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Public Information Notice (PIN) No. 05/64
May 18, 2005
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Executive Board Concludes Article IV Consultation with Liberia

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On April 20, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Liberia.1

Background

Political and economic developments in 2003-04 were marked by an intensification of internal hostilities, followed by the introduction of the National Transitional Government of Liberia (NTGL) and the resumption of external assistance. Real GDP rebounded in 2004, following a steep decline in the second half of 2003 on account of the hostilities and the imposition of the UN ban on timber exports. Prices, particularly of food items, have stabilized as supply constraints eased, and the exchange rate has returned to preconflict levels, reflecting a return of private capital, donor inflows, and an increase in the demand for local currency. Official reserves increased modestly from low levels.

Following initial success in implementing a balanced cash-based budget, fiscal management has weakened. Although a domestically funded fiscal deficit during mid-2004 was quickly rolled back, there was a large buildup of arrears through end-2004. Despite the introduction of a cash-management committee to avoid the recurrence of a cash deficit, significant expenditures were still made without its authorization. Following effective early steps to boost revenues, collections slowed in the second half of 2004, largely reflecting delays in extending preshipment inspections to all imports and exports.

The money supply expanded significantly in 2004. Following a massive decline in commercial bank deposits through mid-2003, deposits increased by about 50 percent during 2004, reflecting donor activities and the inflow of remittances for reconstruction. The Central Bank of Liberia gradually moved toward financial soundness, reflecting its efforts to reduce its operational outlays, with a view to eliminating its cash deficit by early 2006. The banking sector, however, weakened further as a consequence of the last internal conflict.

External developments in 2004 were driven by increased donor activities and stagnating exports. Imports, primarily humanitarian assistance and petroleum, increased considerably, while exports stabilized at a low level, largely due to the UN sanction on timber exports, despite the doubling of rubber exports in 2004. The overall balance of payments deficit continued to be financed by an accumulation of external arrears. Based on preliminary data at end-2004, Liberia's external debt amounted to US$3.8 billion and reached an unsustainable 2,722 percent as a ratio of exports of goods and services on a net present value (NPV) basis.

A number of governance issues emerged in late 2004, challenging the authorities' commitment to establish transparency and accountability. A committee is being put in place to address these issues, including the circumstances surrounding sales of iron ore and the alleged disappearance of a large number of import and export permits.

For 2005, the economic recovery is expected to strengthen, underpinned by continued consolidation of the security situation and reconstruction activities. Real GDP is projected to grow by 8.5 percent, led by agriculture, domestic manufacturing, and services. With higher imports and increased production, domestic prices are expected to moderate further. The trade deficit is projected to narrow on a further moderate increase of exports and decline of donor-funded imports for humanitarian assistance.

Executive Board Assessment

Executive Directors welcomed the improvements in Liberia's security situation and the initial progress made in implementing important reforms. The resulting pick-up in donor-related and reconstruction activities has led to a rebound of economic activity, stabilization of prices and the exchange rate, and a modest increase in official reserves. However, Directors noted that the macroeconomic position is still fragile, activity is still below the pre-war level, poverty is widespread, and the public debt is large and unsustainable.

Directors emphasized that Liberia faces daunting challenges in its quest to rebuild the economy and reduce poverty. A prerequisite will be the achievement of lasting peace and political stability. In this regard, Directors observed that a large number of ex-combatants still needs to be integrated into economic life, and that the lack of cohesion within the power-sharing government continues to hinder the implementation of sound policies and reforms. Directors stressed that Liberia urgently requires external assistance and private investment, and that the flow of such assistance will depend on decisive actions to strengthen institutions, reduce corruption, and improve governance.

Against this background, Directors regretted the recent weakening of government fiscal management. While they commended the swift roll-back of the domestically financed budget deficit, they expressed concern at the emergence of large arrears to finance unplanned spending. They stressed that expenditure controls need to be strengthened, and underscored the importance of a well-functioning cash management system. Directors also called for a redoubling of efforts to bolster revenue collection, and, in this regard, encouraged the authorities to strengthen tax and customs administration and reduce tax concessions. They urged the authorities to make full use of Fund staff advice in these areas.

Directors urged the authorities to improve the transparency and accountability of government operations. They welcomed the establishment of an anti-corruption commission, and encouraged the authorities to make the commission fully operational as quickly as possible. Investigations into the circumstances surrounding sales of iron ore and the alleged disappearance of a large number of import and export permits should be conducted swiftly, and the outcomes of the investigations made publicly available. Decisive actions are also required to fulfill the requirements for a lifting of UN sanctions.

Directors welcomed the steps being taken by the Central Bank of Liberia (CBL) to strengthen its financial position and the framework for monetary operations, and to develop the inter-bank foreign exchange market. They commended the CBL's decisive actions to reduce its operational outlays, with a view to eliminating its deficit by early 2006. Most Directors had doubts whether a move to full dollarization would be advisable, in part because it would preclude more active monetary policies, while a few others felt that dollarization should not be ruled out given its potential for achieving price stability. Directors encouraged the authorities to push ahead with plans for restructuring banks and strengthening bank supervision. They advised to use caution in granting new licenses for commercial banks in the current economic environment.

Directors welcomed the progress in stock-taking of domestic and external debt. They urged the authorities to expedite the process, with a view to developing a strategy for achieving debt sustainability.

Directors noted that, despite some progress made in rebuilding basic statistics, the limited availability and quality of key economic data continues to hamper effective surveillance. In particular, they stressed the need to strengthen fiscal data in order to allow for a more accurate assessment of budgetary developments.

Directors called on the authorities to formulate a concrete action plan to address the identified weaknesses in economic management and governance. Such a plan would facilitate further support by the staff in terms of policy advice and technical assistance in the period leading to the establishment of a new government at end-2005. This plan could also help Liberia establish a track record for a staff-monitored program, which could lead to a de-escalation of the Fund's remedial measures against Liberia. Directors welcomed the authorities' intention to consider increasing payments to the Fund in the context of the 2005/06 budget, if possible.


Liberia: Selected Economic and Financial Indicators, 2001-05


 

2001

2002

2003

2004

2005

   

Est.

Est.

Est.

Proj.


 

(Annual percentage change, unless otherwise indicated)

National income and prices

         

Real GDP

2.9

3.7

-31.3

2.4

8.5

Consumer prices (annual average)

12.1

14.2

10.3

7.8

5.0

Nominal GDP (in millions of U.S. dollars)

543

559

435

492

538

GDP deflator (in U.S. dollars)

-5.9

-0.7

13.3

10.4

0.8

           

External sector (in U.S. dollar terms)

         

Exports of goods, f.o.b.

6.4

30.1

-34.5

-4.7

0.3

Imports of goods, f.o.b.

6.4

-6.3

-3.6

91.4

-1.2

Terms of trade

-21.3

20.3

21.1

4.9

-9.1

Exchange rate (Liberian dollars per U.S. dollar; end of period)

49.5

65.0

50.5

54.5

...

           

Money and banking (stocks, in Liberian dollar terms)

Reserve money 1/

...

...

15.1

29.9

15.0

Broad money 2/

...

...

14.7

43.1

18.3

 

(In percent of GDP, unless otherwise indicated)

Central government operations (January-December)

         

Total revenue and grants

12.8

13.0

11.0

14.1

17.7

Of which: total revenue

11.9

13.0

10.3

13.9

17.7

Total expenditure and net lending

13.5

14.3

10.3

14.2

17.7

Of which: current expenditure

7.5

4.6

5.6

12.2

15.7

capital expenditure

6.0

9.7

4.7

2.0

2.0

Overall fiscal balance (cash basis)

-0.7

-1.3

0.7

-0.1

0.0

           

External sector

         

Current account balance, including grants (deficit, -)

-24.5

-3.4

-18.2

-13.3

-19.9

Of which: public interest payments due

-17.6

-11.2

-12.1

-13.0

-15.5

Current account balance, excluding grants (deficit, -)

-30.4

-11.0

-22.7

-51.8

-46.5

Trade balance (deficit, -)

-5.0

3.8

-7.1

-33.4

-29.9

Exports, f.o.b.

23.6

29.8

25.0

21.1

19.4

Imports, f.o.b.

-28.6

-26.0

-32.2

-54.5

-49.2

Public sector external debt outstanding (total)

596.6

601.5

831.8

766.4

713.2

 

(In millions of U.S. dollars, unless otherwise indicated)

Current account balance including grants (deficit, -)

-133.2

-19.2

-79.2

-65.5

-107.0

Trade balance (deficit, -)

-27.1

21.1

-31.1

-164.2

-160.7

Net official reserves

...

0.4

-2.1

4.2

8.7

(in months of imports of goods and services)

...

0.0

-0.2

0.2

0.4


Sources: Liberian authorities; and IMF Staff estimates and projections.
1/ Liberian dollar currency outside banks and commercial banks reserves denominated in Liberian dollars held at central bank.
2/ Liberian currency outside banks plus demand, time, and savings deposits in Liberian and U.S. dollars.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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