Abstract
First and Second Reviews Under the Extended Credit Facility Arrangement, Request for Waivers of Nonobservance of Performance Criteria
I. Introduction
1. Our Liberian authorities thank the Mission Team for the valuable engagement and constructive dialogue during the first and second reviews of the Extended Credit Facility (ECF) arrangement. They continue to cherish Fund support which has been critical in helping to address the impact of the COVID-19 shock, catalyze additional support from development partners and jump start the recovery process.
2. In response to the macroeconomic challenges inherited in 2018, the current administration focused on macroeconomic stabilization and launched the Pro-poor Agenda for Prosperity and Development (PAPD, 2018–2023). The implementation of reforms under the ECF arrangement supporting the key objectives of the PAPD, has seen progress made in stabilizing the exchange rate and curtailing inflation. Tight monetary policy alongside improvements in public financial management, zero central bank financing, and enhanced domestic revenue mobilization, enabled this outcome. The COVID-19 pandemic, however, continues to exert further strains on the economy while threatening to derail poverty reduction efforts, as well as reverse gains from policy reforms made thus far. Notwithstanding these setbacks, our authorities remain strongly committed to the program which they view as important to restore macroeconomic stability, bridge governance gaps, and help ensure sustainable and inclusive growth.
II. Recent Economic Developments and Outlook
3. Real GDP is projected to contract by 3.0 percent in 2020 due to subdued performance in the secondary and tertiary sectors. The COVID-19 shock also amplified pre-existing vulnerabilities, impacting growth in the first half of 2020. Looking ahead, growth is expected to rebound to 3.2 percent in 2021, and average 4.5 percent in the medium term, driven by higher capital spending and improved business confidence. This notwithstanding, the outlook remains subject to significant downside risks, including a second wave of COVID-19 cases, which would further dampen economic activity, with a larger impact if vaccine access and rollout are delayed.
4. Inflation at end-September 2020 decelerated to 14 percent, from 30 percent a year earlier. The decline in inflation largely reflects a contractionary monetary policy stance, alongside exchange rate stability, a decline in imports, and lower international oil prices. Reflecting the decline in the import bill, the current account registered a slight improvement over 2019. Central Bank of Liberia reporting suggests, however, that the improvement masks a slowdown in remittance inflows, probably on account of recessions experienced in major source markets. Gross international reserves have however improved, projected at 2.5 months of import cover at end 2020 compared to 2.3 months in 2019.
III. Program Performance
5. On the fiscal front, all but one end December 2019 performance criteria (PC) were met. The targets on primary fiscal balance excluding grants and new external non-concessional debt of the public sector were also met. The end-December 2019 ceiling on the CBL’s gross direct credit to the government was met. In addition, the end-December indicative targets on the floor on the total revenue collection; the floor on social and other priority spending; ceiling on net domestic assets of the CBL; and the floor on on-budget capital spending were also met. For end-June 2020 test dates, the ceilings on the contracted new non-concessional debt of the public sector, ceiling on the CBL’s operational and capital spending, and indicative target on the floor on total revenue collection were all attained.
6. The end-December 2019 target on the ceiling on new external arrears of the central government was met with a delay; with outstanding obligations settled just after the test dates. In addition, a special debt service account has been established, leading to quarterly debt service allotment, while direct debits are being recorded in the Integrated Financial Management Information System (IFMIS) to ensure timely settlement of debt service obligations and avoid re-accumulation of arrears. Additionally, the debt management business process has been streamlined. The PC on the ceiling on the central bank’s operational and capital spending was addressed after some months delay due to an upfront unbudgeted payment to external auditors and compensation for laid-off personnel. Going forward, and as articulated in the CBL’s Board approved 2021–23 budget, the central bank is committed to further curtail operational expenses and scale back IT projects. The floor on the change in NIR for end-December 2019 was missed due to additional US dollar emergency liquidity assistance (ELA) to the banking sector by the CBL, while foreign exchange interventions to mop up excess liquidity and contain inflation, limited foreign exchange reserve buffers. As part of efforts to bolster reserves, the central bank has approved an increase in the Liberian dollar composition of spending on wages and salaries. Furthermore, the CBL Board is working on a reform plan to help deter US dollar liquidity pressures in the banking sector.
7. Due to the COVID-19 crisis, emergency expenditures led to missed end-June 2020 targets on the primary fiscal balance excluding grants, the ceiling on the CBL’s gross direct credit to government, and the ceiling on net domestic assets of the CBL. This reflected on- lending of RCF and CCRT resources to the government by the central bank.
8. Despite COVID-19, the authorities have made significant progress on structural benchmarks, most notably on civil service reforms. State-owned enterprises’ (SOEs) quarterly reporting has also improved, while steps have been taken to institutionalize the Treasury Single Account (TSA). While steadfast implementation of the CBL’s Action Plan was impeded by the COVID-19 crisis, the authorities are now scaling up efforts to expedite progress towards completing key actions, particularly those related to bank regulation and supervision.
9. Considering their strong commitment to the program, including remedial actions to correct slippages, the authorities are requesting waivers of the missed performance criteria and modification of the end-June 2020 indicative targets.
IV. Policy Objectives
Fiscal Policy and Debt Management
10. While fiscal policy was temporarily loosened to accommodate interventions to stem the effects of COVID-19 on households and firms, the authorities remain committed to medium-term fiscal sustainability. Consistent with this objective, the FY 2021 budget is fully financed and in line with the program, following additional rationalization of wages and salaries, and the streamlining of other cost centers. The budget has also been adjusted for the revenue effects of COVID-19. Further, revenue collection has improved relative to the ECF program target, with the introduction of excise tax on fuel and the strengthening of the compliance regime. Revenue from these measures has been allocated to priority expenditure areas including financing the bank resolution plan and arrears clearance. Additional budget support from development partners also helped to improve the fiscal position.
11. As noted by staff, our authorities have improved public financial management (PFM) significantly. Concurrently, cash management continues to improve following the requirement that all budget entities process payments through the IFMIS, and the introduction of more regular fiscal reconciliation and reporting. Allotments are now only issued based on available resources. Policy decisions made by the Liquidity Management and Technical Management Committees continue to buttress these efforts.
12. To ensure debt sustainability, our authorities will continue to prioritize borrowing on concessional terms. Moreover, they are reviewing several options to determine the best path to finance development projects and will remain engaged with the Fund. Meanwhile, significant progress has been made in debt management, including the development and implementation of a comprehensive Debt Management Manual which has helped facilitate overdue debt payments including to domestic financial institutions. At the same time, the debt database has been cleaned with the support of development partners. Internal capacity for near-term debt service projections has also improved.
13. The authorities are making determined efforts to intensify revenue collection and operational efficiency in relevant revenue collection entities. In this regard, they have submitted to the Legislature, amendments to the acts of two key revenue collection intermediaries, the Liberia Maritime Authority and the Liberia Telecommunications Authority. When enacted in January 2021, the Liberia Revenue Authority (LRA) would collect all revenues from both agencies, directly, rather than relying on the agencies to apportion their collections between themselves and the LRA. In the near to medium term, the authorities also plan to streamline tax exemptions and enhance customs administration.
Monetary and Financial Sector Policies
14. Consistent with the ECF arrangement, the monetary stance remains anchored on reducing inflation and stemming the decline in the value of the Liberian dollar. Consequently, inflation continues to wane, and the exchange rate has stabilized. The authorities continue to refine the monetary policy framework and work to develop financial markets through active open market operations. The authorities have adopted a currency management plan to ensure adequate Liberian dollar banknotes are always available to meet growing demand. Similarly, the CBL is also committed to resume non-discriminatory foreign exchange auctions. The central bank has prioritized Fund CD in monetary policy operations to bolster ongoing efforts in these areas.
15. The financial sector faces significant challenges occasioned by the COVID-19 pandemic, necessitating measures by the authorities to ensure liquidity in the banking sector. The authorities have requested technical assistance from the US Treasury to provide inputs into a financial sector reform plan, as a matter of urgency. Relatedly, the CBL has drafted a Crisis Management Framework, which has benefitted from inputs of AFRITAC West II. The framework is envisaged to provide critical inputs to the current work to amend the Financial Institutions Act (1999), which aims to address weaknesses in the supervisory framework, including the resolution regime. In the meantime, measures such as the moratorium on asset classification and provisioning rules in response to COVID-19 have been reversed, as the CBL continues to strengthen its regulatory and oversight framework to foster financial sector stability.
16. The National Legislature approved amendments to the CBL Act in October 2020 which will strengthen the operational independence of the CBL and keep the bank focused on its price stability mandate. The amendments, which benefitted from technical assistance from the Fund, include provisions granting CBL the right to seek approval to print bank notes for 3-year periods, and the creation of a monetary policy committee.
Governance and Structural Policies
17. Governance and institutional reforms remain central to the authorities’ development agenda and efforts to ensure inclusive and durable growth. To this end, the government has adopted resolutions from a major anti-corruption conference convened in September 2020, which brought together key state and non-state actors. As a result, the Act governing the Liberian Anti-Corruption Commission (LACC) is being revised, inter alia, to give the institution first tier prosecutorial jurisdiction on corruption, economic and financial crimes. In addition, the authorities are taking steps to legislate a Whistle Blower and Witness Protection Act to protect witnesses and victims consistent with relevant UN charter and best practice. In line with the RCF commitments, the authorities have also initiated major efforts to improve procurement transparency and accountability. Key information such as legal ownership of contracts is currently published on the Public Procurement and Concession Commission’s (PPCC) website. These efforts are in advance of planned revisions to the procurement regulations to further advance accountability and transparency objectives.
18. The enforcement of payroll regulation in March 2020 has yielded tangible results. The authorities’ cleaning of payroll databases has led to the elimination of duplications and ghost workers, and the tracking of employees who are within statutory pension ages. Information on 87 percent of public sector workers has been biometrically captured in the payroll database and corresponding identification cards issued to these employees. As an integral part of payroll reforms, the completion of the national identification card drive is being prioritized. Meanwhile, hiring has been centralized and payrolls including those of Presidential appointees, have been integrated within the payroll management system under the purview of the Civil Service Agency. The inter-ministerial National Payroll Cleaning Taskforce continues to monitor movements in the payroll.
V. Conclusion
19. The Liberian authorities consider Fund support crucial in building institutional and human capital, as the country strives to implement far-reaching and growth-enhancing reforms. They regard support from the Fund and key partners as essential to the realization of the key objectives of PAPD. The authorities, for their part, reiterate their commitment to the steadfast implementation of reforms under the ECF arrangement and look forward to Directors’ support in completing the current reviews.