of 60 percent of quota. Access of 14 percent of quota (US$49 million) is within the normal access limits under the PRGT. While this access level is on the low end of COVID-19 RCF disbursements as a percent of quota, it is 1.7 percent of GDP, which is above the average for sub-Saharan Africa(1.3 percent of GDP).5 In addition, Liberia’s repayments to the Fund eligible for debt relief under the CCRT in the next two years is 1.5 percent of GDP, which is the second highest CCRT debt relief among Fund membership as a percent of GDP. The RCF access level will fully cover the remaining financing gap (including funds committed by other donors) for FY2020.

29. The proposed access of 14 percent of quota is about 32.7 percent of the estimated financing gap (US$150 million) for CY2020. Remaining needs, include the fiscal financing gap projected for FY2021 budget, are expected to be filled by bilateral donors and development partners (US$63 million), prospective Fund support (US$38 million), and policy adjustment (Table 2). Liberia is expected to continue with the ECF arrangement and conclude upcoming reviews once the obstacles noted above abate. A second RCF request to help fill the financing gap in FY21 is also expected to be made by the authorities soon once fiscal plans for FY21 are clarified.

30. RCF will be disbursed to the CBL, with 100 percent of the funds then on-lent to the government. In accordance with the safeguards assessments policy, a Memorandum of Understanding (MOU) was signed between the central bank and the government to establish the responsibilities for servicing financial obligations to the IMF. The MOU also specifies that half of the disbursement (US$25 million) will be directed immediately to the WFP for implementation of the program of emergency food aid.

Staff Appraisal

31. The COVID-19 pandemic is likely to inflict a heavy economic toll on Liberia at a time when the economy was poised for recovery. While the number of confirmed COVID-19 cases remains below 200, the prevention and containment measures the authorities have taken, and the associated disruptions to local transit and cross-border travel, are likely to impose a large toll on the economy. Hotels and related businesses are particularly vulnerable as they continue to suffer a lack of foreign arrivals due to the suspension of major international flights to Liberia.

32. Staff welcomes the authorities’ efforts to fight the pandemic amidst significant revenue shortfalls. The initial response to the pandemic, including the emergency food aid program, has been appropriate, but more remains to be done. In this regard, staff sees passage of the agreed FY2021 budget with high-quality revenue measures as key to addressing the COVID-19 crisis and providing support to the emergency response. Staff also urges the authorities and other development partners to expeditiously finalize the comprehensive off-budget COVID-19 response plan together with its financing arrangements.

33. The authorities have taken strong steps to improve fiscal transparency to safeguard on-lent resources. Staff notes that part of the on-lent resources will be directed to government institutions that are at the center of the response to the crisis, but have a poor track record with ex post reporting of their expenditure in IFMIS. Consequently, it will be crucial to improving transparency and accountability that the authorities follow through with their commitment to require these institutions to use IFMIS for all purchases going forward. Transferring the collection of all revenues formerly accruing to the Liberian Maritime Authority and the Liberian Telecommunications Authority to the Liberian Revenue Authority, and funding both instead through the budget, will also help in this regard. Moreover, rebuilding confidence in the government’s conduct of fiscal affairs will also significantly advance with the publication of regular weekly fiscal reports on detailed revenue and expenditure. The conduction and publication of the GAC post-crisis audit report will help to improve public sector spending efficiency.

34. Steps to stop further loss of reserves are also welcome. The initiation of the procurement process for additional local currency banknotes, and the assessment and selection of options for addressing the liquidity situation in the banking sector will help stem reserve loss and preserve foreign-currency resources for crisis-fighting priorities.

35. Liberia is assessed as having a sustainable debt burden and adequate capacity to repay the Fund (Table 7). The updated DSA continues to find Liberia at moderate risk of external debt distress.

36. Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR 36.176 million (14 percent of quota) to be on-lent to the government as budget support.

Figure 3.
Figure 3.

Liberia: Recent Economic Developments, 2016–20

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A001

Sources: Central Bank of Liberia, and IMF staff calculations.1 Quarterly average rice imports needed to meet 400g rice per person per day criteria (World Food Program).2 Quarterly average fuel imports considered adequate by Liberia Peroleum Refining Company (LPRC).
Figure 4.
Figure 4.

Liberia: Fiscal Performance, FY2014–20

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A001

Sources: Liberian authorities; and IMF staff calculations.
Table 1.

Liberia: Selected Economic and Financial Indicators, 2018–25

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

Central government operation is based on a commitment basis and refers to the budgetary central government operations and off-budget projects. Fiscal year refers to July 1 to June 30.

Ratios are calculated using external debt (in USD) evaluated at the end of period exchange rate over GDP (in USD) evaluated at the period average exchange rate.

Including the central government debts from the Central Bank of Liberia.

Projections for reserves assume that the remaining financing gap will be filled by donor financing, including possibly from the RCF, and other sources.

Table 2.

Liberia: Balance of Payments, 2018–25

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

article image
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.

“Private financing” may reflect current transfers that are not captured by the official statistics.

Includes SDR holdings.

CCRT prospective financing is contingent on availability of resources and IMF Board approval of additional funding.

Recorded in fiscal years.

Projections for reserves assume that the remaining financing gap will be filled by donor financing, including possibly from the RCF, and other sources.

Table 3a.

Liberia: Fiscal Operations of the Budgetary Central Government (Including Off-Budget Transactions), 2018–251

(Millions of U.S. dollars)

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

Fiscal table is shown on a commitment basis and refers to the budgetary central government operations and off-budget projects. Fiscal year refers to July 1 to June 30.

Starting in FY2020 budget support loans are shown as borrowing, while data prior from FY2020 show budget support loans as part of grants in line with past practice.

To ensure estimates are comparable across vintages in the table: i) budget support loans have been reclassified as borrowing; and ii) debt-to-GDP ratio is calculated as the stock of debt in USD divided by nominal GDP in USD.

Including property tax and social contribution by foreign concessions.

Including net issuance of T-bill and T-bond.

Including the central government debt from the Central Bank of Liberia, which was not included prior to 2019 Article IV Consultation.

Table 3b.

Liberia: Fiscal Operations of the Budgetary Central Government (Including Off-Budget Transactions), 2018–251

(Percent of GDP, unless otherwise indicated)

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

Fiscal table is shown on a commitment basis and refers to the budgetary central government operations and off-budget projects. Fiscal year refers to July 1 to June 30.

Starting in FY2020 budget support loans are shown as borrowing, while data prior from FY2020 show budget support loans as part of grants in line with past practice.

To ensure estimates are comparable across vintages in the table: i) budget support loans have been reclassified as borrowing; and ii) debt-to-GDP ratio is calculated as the stock of debt in USD divided by nominal GDP in USD.

Including property tax and social contribution by foreign concessions.

Including net issuance of T-bill and T-bond.

Including the central government debt from the Central Bank of Liberia, which was not included prior to 2019 Article IV Consultation.

Table 3c.

Liberia: Fiscal Operations of the Budgetary Central Government, 2018–251

(Millions of U.S. dollars)

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

Fiscal table is shown on a commitment basis and refers to the budgetary central government operations and off-budget projects. Fiscal year refers to July 1 to June 30.

Starting in FY2020 budget support loans are shown as borrowing, while data prior from FY2020 show budget support loans as part of grants in line with past practice.

To ensure estimates are comparable across vintages in the table: i) budget support loans have been reclassified as borrowing; and ii) debt-to-GDP ratio is calculated as the stock of debt in USD divided by nominal GDP in USD.

Including property tax and social contribution by foreign concessions.

Including net issuance of T-bill and T-bond.

Including the central government debt from the Central Bank of Liberia, which was not included prior to 2019 Article IV Consultation.

Table 3d.

Liberia: Fiscal Operations of the Budgetary Central Government, 2018–251

(Percent of GDP, unless otherwise indicated)

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

Fiscal table is shown on a commitment basis and refers to the budgetary central government operations and off-budget projects. Fiscal year refers to July 1 to June 30.

Starting in FY2020 budget support loans are shown as borrowing, while data prior from FY2020 show budget support loans as part of grants in line with past practice.

To ensure estimates are comparable across vintages in the table: i) budget support loans have been reclassified as borrowing; and ii) debt-to-GDP ratio is calculated as the stock of debt in USD divided by nominal GDP in USD.

Including property tax and social contribution by foreign concessions.

Including net issuance of T-bill and T-bond.

Including the central government debt from the Central Bank of Liberia, which was not included prior to 2019 Article IV Consultation.

Table 4.

Liberia: Monetary Survey, 2018–25

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

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Sources: Liberian authorities; and IMF staff estimates and projections.

Projections for reserves assume that the remaining financing gap will be filled by donor financing, including possibly from the RCF, and other sources.

See Text Table 1 for adjustments to Net International Reserves target from program approval.

Table 5.

Liberia: Financial Soundness Indicators, 2014–18

(Percent)

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Sources: Liberian authorities; and IMF staff estimates.

Classification changed from 2017 in line with ISIC.

Table 6.

Liberia: External Financing Requirement and Sources, 2017–25

(Millions of U.S. dollars)

article image
Sources: Liberian authorities and IMF staff estimates and projections.
Table 7.

Liberia: Indicators of Capacity to Repay the IMF, 2019–29

(As of October 2019; SDR millions, unless otherwise indicated)

article image
Sources: Liberian authorities; and IMF staff estimates and projections.

Total debt external public debt service includes IMF repayments.

Annex I. Social Spending in Liberia (Update from the 2019 Article IV)

1. Liberia lacks a robust system to protect its most vulnerable population from the health and economic consequences of COVID-19. Existing social safety net programs are financed with foreign aid in the form of off-budget projects, mostly from the World Bank, USAID, World Food Program (WFP), and UNICEF. However, these programs are limited, and the social protection system remains underdeveloped and underfunded (Table A1.1). Partly due to lack of coordination among donors and the government, access to social safety nets remains uneven across the population.

2. The donor community and the authorities are working diligently amid the pandemic towards scaling up existing projects, but greater coordination is needed. Consistent coordination with donors and the relevant line Ministries is essential for a timely and effective response to the crisis and to ensure that the population go along with the lockdown. Rapid scale up of food distribution and cash transfer programs depend on food availability, procurement capacity, market functionality, penetration of mobile money, liquidity constraints, and security considerations. It also requires strengthening partnerships at national, subnational and community levels, as well as increasing staffing capacity and extension of geographical presence across the country.

3. Addressing food insecurity during the lockdown period remains the most urgent task and needs to be done through a combination of in-kind food distribution and cash-transfers. Among others, the government and WFP are working together to scale up the following programs:

  • “Shelter-in-place” food security response: aims to provide a nutrition-sensitive (daily levels of fat, protein and carbohydrates), and balanced food basket comprising rice, beans, vegetable oil and salt to around 1.4 million inhabitants (280,000 households) estimated to fall into food insecurity in Montserrado and Margibi counties. The cost is estimated at around $15.3 million per month ($0.37 dollars per day per person) depending on food basket and area coverage.

  • Home-grown school feeding program: WFP’s national home-grown school feeding program supports nearly 90,000 primary schoolchildren in Nimba and Maryland. With school closures, WFP has shifted transfer modalities from direct school meal distributions to take-home rations of in-kind food to sustain an estimated 45,000 vulnerable households. With funding, this can be rapidly scaled up to reach a total of 335,000 vulnerable households in the country.

4. The humanitarian response to the crisis would be costly and the fiscal stance is expected to deteriorate further without greater support in the form of grants. Donors are reallocating resources from existing projects to the most urgent interventions, but additional resources may be needed in the form of grants as Liberia’s borrowing space is very limited. The GOL have allocated additional spending of $3 million in FY2020 and $5 million in FY2021 budgets, made reductions in non-essential primary expenditure, and is working with the international community to secure additional funding. The GOL has made an initial budget allocation of $35 million to guarantee food assistance for two months through the “shelter-in-place’ program. Depending on the length of the lockdown and geographical coverage of the program, the cost could increase above $60 million, and the government will need to secure additional resources to finance it.

Table 1.

Liberia: Social Safety Net Programs Operated by Major Donors

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Sources: Compilation from Survey to Major Donors operating in Liberia.

Annex II. Weekly Fiscal Dashboard, March 2020

Liberia: FY2020 Fiscal Budget Execution Report,

(Millions of USD, fiscal year-to-date, as of March 30, 2020)

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A001

Sources: Liberian authorities.

Appendix I. Letter of Intent

Monrovia, June 1, 2020

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva,

1. Since adopting an ECF-supported program in December 2019, Liberia has been fully committed to reforms aimed at leaving behind a prolonged period of economic stagnation. The need for reform built up over a number of years, as our economic position suffered from a series of exogenous shocks—including to commodity prices, the departure of our UN peacekeeping force, and the outbreak of Ebola—with the situation exacerbated by less-than-optimal economic management. Nonetheless, over the four months following program inception, we made impressive steps towards regaining macroeconomic stability, establishing greater fiscal control and transparency, and laying the foundations for a re-igniting of the growth needed to improve the living conditions of our population, the majority of whom continue to exist in poverty and want. Much remains to do, however, as inflation remains high, fiscal resources are too tight to satisfy demand for investment in both physical and human infrastructure, and governance issues persist. Nonetheless, with the ECF arrangement providing an appropriate policy framework, we believed up to recently that perseverance with the program would be sufficient to advance us towards our development goals.

2. The appearance of the COVID-19 global pandemic changed this perception. Since Liberia discovered its first case of the virus in March 2020, the number of cases has increased to more than 200, and the authorities have adopted serious containment measures. In addition to mandating a two-week quarantine period for returning travelers from infected areas, on March 21, 2020 we issued severe social distancing rules, including closure of all schools, night clubs, cinemas, beaches, spas, and places of worship; banning of all street selling and gatherings of more than 10 people; limits on admittance to banks and restaurants to five customers kept six feet apart; social distancing for health facilities and pharmacies (which are to remain open); mandatory washing of hands with soap and clean water at all establishments; and, in addition, a hotline has been established for use by the population to report those exhibiting COVID-19 symptoms. So far, the number of confirmed cases remains quite small. However, we are fully cognizant that should these numbers experience the same exponential growth as they have in other countries, our health care system—inadequate in the best of times—would be quickly overwhelmed. In recognition of this vulnerability, we will shortly initiate a complete lockdown of the hardest hit areas of the country, including Montserrado County.

3. We anticipate that the economic effects of the crisis on Liberia will be severe. The full impact is not known, but GDP growth for 2020 is projected at -2½ percent, a 3 percentage point downward revision compared to pre-COVID-19 expectations. While the terms of trade shock has so far been positive—prices of imported fuel declined much more than those of our export commodities—the general lockdown abroad and at home, combined with suspension of aid-related travel is adversely affecting the hotel and related service sectors. Revenue shortfalls for this fiscal year had already emerged before the arrival of the virus and were met with a reduction in budgetary allocations. However, additional COVID-19-related shortfalls are now anticipated to reduce this fiscal year’s revenues by a further ¾ percent of GDP (US$17 million). Looking ahead to FY2021, increasing revenue shortfalls and the need for some additional COVID-19-related spending will likely produce a cumulative fiscal gap of about 3½ percent of GDP across both fiscal years. Complicating next year further, a sharp contraction in capital inflows, including a reduction in official financing of infrastructure projects, is expected to more than offset the improvements in the current account, and increase our balance of payments need by 5.3 percentage points of GDP. The banking system will also suffer, but with magnitudes difficult to predict. While the system labors under a large stock of nonperforming loans, loan provisioning was broadly adequate up to the time the COVID-19 pandemic began. We anticipate, however, that the quality of assets could deteriorate significantly as the crisis adversely impacts the cashflows of many borrowers. For the present, however, despite heightened US dollar liquidity risks in some banks—which our proposed program will address—the sector remains largely stable.

4. Against this dire background, we are requesting emergency funding from the IMF under the Rapid Credit Facility (RCF) to finance our urgent balance of payment needs which have partly arisen from a deteriorating fiscal position. Specifically, we are requesting support equivalent to SDR 36.176 million (14 percent of quota, about US$49 million). While we would ask that these funds be disbursed to the Central Bank of Liberia (CBL), considering the sizable fiscal gap we face, we further ask that this support be made available to our fiscal budget by having it on-lent by the CBL to Government on the same terms and currency composition as obtained from the IMF. We have already prepared, in consultation with Fund staff, a memorandum of understanding (MOU) between the Government and the CBL stipulating responsibilities for servicing financial obligations to the IMF. In order for the World Food Programme (WFP) to help us execute our large-scale program of in-kind food assistance for 2.5 million of our most vulnerable citizens in all the 15 counties we will, upon receipt of the RCF funds, immediately transfer US$25 million to the WFP (less any advances already transferred from the Government of Liberia for this purpose). The recast budget approved by the Legislature also incorporates additional measures aimed at supporting poor households during the lockdown. These include appropriating US$2 million to pay electricity and water bills for poor households consuming below specific thresholds per month, and US$2 million to provide support to market women and petty traders. We note that this support would be in addition to IMF debt relief that could be provided under the Catastrophe Containment Relief trust (CCRT) and for which we take this opportunity to express our gratitude. We are also requesting the Debt Service Suspension Initiative (DSSI), supported by the G-20 and the Paris Club, while remaining committed to spending the freed resources on COVID-related health or economic relief; disclosing our public sector debt to the IMF; and not contracting any new non-concessional debt during the suspension period.

5. Based on the expectation of your support, we have prepared a set of policies to protect our economy and people from the worst of the COVID-19 effect. On the fiscal side, in FY2021 we expect a combination of IMF disbursements, generous additional budget support from our major donors, and moderate cuts to wages, subsidies and capital spending to largely compensate for lost revenue, allowing health and social safety net spending in our FY2021 budget to approximate the level anticipated under our ECF-supported program. Within this envelope, however, we intend to substitute US$10 million (¼ percent of GDP) of above the line current spending for below the line clearance of outstanding domestic arrears to support the private sector in these difficult times. With respect to monetary policy, the existing shortage of Liberian dollar banknotes and lack of confidence in the banking system, significantly elevate risks to our external buffers and limits our ability to respond to the crisis. However, we are working towards remedying these by moving ahead with the printing of additional banknotes, with the first shipment expected by early July. The IMF staff has advised us to also make provision in our fiscal program for the buyback of US$15 million of government bonds to allow for immediate injection of additional much-needed US dollar liquidity into our banking sector. An alternative solution would be to proceed with a private bank’s bond discount facility (BDF), though it poses heightened debt sustainability risks. Government currently favors the latter alternative based on the scale of the liquidity constraints banks face, but discussion will continue in the weeks ahead in the context of the formulation of the FY2021 budget. To adequately safeguard financial stability, the CBL will pursue measures consistent with the understandings reached under the Extended Credit Facility (ECF) arrangement to ensure that any emerging risks to the banking sector are addressed in the near-term. On the prudential side, in recognition of the virus’ adverse impact on private sector cashflows and on the quality of banking sector assets, the CBL will permit financial institutions some additional and reasonable flexibility on a case-by-case basis to solvent borrowers in hard-hit sectors experiencing temporary liquidity shortfalls, but will maintain loan reporting, classification, and provisioning standards to avoid compromising information on loan quality. However, in the interests of prudence, in exchange for this latitude and for the period it persists, banks will be required to forego paying shareholder dividends or executive bonuses.

6. We are also in the process of implementing a number of policy measures that are needed to mitigate somewhat the projected large shortfall in revenue. We view these actions as appropriate to the very difficult economic situation we face and expect that their implementation will help significantly to safeguard and augment scarce resources, as well as provide the Fund with assurance that its resources will be used appropriately. They include (i) ensuring proper monitoring and control of all expenditure in the months ahead by mandating that all advance-reporting agencies revert to using the government’s Integrated Financial Management Information System (IFMIS) for all purchases beginning July 1, 2020; (ii) the government publishing weekly spending reports and non-compliant institutions’ unreconciled spending amounts on the MFDP website effective immediately; (iii) having safeguarded additional revenues by enacting the necessary legal arrangements to ensure that, beginning with the FY2021 fiscal year, 100 percent of all revenues accruing to the Liberian Maritime Authority (LMA) and the Liberian Telecommunications Authority (LTA) from all sources are collected by, and flow directly to, the Liberian Revenue Authority—with the sole funding source of all operating and capital expenses of the LMA and LTA in FY2021 restricted henceforth to formal lump sum allocations in the FY2021 national budget; and (iv) preserving the revenue base by enacting in May 2020 a 30 cent per gallon excise tax on fuel products—given the recent decline in the world oil prices, we expect this measure to yield 1.2 percent of GDP of additional revenue without necessitating an increase in the retail price of fuel. We will submit a budget for FY21 consistent with these measures and other understandings reached with IMF staff.

7. Given the need for transparency and accountability in the use of resources, we commit to having the General Audit Commission conduct a post-crisis audit of all the crisis response spending within a year of the approval of the RCF disbursement. This action will not only ensure that the crisis spending is not wasted but will also provide lessons that will be needed to further strengthen our existing systems to effectively respond to crisis situations as well as public sector spending more broadly in the post-crisis period. For transparency, we will publish the results of the audit online within two weeks of its finalization. We will also publish on the government’s website all procurement contracts paid from the budget in the remainder of FY2020 and all of FY2021 above a value of US$200,000 for goods, above US$400,000 for works, and above US$100,000 for services, along with the names of the companies awarded the contract, their beneficial owners, and validation of delivery of the goods and services specified in the contracts.

8. We remain committed to the goals and policies contained in our ECF-supported program, and look forward to completing the first review once the COVID-19 situation eases. Our focus over the few months will need to be on short-term macroeconomic and fiscal stability and crisis response. However, looking ahead, in consultation with IMF staff, we have already clearly identified the actions necessary to bring our ECF-supported program back on track. We want to return quickly to the growth and macroeconomic trajectory outlined in our ECF-supported program, as we continue to regard this framework as both appropriate and necessary for the underpinning of our medium-term development plan, the Pro-Poor Agenda for Prosperity and Development, and will continue to seek donor assistance in support of this plan.

9. We believe that the measures and policies outlined in this letter are enough to address the immediate priorities required by the pandemic. We will use the resources provided by the Fund in a manner consistent with the understandings reached and welcome the planned ex-post audit of such use in about a year’s time. We covenant that we will not introduce measures or policies that worsen the balance-of-payments position, and that we will not impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance-of payments purposes, or multiple currency practices, or enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement. Should the measures and policies we have adopted prove insufficient to their aims, we will take additional measures necessary to achieve those ends and will consult with the IMF on the adoption of such additional measures prior to any revision. We will also provide Fund staff with all information they require to monitor our economic situation on a regular and timely basis, including by continuing to provide all the data stipulated in the Technical Memorandum for the ECF-supported program (IMF Country Report No. 19/381). We will also, as far as is practical, share any other information that may be necessary to evaluate and understand our economic situation.

10. In line with our commitment to transparency, we authorize the IMF to publish this document, and the related staff report, data tables, and debt sustainability analysis report on its website and other media once the RCF disbursement is approved.

Sincerely,

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Table 1.

Liberia: Prior Actions for RCF, 2020

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1

Fiscal year is July 1-June 30.

2

The US$119 million revenue shortfall assumes the introduction of excise tax on fuel (¶17). Without this tax measure, the revenue shortfall from a decline in GDP of US$98 million from pre-COVID-19 baseline would be even larger at US$148 million assuming tax buoyancy of 1.5.

3

The 2016 household income and expenditure survey (HIES) showed about 2.2 million Liberians or 50.9 percent of the population of 4.2 million was classified as poor. The WFP estimates based on 2018 CFSNS that 3.5 million people are food insecure.

4

Regulatory measures announced by the CBL allow banks to exercise flexibility in restructuring terms for loans to specific categories of borrowers that had current loans on a case-by-case basis.

5

The different relative rankings depending on whether access is scaled by GDP or quota reflects that Liberia has the largest quota among Fund members relative to GDP due to the large decline in GDP during Liberia’s civil wars.

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Cover IMF Staff Country Reports
Liberia: Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Liberia
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 202
Publisher:
International Monetary Fund
ISBN:
9781513547282
ISSN:
1934-7685
Pages:
60
DOI:
https://doi.org/10.5089/9781513547282.002
  • <sup><xref ref-type="fig" rid="RA01fig01">Text Figure 1.</xref></sup>
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    Text Figure 1.

    Liberia: Impact of COVID-19, 2017–22

    (Percent of GDP; except percent for growth)

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    Figure 1.

    Liberia: Foreign Exchange Developments, 2015–20

  • <sup><xref ref-type="fig" rid="RA01fig03">Figure 2.</xref></sup>
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    Figure 2.

    Liberia: Monetary Developments, 2013–20

  • Figure 3.
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    Figure 3.

    Liberia: Recent Economic Developments, 2016–20

  • Figure 4.
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    Figure 4.

    Liberia: Fiscal Performance, FY2014–20

  • View in gallery

    Liberia: FY2020 Fiscal Budget Execution Report,

    (Millions of USD, fiscal year-to-date, as of March 30, 2020)

Text Figure 1.

Liberia: Impact of COVID-19, 2017–22

(Percent of GDP; except percent for growth)
Figure 1.

Liberia: Foreign Exchange Developments, 2015–20
Figure 2.

Liberia: Monetary Developments, 2013–20
Figure 3.

Liberia: Recent Economic Developments, 2016–20
Figure 4.

Liberia: Fiscal Performance, FY2014–20

Liberia: FY2020 Fiscal Budget Execution Report,

(Millions of USD, fiscal year-to-date, as of March 30, 2020)