3. At 5 percent, real GDP growth performance in 2021 was well above the 3.6 percent expected at the time of the third program review. Recovery in services alongside strong performance in gold, rubber, cement, and palm oil have supported this positive outcome. In the medium-term, growth is projected at between 5 – 6 percent. The current account deficit is expected to narrow to 16 percent of GDP in 2022 as the trade account continues to improve. The net international reserve position has also improved with import cover almost doubling to over 4 months on the back of the general SDR allocation.

4. Under the program, the authorities brought inflation down from an average 27 percent in 2019 to 5.5 percent at the end of 2021, as reforms ended monetary financing of the budget and installed prudent fiscal and monetary policies. However, as global inflationary pressures have risen in recent months, this has fed into Liberian prices and inflation rose in the first quarter of 2022, fueled by rising food and energy prices in the wake of the Russian war in Ukraine. Inflation is expected to settle at around 5 percent in the medium term as global prices normalize.

5. Program performance against quantitative targets (QTs) and continuous performance criteria (PCs) for end-June 2021 was quite strong, despite disruptions from the pandemic and recent shocks that added to an already heavy workload. Five out of six PCs were met, with the sixth (accumulation of net international reserves) missed by a small margin. Four out of five indicative targets (ITs) were met. The fifth, on-budget capital spending, fell short of the target floor due to funding challenges.

6. Three structural benchmarks (SBs) that had been converted to prior actions; namely submission of the FY2019/20 budget audit report to the Legislature, adoption of the Whistleblower and Witness Protection Act, and adoption of the Liberia Anti-Corruption Commission (LACC) Act and amendments to the Code of Conduct, were satisfied. Two additional SBs relating to enhancing reporting practices on foreign exchange withdrawals and developing a methodology for forecasting future demand for bank notes by denomination, were met on time, while four relating to issuance of a circular to mandate that government contracts be accompanied by IFMIS-generated purchase orders, enhancing reporting practices on foreign exchange withdrawals through semi-annual external audits on the foreign exchange reserves, destruction of unfit notes, and setting up a dual control security strategy, respectively, were implemented with a delay. Work is underway on the remaining SBs.

7. The authorities continue to follow a prudent fiscal stance, with a view to fostering fiscal and debt sustainability. The fiscal deficit (excluding grants, donor projects) declined from 2.2 percent of GDP in 2020 to 0.9 percent in 2021. However spending pressures including from the effects of the Russia war in Ukraine pushed the 2022 deficit back up to 2.4 percent of GDP. To help offset the additional demands on resources, the authorities reduced other current and capital spending, secured additional domestic revenues, and postponed the envisaged payback of Liberian-dollar-denominated T-bonds. The authorities plan to reverse the increase in the deficit in 2023, bringing it back down to lower levels. In the meantime they intend to avoid fuel subsidies for now and limit rice subsidies to offsetting the sharp increase in shipping costs for imports. As per the Amended and Restated Act of the Central Bank of Liberia, the authorities will refrain from using direct credit from the central bank. They will also avoid incurring payment arrears.

8. They also agree with staff on the importance of reforming public enterprises and strengthening their management and governance to reduce subsidization and improve service delivery. Among other things, they plan for Cabinet to adopt a comprehensive reform action plan for the Liberia Electricity Company (LEC), validated by development partners that are supporting LEC reforms, in October 2022. They note that a lasting solution requires deep reforms, including systems that will curb rampant power theft and entrench efficiency. Measures to strengthen management of LEC are needed and they are in the process of appointing a new management team. The authorities are also progressing with reforms of airport operations, seeking fundamental reform and identifying new airport management. Current budgetary allocations to the airport authority (to ensure safe operations) and to the LEC, relate to repairs and the rehabilitation of dilapidated infrastructure. The authorities also intend to expand the coverage and monitor the quality of SOE debt, in debt management reports.

9. The authorities are committed to improving spending efficiency and protecting capital spending in budget execution. Adequate justification is required for any transfer of funds from approved capital budgets to recurrent spending (procedure set out in the Public Finance Management Act (2009) and the Budget Transfer Act (2008)). On capital spending, the authorities continue work to build efficiencies. A pipeline of approved sector projects will be developed, led by the Project Implementation Unit of the Ministry of Finance and Development Planning (MFDP). On recurrent spending, the authorities are committed to containing the wage bill and plan a further reduction of 3,000 in the number of civil service employees, adding to the 5,000-reduction recorded since 2019. Physical verification of employees, additional retirement, and stringent justification requirements for new recruitment will be applied.

10. On the revenue front, the authorities’ fiscal performance in FY2020/21 was strong. The primary fiscal deficit excluding grants overperformed the program target by 0.9 percent of GDP largely due to strong revenue performance. This reflected the introduction of a fuel excise tax, changes in the application of the personal income tax, robust border tax collection on the back of strong imports, and progress made with revenue administration reforms.

11. Looking forward, the authorities intend to continue to improve revenue mobilization. They plan to replace general sales tax with value-added tax to improve efficiency and broaden the tax base. It is envisaged that a comprehensive draft bill will be ready for submission to the Legislature by late 2023 or early 2024. They also plan to further streamline tax exemptions and ensure their proper application and have already scaled down the investment tax incentive regime by limiting the number of qualifying sectors to 9 down from 18, and cutting the validity period to 3 years, down from 5. They are also considering transforming duty waivers for Liberian returnees into a rebate system, replacing petroleum tax exemptions with a tax rebate system, directing that all government contracts be inclusive of tax, curtailing duty waivers for the import of vehicles by members of the Legislature, further narrowing the investment tax incentive regime, reducing the scope of exemptions that can be granted by decree, and narrowing tax exemptions that are allowable in concession agreements. The Liberia Revenue Authority is also pursuing a more systematic audit of large companies, coupled with more efficient processing and cross-checks of tax filings.

12. Work continues to enhance and strengthen public financial management (PFM). This includes advancing the Treasury Single Account (TSA) project including putting requisite structures in place at the central bank. Many of the 509 accounts of ministries, public agencies, and public commissions (MACs) at commercial banks have been closed or identified as donor-project accounts (which are outside the TSA perimeter). Once requisite systems are ready the intention is to make the TSA fully operational with the rest of the non-donor bank accounts of MACs at commercial banks closed by end September 2022, transferring their balances to the central bank; except for the 45 accounts for institutions that operate in regions of the country where the Central Bank of Liberia (CBL) has limited presence and are intended to support regional fiscal decentralization. The General Audit Commission is also validating past arrears claimed by vendors.

13. The authorities have kept the monetary policy rate at 20 percent since August 2021, well above inflation which averaged 7.8 percent in 2021 and ended the year at 5.5 percent. Given excessive dollarization, the share of money that is under the direct control of the central bank is limited, constraining the central bank’s ability to contain inflation by tightening monetary conditions. The authorities have thus had to resort to a very high policy rate to achieve disinflation and ensure that monetary policy remains geared towards price stability. The authorities continue to monitor inflation closely alongside exchange rate developments, given recent external price pressures, and remain committed to single digit inflation in the medium term, targeting 5 percent.

14. De-dollarization will be needed for meaningful monetary policy autonomy, while also facilitating the accumulation of foreign reserves and increasing seigniorage. In this regard, the first phase of the currency changeover is being rolled out, while modifications are also being made to the implementation plan for the next phase to ensure a similarly successful roll out. This in turn will support longstanding plans to modernize the monetary policy framework, which include adopting a flexible reserve money operating target framework and using interest-rate based instruments to implement monetary policy in the short term, resuscitating the interest rate corridor system, and conducting auctions for longer term CBL bills at a variable rate tender not later than June 2023, in preparation for transitioning to a full-fledged interest-rate based framework. A Monetary Policy Committee with responsibility for formulating monetary policy, will be constituted.

15. While the banking sector as a whole remains relatively stable, and system level regulatory capital and liquidity requirements are met, vulnerabilities remain with challenges at various banks. Remedial measures are being taken to address high non-performing loans (NPLs) that exceed the10-percent NPL ratio threshold in almost all ten banks. The CBL will require banks to report quarterly on NPL developments and progression, and will strictly enforce provisioning regulations, including the write-off of NPLs that are older than three years. It will resume enforcing penalties for violations of reserve requirements in the third quarter of 2022. In the interim, non-compliant banks will continue to be subject to other supervisory measures. Additional capital injections will be required as needed. The CBL is also exploring options to aid banks’ recovery and may apply regulation to disallow delinquent borrowers from the use of any banking services, in consultations with banks. The recommendations of the IMF CD mission on financial soundness indicators will be implemented to help address data issues.

16. Measures to reform the Liberian Bank for Development and Investment (LBDI) continue, with the government’s US$31 million capital injection and the appointment of a new CEO being important milestones. Attention will be given to preserving liquidity and containing operating costs. The alignment of LBDI’s books with supervisory findings is well advanced and priority is being given to strengthening record keeping at the bank, NPL collections, and improving underwriting standards. Plans will continue to attract additional investors and secure enough capital and liquidity to expand operations and shift the strategic orientation.

17. Once the Financial Institutions Act (FIA) is submitted to the Legislature in September 2022 and adopted thereafter, CBL will have a wide range of powers to deal with distressed banks, and authority to impose supplementary capital buffers. The FIA will also enable a stronger bank resolution regime. A framework and a manual for supervisors on risk-based supervision is in the works and will be approved by the CBL Board. Guidelines have been sent to banks for final comments ahead of issuance around September.

18. Governance continues to feature prominently in the authorities’ reform agenda, as also reflected in the national development plan. A major advance in the fight against corruption has been the approval by the Legislature of the legislative package strengthening governance institutions and improving their transparency, alongside requisite amendments to the Liberia Anti-Corruption Commission Act (LACC), the Code of Conduct, and the Whistleblower and Witness Protection Act. The amended LACC optimizes integrity and impartiality in the appointment process for Commissioners, among other things, and this revised process is now being used.

19. Significant progress has also been made in improving transparency. The Public Procurement Commission’s (PPCC) publication of awarded contracts and associated key information for FY2020/21 is almost completed and that of contracts pertaining to the 2021 special budget is under way. New procedures have been adopted with MACs required to submit contract information in a timely manner to secure funding. Going forward, bidders will be required to disclose beneficial ownership information and to record this in the PPCC’s vendor registry; and beneficial ownership of companies winning public contracts will be published. In the meantime, the Liberian Business Registry is helping PPCC determine beneficial ownership of companies that recently won public contracts. Progress is also being made in government operations transparency with a view to improving the quality and timeliness of the government’s audited annual financial statements. The audit report for the FY2019/20 budget has been submitted to the Legislature while that for the FY2020/21 budget will be submitted by end-September 2022; meanwhile the government is committed to addressing shortcomings identified in audit reports.

20. On the investment climate and challenges related to cross-border trade, authorities are taking deliberate steps to reduce the number of checkpoints and improve trading outcomes. They will revitalize a digital, decentralized one-stop shop at the Liberia Business Registry (LBR) to improve the registration process for businesses and ensure a seamless business registration process, aligning business registration systems between the LBR, Liberia Revenue Authority, the Ministry of Finance, and the Ministry of Commerce and Industry. Authorities also aim to facilitate digitalization with training for judges and ensure consistent access to reliable electricity in commercial and other courts, to bolster judiciary efficiency.

21. The authorities appreciate the Selected Issues Paper (SIP) on climate change and hope to be considered for Resilience and Sustainability Trust support in a timely manner. As noted in the SIP, Liberia is ranked among the most vulnerable (174th out of 182 countries) in terms of its lagging in climate adaptation readiness and the authorities are concerned at the extent to which this will place the country’s systems and sustainable development at risk, and the disproportionate impacts on poorer parts of the population. Given its high vulnerability classification, Liberia undertook climate readiness and risk assessments to inform adaptation needed to limit economic impacts on the poor and in coastal zones, agriculture, waste management, forestry and fisheries (critical to food and health security), among others, putting together the 2020-2030 National Adaptation Plan with support from UNDP. The authorities intend to act on priority areas identified in the Plan, building resilience and prioritizing scaling up interventions toward climate change adaptation, setting up accountability arrangements needed to unlock international support, including climate change considerations in public investment decisions, and progressing swiftly with measures requiring few financial resources such as climate conscious zoning and extension services.

22. Notwithstanding mounting global uncertainty and rising commodity prices, our Liberian authorities remain committed to maintaining macroeconomic and financial stability while sustaining recovery and facilitating inclusive and sustainable growth with prudent policies and reforms, anchored by development objectives articulated in the Pro-Poor Agenda for Prosperity and Development (PAPD) and the ECF program. They appreciate the soundness and quality of the tailored advice from the Fund and the valuable supporting capacity development.