Liberia: Request for Disbursement Under the Rapid Credit Facility—Debt Sustainability Analysis
Author:
International Monetary Fund. African Dept.
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Publication Date:
12 Jun 2020
eISBN:
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; fuel import price; dynamics equation; sustainability framework; public debt-to-GDP ratio; creating flow; Debt sustainability analysis; Debt service
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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

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The Debt Sustainability Analysis (DSA) continues to assess Liberia at moderate risk of external debt distress and high risk of overall public debt distress, with very limited space to accommodate shocks and an extended breach of the PV of public debt-to-GDP ratio. However, public debt is assessed to be sustainable as (i) both the PV of public debt-to-GDP and PV of debt-to-revenue ratios are projected to be on a downward trend and (ii) the high PV of public debt ratios largely reflect debt to the central bank, for which the interest rate is relatively low but is not discounted in the PV calculations. Moreover, staff projects that there is a high likelihood that Liberia will be able to meet all of its current and future financial obligations. The macroeconomic outlook is less favorable compared to the previous Debt Sustainability Analysis (DSA) in December 2019 due to the external shock caused by the COVID-19 pandemic. The analysis indicates that the impact of the COVID-19 shock, especially on the growth outlook, further reduces Liberia’s space to absorb shocks relative to the previous DSA. However, Liberia remains at moderate risk of external debt distress. This DSA also points to the tension between the near-term borrowing need to minimize the COVID-19 impact and the need for medium-term borrowing space to support post-COVID-19 recovery, and in turn highlights the potential benefit of debt relief from the Catastrophe Containment Relief Trust (CCRT).4 In addition, the authorities will request the debt service suspension from official bilateral creditors as envisaged under the Debt Service Suspension Initiative (DSSI) supported by the G-20 and Paris Club and intend to adhere to the needed commitments.5 $1.2m of debt service will be suspended under DSSI. This debt suspension is reflected in the macro framework and the DSA, reducing debt service pressure in 2020. Staff considers the projected fiscal adjustment as realistic given that COVID-19 related spending is projected to phase out over time and given the authorities’ fiscal measures taken and committed under the RCF and ECF-supported program. In this regard, the authorities should refrain from non-concessional borrowing in the near term and risky collateralized agreements at all times, while ensuring that new debt is contracted transparently. Due consideration should also be given to the country’s absorption capacity, which remains low.

Figure 1.
Figure 1.

Liberia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Liberia: Indicators of Debt Under Alternative Scenarios, 2020–30

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Liberia: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Liberia: Realism Tools

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A002

Figure 5.
Figure 5.

Liberia: Qualification of the Moderate Category, 2020–301/

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
Figure 6.
Figure 6.

Liberia: Probability of Debt Distress of Public and Publicly Guaranteed External Debt Under Alternative Scenarios1/

Citation: IMF Staff Country Reports 2020, 202; 10.5089/9781513547282.002.A002

1/ The probability approach focuses on the evolution of the probability of debt distress over time, rather than on the evolution of debt burden indicators.Sources: Country authorities; and staff estimates and projections.
Table 1.

Liberia: External Debt Sustainability Framework, Baseline Scenario, 2017–40

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r – g – ρ(1 +g) + εα(1 +r)]/(1 +g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε = nominal appreciation of the local currency, and a= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Liberia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–40

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Liberia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–30

(Percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Liberia: Sensitivity Analysis for Key Indicators of Public Debt, 2020–30

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Debt coverage has remained the same as in the previous DSA.

2

Liberia’s debt-carrying capacity based on the Composite Indicator (CI), which is based on the October 2019 WEO and the 2018 CPIA, is assessed as weak. The CI score is 2.41.

3

See Table 2 of the main text for the COVID-19 response spending and sources of funding so far. The World Bank additional financing includes US$25 million of budget support and US$30 million of off-budget financing (primarily health and social protection programs).

4

The DSA and macro-framework assume CCRT debt service relief through April 2022. The last 18 months of debt service relief is subject to the availability of CCRT resources.

5

Participation in the DSSI which provides a time-bound suspension of official bilateral debt service payments to IDA-eligible and least developed countries as defined by the UN would provide additional fiscal space in the near term.

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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
  • Figure 1.
    View in gallery
    Figure 1.

    Liberia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30

  • Figure 2.
    View in gallery
    Figure 2.

    Liberia: Indicators of Debt Under Alternative Scenarios, 2020–30

  • Figure 3.
    View in gallery
    Figure 3.

    Liberia: Drivers of Debt Dynamics – Baseline Scenario

  • Figure 4.
    View in gallery
    Figure 4.

    Liberia: Realism Tools

  • Figure 5.
    View in gallery
    Figure 5.

    Liberia: Qualification of the Moderate Category, 2020–301/

  • Figure 6.
    View in gallery
    Figure 6.

    Liberia: Probability of Debt Distress of Public and Publicly Guaranteed External Debt Under Alternative Scenarios1/

Figure 1.

Liberia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30
Figure 2.

Liberia: Indicators of Debt Under Alternative Scenarios, 2020–30
Figure 3.

Liberia: Drivers of Debt Dynamics – Baseline Scenario
Figure 4.

Liberia: Realism Tools
Figure 5.

Liberia: Qualification of the Moderate Category, 2020–301/
Figure 6.

Liberia: Probability of Debt Distress of Public and Publicly Guaranteed External Debt Under Alternative Scenarios1/