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Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.


Concluding Statement

IMF Staff Visit To Review January-June 2000 Staff Monitored Program (SMP)

September 15, 2000

I. Introduction

1. An IMF staff team visited Monrovia during September 6-15, 2000 to assess performance under the January-June 2000 staff-monitored program.1 The staff team found that following broadly satisfactory implementation under the program in the first quarter in most areas, overall performance deteriorated significantly in the second quarter of 2000. The deterioration largely reflected the weak fiscal policy stance in the second quarter, as extrabudgetary expenditure rose sharply. In addition, key structural measures related to the liberalization of rice and petroleum imports were not implemented as planned, though in part this reflected a delay in the provision of donor technical assistance. Under the circumstances, the IMF staff team discussed with the authorities a package of measures that would need to be implemented to improve performance. The measures related to the enhancement of fiscal transparency and control, the elimination of wage and nonwage domestic arrears, and substantial progress toward liberalization of rice and petroleum imports.

2. The staff team noted with concern the recent deterioration in Liberia's relations with donors and external creditors, including the freezing of a new US$45-50 million post conflict assistance program by a key donor. In addition to establishing a credible record of policy performance, relations with donors and external creditors will need to improve significantly, so as to lay the foundation for securing adequate financing assurances, before possible discussions on a rights accumulation program could begin. The timing of a possible follow-on SMP will depend on the achievement of informal quantitative performance benchmarks established for end-September and end-December 2000, and the implementation of measures described in Section III below to improve fiscal management/control. Progress toward the liberalization of rice and petroleum imports, with World Bank technical assistance, will also be assessed. During the visit, the authorities reconfirmed their intention to publicly release the staff's assessment of performance under the SMP.

II. Policy Implementation and Developments under the January-June 2000 Staff Monitored Program

3. The government's program aimed at fostering macroeconomic stability, consolidating progress in rebuilding the economy, and continuing to restore public confidence in the context of a post-conflict environment. The main features of the program comprised: (a) fiscal policies to achieve a balanced fiscal position on a cash basis and improve expenditure control and transparency; (b) the 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.

4. Economic developments were largely positive during the first half of the year, as the economy continued on its recovery path following the seven-year civil war. It is estimated that real GDP will expand by about 15-20 percent in 2000, after rising by some 20 percent in 1999. However, despite these recent gains, per capita income remains at about one-third of pre-war levels and unemployment, particularly in urban areas, is widespread. Domestic production, led by timber, rice and rubber, continued to increase in the first half of 2000, at about the roughly the same pace as in 1999. Preliminary data on external trade indicate that U.S. dollar exports increased markedly during January-June 2000, compared with the same period in 1999, primarily on account of expanded timber operations, while imports were roughly unchanged.

5. The exchange rate remained broadly stable, averaging L$41-42 per U.S. dollar during the first 8 months of the year. The consumer price index rose by 7 percent during the first half of 2000, reflecting in part a sizable adjustment in health care service fees and rents in late 1999.

Fiscal policy

6. Fiscal performance deteriorated sharply during the second quarter of the year. Consequently, despite higher-than projected revenue, a fiscal deficit of US$4 million (1 percent of GDP) on a commitment basis emerged for the January-June 2000 period, compared with a targeted surplus of US$2 million. To a large degree, the deficit reflected sizable increases in extrabudgetary expenditure for presidential and security-related outlays in the second quarter, and was financed by a buildup of civil service wage arrears (US$2½ million) and other nonwage arrears (US$1½ million).

7. Domestic revenue rose to US$38 million (7 percent of annual GDP) during January-June 2000 (an increase of 24 percent compared with the same period in 1999), thanks largely to strong growth in tax receipts. Tax revenue reached US$27 million compared with US$17 million in 1999, with the increase primarily related to higher collections on imports. In addition, increased nontax revenue, driven by improved timber concession receipts, more than offset a US$2 million shortfall in maritime revenue. The continued sharp decline in maritime inflows is troublesome and should be reviewed closely so that remedial measures can be taken if necessary. The transfer of maritime operations to a new agent on January 1, 2000 led to a delay in the collection of corporate registration fees, explaining part of the decline. In addition to domestic receipts, the Government of Liberia received US$2 million in donor grants during the period, to assist in the reconstruction of power generation capacity in Monrovia, and resulted in limited power restored to a small section of the city by September.

8. Expenditure on a commitment basis rose to US$44 million (8 percent of GDP) during January-June 2000, compared with a program target of US$30 million. The sizable increase above plan was largely due to growth in outlays on goods and services, which represented 54 percent of total expenditure, much of which was extrabudgetary (compared with: wages, 19 percent; direct security-related expenditure, 10 percent; travel, 8 percent; and health and education, 9 percent). In terms of agencies, expenditure by the Office of the President represented 28 percent of the total. The authorities explained that a portion of the additional spending in the second quarter represented increased expenditure for border security related to the resurgence of fighting in Sierra Leone and the undertaking of diplomatic efforts to release United Nations peace-keeping forces taken hostage there. Estimates of these expenditures were not available.

9. Cash management deteriorated significantly in the second quarter of 2000. Expenditures on security and presidential affairs were a key factor in the deterioration, manifested as a large share of expenditures (some 25 percent) made outside the budget process, through tax offsets and direct allocation of tax receipts at source. The expectation that these practices would be reduced significantly to pre-specified amounts for debt service payments was not realized.

10. The use of tax offsets and credits to new forestry concessions has recently become an important means of offbudget expenditure, including for road and other development projects, particularly in the second quarter. As this practice raises concerns of management and transparency, it should be ended and the revenue allocated through existing budget procedures and accounts. In this regard, while the consolidation of government revenue into priority accounts in selected commercial banks has improved fiscal oversight and transparency, further actions are needed. The completion of the transfer of central government deposit accounts to the Central Bank of Liberia (CBL) which began recently should help considerably in improving cash management and monitoring cash flow.

11. A new tax code was submitted to the Legislature in August replacing emergency tax regulations with a consistent tax framework, based on international best practices, including the introduction of a goods and services tax. The target implementation date for the new code is January 1, 2001, following promulgation of regulations and a country-wide public awareness campaign. The government has also proposed 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 1 percentage point increase in the average tariff rate. These changes are intended as a first step toward harmonizing Liberia's trade regime with ECOWAS, as envisioned under the agreed monetary and trade union, although the proposed rates in Liberia still remain below the average in ECOWAS countries.

Monetary and financial sector policies

12. With a newly established central bank and fragile banking sector, monetary objectives under the staff-monitored program centered on improving the liquidity position of the central bank, laying the foundation for the conduct of monetary policy, and strengthening the banking system. In support of this policy, the authorities formulated an action plan for currency reform, and conducted a currency exchange during March-July, replacing Liberty banknotes (one-for-one) and JJ Roberts banknotes (two-for-one) with new Liberian dollars. Although the exchange rate came under pressure in the first week following the start of the exercise, the rate stabilized thereafter and remained through August 2000 in the range of L$41-42 per U.S. dollar.

13. Progress was also made in strengthening the financial position of the Central Bank of Liberia (CBL). In March 2000, the CBL was adequately capitalized (a structural benchmark) through the issuance by government of a negotiable, interest bearing note for US$5.0 million, and in the following month an agreement was concluded to reschedule all debt owed by the government to the CBL into two loans over a thirty-year period commencing in June 2000. To permit more transparent compliance and resolve outstanding issues with regard to reserve requirements, current accounts for each of the currently active commercial banks were opened with the CBL, and these accounts are now being used for the clearing of checks and settlement of balances among banks. In support of a move towards a comprehensive monetary framework for Liberia, an agreement was also reached in principle to transfer all deposits of the government to the CBL, and a first account with the CBL was opened. However, the health of the CBL remains at risk, since the government has not yet begun to service the new loan, nor has it allocated the full amount for payments under the loan in the draft 2000/01 budget.

14. In order to address serious problems in the banking system, the CBL issued a set of prudential guidelines for commercials banks (also a structural benchmark), and completed the re-licensing of all operating banks based on a positive assessment of each bank's capital adequacy and other prudential ratios in line with the guidelines. With technical assistance from the Fund, the banking supervision department was also strengthened. Early in the year, the CBL had been forced to take decisive action by closing one commercial bank and assisting in its re-organization under a provisional administrator and newly appointed Board of Directors. Implementation of a strategy to deal with the remaining failed banks, closed during the civil war, is currently underway.

15. Monetary developments during the first half of 2000 reflected the tentative health of the banking system and rising tensions in the subregion. Commercial banks remain reluctant to lend to the private sector, partially on account of problems with loan recovery in the court system; processing fees, including for government financial transactions, remain the principal means of income generation for banks. A draft monetary policy framework is currently being prepared by the CBL, including issues related to required and excess reserves and indirect instruments of monetary policy and should be completed by end-2000.

16. In the area of monetary statistics, commercial and central bank balance sheets were compiled through June 2000 and a new report format for commercial banks was implemented. While some discrepancies remain, the authorities intend to begin publishing monetary statistics during the second half of the year. Marked changes in the summary accounts of deposit money banks from December 1999 through July 2000, including foreign assets and demand deposits, largely reflected the resolution of two court cases by one commercial bank. As a result, both reserve and broad money contracted in the period under review, rather than rising modestly as envisaged under the program.

Structural and other policies

17. Liberalization of rice imports was not implemented as anticipated under the program by end-June 2000 (a structural benchmark). This reflected a delay in the development of a regulatory framework and monitoring system for rice importation (also a structural benchmark), as the provision of technical assistance was delayed. The government has reiterated its commitment to liberalize rice imports, after missing the end-June performance target but stressed it was vital to ensure that adequate domestic stocks of rice were available at all time. The government noted it intended to work closely with the World Bank to implement necessary regulatory changes and a monitoring system before imports are fully liberalized. The government should push forward in the coming month to publish rice import, stock and price information on a weekly basis.

18. The development of a plan to restructure and liberalize petroleum imports was also not completed as anticipated under the program by end-June 2000. This, however, also reflected delays in the provision of donor technical assistance to undertake a study tour of several countries in the region which have successfully undertaken liberalization of the petroleum sector. The audit of the 1998-99 accounts for the petroleum parastatal, LPRC, is currently underway, though the publication of the audited report is not expected until October/November 2000. The government is urged to work closely with the LPRC to accelerate work in this area and develop a restructuring/liberalization plan by the end of the year.

19. The government has continued in its effort to develop a medium-term economic reform and reconstruction strategy with the assistance of the UNDP, and is expected to complete its strategy by year-end.

III. Policies Measures to Improve Fiscal Performance During the second Half of 2000

20. The staff team found that many of the specific measures discussed with the authorities during the May mission to improve fiscal performance had not been implemented. These measures aim to improve fiscal performance by increasing revenue and improving expenditure control and transparency. A number of the measures also aim to promote good governance. Satisfactory implementation of these actions will be an important factor in considering a possible follow-on staff-monitored program, including:

· Elimination of civil service wage arrears (3 months wages at end August) and progress toward eliminating the outstanding stock of nonwage domestic arrears;

· Incorporation in the FY2000/01 budget document of a report on government revenue and expenditure for the January-June 2000 interim budget period, including for all sectors and ministries;

· Preparation of a detailed report on revenue from timber concessions for the January 1999-June 2000 period, including exemptions and tax offsets for government-related expenditures. The analysis should compare initial assessments against cash tax payments, discussing the difference between the two, including expenditure by timber concessions for public works projects and other activities, and any weaknesses in reported data.

· Completion of the financial audit of the LPRC by November 2000, and the undertaking of an analysis of tax obligations and tax payment by the parastatal during the 1999-2000 period, including corrective actions to improve tax payments and profit transfers. In addition, the Ministry of Finance in conjunction with the Maritime Bureau should investigate the recent significant decline in maritime revenue and prepare an action plan to improve revenue yields.

· 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. All revenues should be consolidated in central government treasury accounts at the central bank before allocation to authorized agencies for approved expenditures;

· Completion of a phased plan begun in July to transfer government deposit accounts to the central bank from commercial banks, taking into consideration the impact of the transfers on the health of the commercial banks;

· Conduct monthly reviews of outstanding processed and unprocessed vouchers, to ensure consistency with approved allotments, and strict adherence to the non-accrual of new domestic payments arrears. Discuss reviews in biweekly interagency budget meetings, including actions to eliminate remaining arrears;

· Implementation of the new tax code in January 2001. With IMF technical assistance, strengthen tax administration and undertake public awareness campaign for the introduction of the new tax code during the fourth quarter of 2000.

IV. Indicative Policies and Targets for the third & Fourth Quarter of 2000

21. The economic policy objectives of the government remain to achieve economic growth of some 15-20 percent in 2000, largely reflecting continued recovery in the forestry and agriculture sectors, with inflation in the range of 5 percent and the exchange rate stable, despite the recent decline in donor financing. The core of the government's stabilization efforts during the second half of 2000 should be to achieve a balanced budget on a cash basis, and to eliminate wage arrears while avoiding any accumulation of new domestic payments arrears.

22. Strong efforts should be made in the coming months to improve relations with donors and external creditors and to reactivate ongoing development projects, including possible post-conflict grant assistance from bilateral and multilateral donors. Implementation of measures to improve policy performance will also be important. In this regard, the government should accelerate its preparation of a comprehensive medium-term economic reform and reconstruction strategy, with the view to presentation of the framework to donors and creditors by end-2000, including a strategy to address the unsustainable external debt situation.

23. Given the improvement in revenue collection during January-June 2000, an overall domestic revenue target of US$90 million for FY 2000/2001 (July-June) is considered achievable, based on the introduction of the new tax code on January 1, 2001. The total would comprise US$60 million in tax revenue, US$17 million in non-tax revenue, and US$13 million in maritime receipts. Indicative targets for end-September and end-December 2000 have been provided.

24. On the expenditure side, new commitments would be limited to US$86 million. The expenditure profile would include US$17 million in wages and salaries, US$24 million in goods and services, US$12 million in domestic debt service payments, US$2 million in external debt service payments (including for overdue contributions to international organizations), and US$18 million in domestic capital expenditure. In addition, it is expected that the outstanding stock of civil service wage arrears would be significantly reduced by end-December 2000. The government noted during the discussions that it remains committed to maintaining its current level of payments to the IMF, but that additional payments to the IMF or multilateral development banks would not be possible in the current difficult external environment. The government should strive to fully implement its planned increases in social sector and other poverty-related spending.

25. Monetary and financial policies are expected to continue to reinforce macroeconomic stability and the restructuring of the banking sector. Monetary policy would continue to be based on maintaining a moderate rate of inflation (below 5 percent) and a market-determined exchange rate, anchored by modest money growth and a balanced fiscal position without government recourse to the banking system. It is expected that any increase in currency, after reconciling for the currency exchange exercise, would be limited to the 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 implemented over the medium term, as monetary instruments and secondary markets are developed. For planning purposes, reserve money growth in the range of 4 percent annually is projected.

26. The staff team encourages the authorities to continue their efforts to improve the collection and analysis of key economic, financial and poverty indicators. With IMF technical assistance, we look forward to the compilation of balance of payments statistics by year end by the CBL. In this regard, the composition of an interagency task force to compile monthly trade data is urgently needed, including representatives of the Ministry of Commerce, Ministry of Planning and Economic Affairs, Ministry of Finance, and the CBL, with representation from BIVAC, LPRC and FDA. Progress to date on the collection of loan-by-loan external debt data is also encouraging. We would recommend that the consumer price index be compiled and published within 30 days after the monthly survey is completed.

27. The mission found that good progress had been made in setting up the new central bank and improving banking supervision. In this regard, IMF technical assistance in this area should continue to help the authorities to establish a well-functioning and healthy financial system. Technical assistance in the area of budget preparation and management as well as tax policy and administration also continues to remain important to improve the transparency and management of fiscal operations.

1 An initial assessment of the first quarter was completed in May 2000.