IMF Staff Visit To Review January-June 2000 Staff Monitored Program (SMP)
May 26, 2000
1. The government of Liberia launched a new staff-monitored program (SMP) for the period January-June 2000 in late 1999. The program aims to foster macroeconomic stability, consolidate progress in rebuilding the economy, and continue to restore public confidence in the context of a post-conflict environment. The main features of the program comprise: (a) fiscal policies to achieve a balanced fiscal position on a cash basis; (b) allocation of resources to priority sectors including health and education; (c) avoidance of any accumulation of new domestic payment arrears and elimination of domestic payment arrears accumulated in 1998/99; (d) introduction of a new currency to replace the existing stock of JJ Roberts and Liberty banknotes; (e) capitalization of the central bank, strengthening of the banking system, and development of a monetary policy framework; and (f) implementation of key structural reforms related to the liberalization of rice and petroleum imports.
2. Overall objectives of the program were broadly achieved during the first quarter of 2000, as post-war economic recovery continued, with signs the rebound is broadening to the forestry sector. Inflation remained subdued, with the consumer price index rising by 3 percent during the first quarter of 2000, compared with the same period in 1999. The exchange rate remained broadly stable, averaging L$41 per U.S. dollar during the first four months of this year. Good progress was made in the areas of monetary and financial sector reform, and structural reforms are ongoing. Notwithstanding this progress, fiscal performance was mixed in the first quarter, primarily related to expenditure control.
3. As noted in the Communiqué of the Multi-Donor Assessment Mission to Liberia in November 1999, satisfactory implementation of the SMP would be one important factor affecting donors' consideration to hold a subsequent donors' meeting. The IMF staff's initial assessment of the SMP is provided below. Overall, the assessment finds that the SMP has been satisfactorily implemented in a number of important areas, including with respect to financial, monetary and structural reforms, while fiscal performance has been mixed. It is anticipated that IMF staff will return to Monrovia in August/September to complete a full assessment of the SMP through end-June 2000, with an emphasis on improvements in fiscal performance.
II. Policy Implementation and Developments under the SMP
4. The overall fiscal position remained largely in balance on a cash basis during the first quarter of 2000. Based on provisional data, a fiscal surplus of US$0.4 million (0.1 percent of GDP) was recorded on a commitment basis, compared with a programmed surplus of US$1.4 million. Revenues rose by 32 percent, to US$15.6 million, compared with the same period in 1999, thanks to a strong increase in tax receipts. However, first-quarter revenue was US$1½ million below program projections on account of lower maritime receipts, as the transfer of maritime operations to a new agent on January 1, 2000 led to a delay in the collection of corporate registration fees. Aggregate expenditure commitments were contained at US$15 million in the first quarter in an effort to reduce the outstanding stock of domestic payments arrears. Domestic arrears were reduced by US$0.5 million (on a net basis), resulting in a modest budget deficit on a cash basis (US$0.1 million).
5. Based on preliminary data, budget performance deteriorated in April 2000, as expenditure allocations increased significantly, leading to a budget deficit for the January-April period of US$0.9 million on a cash basis, including an accumulation of US$0.4 million in nonwage arrears. The government explained that unplanned expenses for extensive regional discussions and increased border security, both associated with the situation in Sierra Leone, resulted in additional pressure on the budget.
6. Despite progress in controlling ministries' expenditure commitments, cash management continued to be a problem. While the Ministry of Finance reduced the outstanding stock of 1998/99 arrears by US$3.3 million in the first quarter, new domestic arrears on wages of US$2.8 million emerged. This development reflected continued difficulties in coordinating fiscal management among key expenditure authorities and continued high allocations for security and presidential priority projects. In particular, lower maritime revenue and allocations of revenue at source for priority expenditures were not adequately reflected in revised monthly cashflow projections. This underscores the urgency of the authorities' work program to improve expenditure coordination, to eliminate extrabudgetary expenditures through the allocation of revenues at source, and to continue to improve reporting of revenues and outlays in the budget. As a result of higher security and presidential allocations, budget priorities in the health and education sectors have been underfunded.
7. Improvements in recording revenues and expenditures by functional classification have continued. However, the reconciliation of tax collections from rapidly expanding forestry concession activities should be improved. In addition, while the consolidation of government revenue into priority accounts in selected commercial banks has improved fiscal oversight and transparency, further actions are needed. In this regard, it will be important for the government to transfer central government deposit accounts to the Central Bank of Liberia (CBL) during the second half of the year, which should aid in managing and monitoring cash flow.
8. Submission of the new tax codes to the legislature has been delayed from February 2000, following further revisions, and is now planned in June; implementation of the new codes is expected October 1, 2000, following promulgation of regulations and a country-wide public awareness campaign. The government is also expected to propose a new import tariff structure to replace the current emergency tariff legislation, including elimination of the customs user fee. The revised tariff structure would bring Liberia's tariff structure more in line with ECOWAS rates, and lead to a 2 percentage point increase in the average tariff rate. These changes are intend as a first step toward harmonizing Liberia's trade regime with ECOWAS, as envisioned under the agreed monetary and trade union, though the proposed rates in Liberia still remain well below the average in ECOWAS countries.
Monetary and financial sector policies
9. Good progress has been made in the implementation of monetary and financial sector policies. The Central Bank of Liberia (CBL) began issuing a new currency to replace the existing stock of JJ Roberts and Liberty banknotes on March 29, 2000. The operation was extended to June 2000, to ensure CBL officials have adequate time to visit remote areas across the country. Wide acceptance of the new banknotes has been reported and no sustained pressure on the exchange rate has emerged. The central bank reiterated its commitment to limit the issuance of new currency to the replacement of the existing stock of banknotes during the program period, and will complete an audit of the exchange operations at the end of the exchange period. The structural benchmarks with respect to the required minimum capitalization (US$5 million) of the new central bank and issuance of prudential regulations for commercial banks were met.
10. A draft monetary policy framework has been prepared by the CBL, including issues related to required and excess reserves and indirect instruments of monetary policy. It is anticipated that a complete policy framework and operational monetary targets for the second half of 2000 will be prepared by end-June 2000. The CBL and Ministry of Finance completed the restructuring of central government debt owed to the central bank in April as anticipated, and the agreement is expected to be fully reflected in the FY 2000/01 budget. The monetary authorities have also made good progress in improving banking supervision operations. In this context, the CBL moved to suspend the operations of one illiquid commercial bank in April, and will review a proposal for infusing new capital into the seized bank by July. The CBL is in the process of relicensing commercial banks, and is expected to complete this process for the four currently open banks by June. A strategy to deal with failed banks has also been drafted and will be discussed and approved by CBL management in the coming month. Costs associated with the resolution of the failed banks, however, remain to be finalized and-if needed-financed.
11. In the area of monetary statistics, commercial and central bank balance sheets were compiled through March 2000 and a new report format for commercial banks was implemented. While some discrepancies remain, the authorities are considering publishing monetary statistics by midyear. It is expected that the CBL will begin to compile balance of payments statistics with technical assistance from the IMF mid-year as well.
Structural and other policies
12. Structural reforms in the rice and petroleum sectors are continuing. However, development of a regulatory framework and a monitoring system for rice importation has been delayed, as has the completion of a regional study of petroleum import policies, largely reflecting delays in the provision of donor technical assistance. Nonetheless, the government has reiterated its commitment to liberalize rice imports midyear and to prepare an action plan for the liberalization of petroleum imports by midyear. To ensure adequate domestic stocks of rice, the government will work closely with the World Bank to implement necessary regulatory changes and a monitoring system before imports are fully liberalized.
13. The government has continued in its effort to develop a medium-term economic reform and reconstruction strategy with the assistance of the World Bank and UNDP, and is expected to complete its strategy by mid-July, in preparation for a possible donors' conference later in the year.
III. Fiscal Policies and Measures During the Second Quarter of 2000
14. Macroeconomic stabilization and economic reconstruction continue to be core objectives of the government's policies in the second quarter, as described in the memorandum of economic and financial policies. However, given recent developments, progress on improving fiscal monitoring and expenditure control will need to be accelerated to meet end-June performance targets.
15. With respect to the budget, revenue projections should be reviewed weekly to ensure that current estimates are achievable, while expenditure allotments (including noncash allocations to priority sectors) are strictly limited to ensure a balanced budget on a cash basis. In addition, it will be important to eliminate wage arrears that have accumulated and to refrain from allocating revenues at source, while continuing to fully account for all revenue. In this regard, the next assessment of the SMP following the completion of the program will be based on end-June quantitative performance benchmarks agreed under the program and progress toward improving expenditure control. The following specific budget actions will form important components of that assessment:
· Elimination of March and April wage arrears by end-June and elimination of remaining wage arrears and payment of current wage obligations in July;
· Significant improvement in expenditure control, with the institution of weekly interagency budget taskforce meetings including active participation by the Office of the President, Finance Ministry and Budget Bureau;
· Restructuring of the budget process and Budget Bureau to improve oversight, management and coordination;
· Preparation of a detailed analysis by end-June 2000 of tax revenue from timber concessions for the January 1999 - March 2000 period, including exemptions and offsets reflecting initial assessments and payments.
· Elimination of the practice of allocating revenues at source for priority expenditures (non-cash revenue), with the exception of already agreed domestic debt service payments in 2000;
· Implementation of a phased plan in July 2000 to transfer government deposit accounts to the central bank from commercial banks. It is expected that the government would lower transactions fees substantially and improve oversight. The transfers could be completed by end-2000;
· Monthly review of outstanding processed and unprocessed vouchers, to ensure consistency with approved allotments, and strict adherence to the non-accrual of new domestic payments arrears;
· Transmittal to the legislature of an updated and revised interim January-June 2000 budget and transmittal of the FY 2000/01 balanced budget by June 30, 2000; and
· Submission of the new tax code to the legislature by end-June 2000, with a target implementation date of October 1, 2000. With IMF technical assistance, strengthen tax administration and undertake public awareness campaign for the introduction of the new tax code.
IV. Indicative Policies and Targets for the third & Fourth Quarter of 2000
16. It will be important to continue to consolidate the progress achieved to date with respect to maintaining macroeconomic stability and initiating a medium-term reconstruction program. In this regard, it will be critically important for the government to complete its preparation of a fully articulated medium-term economic reform and reconstruction strategy, consistent with current implementation capacity and financing, by end-July.
17. The overarching economic policy objectives of the government continue to be to achieve economic growth of some 20 percent in 2000, with inflation remaining below 4 percent and the exchange rate stable. The core of the government's stabilization efforts during the second half of 2000 will continue to be a balanced budget on a cash basis and the avoidance of any accumulation of new domestic payments arrears.
18. Preliminary discussions on the FY 2000/2001 budget suggest that an overall domestic revenue target of US$80 million is achievable, based on the introduction of the new tax code on October 1, 2000. Revenue would comprise US$54½ million in tax revenue, US$13 million in non-tax revenue and US$13 million in maritime receipts. Indicative targets for end-September and end-December 2000 have been provided.
19. On the expenditure side, commitments would include US$18½ million in wages and salaries, US$34½ million in goods and services, US$7 million in domestic debt service payments, US$45 million in external debt service obligations (US$1 million in payments, with the remainder financed by arrears accumulation), and domestic investment expenditure of US$3 million. The government remains committed to maintaining its current level of payments to the IMF, but notes that additional payments to the IMF or multilateral development banks would not be possible in the current difficult external environment. At the same time, the government asked the international financial institutions to consider a consistent policy of nonpayments across all institutions for FY 2000/01.
20. In addition, the government is considering additional development expenditures in the range of US$60-70 million for FY 2000/01 related to: demilitarization, demobilization, and reintegration activities; civil and security service reform; provision of basic social services; infrastructure reconstruction; poverty reduction; import liberalization; and capacity building. Additional development expenditure would be contingent on donor financial support. Specific financing requirements and a comprehensive strategy to address the unsustainable external debt situation will be addressed in the medium-term economic reform and reconstruction strategy.
21. Monetary and financial policies are expected to continue to reinforce the restructuring of the banking sector. Monetary policy would be based on a low inflation target and a market-determined exchange rate, anchored by nominal money and a balanced fiscal position without government recourse to the banking system. It is expected that any increase in currency after the exchange is complete would be limited to the modest purchase of foreign currency to begin to rebuild international reserves in the July-December 2000 period. Intervention to rebuild international reserves, however, would occur only in the context of a stable exchange rate. It is expected that the conduct of an indirect monetary policy will be limited in the near term, as monetary instruments and secondary markets have yet to be developed. For planning purposes, reserve money growth in the range of 4 percent annually is projected.
22. It is anticipated that the medium-term economic reform and reconstruction strategy, including specific measures and benchmarks, would be prepared by the authorities for discussion in the context of the subsequent IMF assessment mission.