IMFSurvey Magazine: In the News
IMF to Back Liberia With Debt Relief, New Financing
By IMF Survey online
March 18, 2008
- Liberia clears arrears built up since 1980s and normalizes financial relations with the IMF
- IMF provides financing to Liberia of $952 million
- Debt relief supported by 102-country fundraising operation
In a major move to back Liberia's economic recovery after a ruinous 14-year period of civil war, the IMF has announced a series of measures to support one of Africa's poorest countries with debt relief and new financing.
Over the past two years, the Liberian government has implemented significant reforms to rebuild its economy and reduce poverty. On March 14, Liberia took another important step forward to reintegrate the war-battered country back into the global economy by clearing its long standing overdue obligations of $888 million build up since the 1980s and normalizing its financial relations with the IMF.
In response, the IMF Executive Board agreed to
• restore Liberia's voting and related rights in the IMF and its eligibility to use the general resources of the Fund.
• provide financial support totaling $952 million—comprising a three-year $391 million arrangement under the Poverty Reduction and Growth Facility (PRGF) and a $561 million arrangement under the IMF's Extended Fund Facility (EFF)—in support of the Liberia government's economic program for 2008-10.
• start providing debt relief to Liberia, along with other creditors, to cover at least $4.4 billion of the country's $4.7 billion debt outstanding at end-June 2007.
Opening the door
Normalizing financial relations with the IMF also opens the door for other institutions to provide greater and much-needed financial support for Liberia. More generally, the clearance of Liberia's arrears marks an important step towards the country's reintegration into the international community.
Arrears to the World Bank and African Development Bank were cleared in December 2007 and further steps are being taken to regularize relations with other creditors, including a meeting of the Paris Club scheduled for April. Bridge loans from the United States Government helped Liberia clear its arrears to the IMF, the World Bank, and the African Development Bank, and pay for an increase in Liberia's quota in the Fund.
"This has been a historic week for the Fund. We have seen Liberia's long-standing arrears to the IMF cleared and the Fund has been able to provide significant new financial resources in support of the Liberian Government's reform program. Liberia has also reached a key milestone in its campaign to have its external debts reduced to sustainable levels," said IMF First Deputy Managing Director John Lipsky (watch his remarks on video).
Liberia's two civil wars during 1989-2003 had a devastating impact on Liberia's economy, reducing real GDP to about 40 percent of its pre-war level. An estimated 64 percent of the population of 3.8 million lives below the national poverty line, with 48 percent living in extreme poverty. The Accra Comprehensive Peace Agreement signed in 2003 initiated a political transition, culminating in presidential elections in October-November 2005.
To address serious concerns regarding economic mismanagement, the National Transitional Government of Liberia, which governed during 2003-05, and key international partners established the Governance and Economic Management Assistance Program to improve financial and fiscal administration, as well as transparency and accountability.
For over two years, the IMF has been supporting efforts to rebuild the Liberian economy. When President Ellen Johnson-Sirleaf took office in early 2006, the Fund quickly agreed with the new government on a reform program. This ambitious program has been implemented effectively, but it has not been easy. Capacity is very weak, and some planned measures have often taken longer than expected.
Growth picking up
The Liberian people have already seen significant benefits from their government's reforms. After falling over 30 percent in 2003, GDP growth steadily increased to an estimated 9.5 percent in 2007 and investment is picking up strongly. Donors have provided substantial resources to help the process of rebuilding. Government revenues have more than doubled and the government now pays wages and suppliers on time.
Real GDP growth is projected to average 11.3 percent per annum for 2008-12, underpinned by a sustained recovery in the resource-based sectors, following the lifting of UN sanctions on diamond and timber exports and substantial private investment in the iron ore sector, and continued strong performance in the service sector. A sustained recovery though will depend on maintaining security and strong external financial and technical support, as well as an increase in private sector-led investment in key sectors.
Substantial IMF technical assistance has been provided since the peace accord in the area of fiscal and monetary policy, financial sector reform, and statistics. In fact, Liberia is currently the third largest receiver of technical support from the IMF in Sub-Saharan Africa.
Now, with Liberia's relations with the Fund normalized, the IMF is able to step forward with substantial debt relief and financing, supporting a program that should help catalyze further financial support from the donor community.
IMF members backed debt relief for Liberia
To date, 102 countries, including many low-income countries, participated in the fund-raising effort for Liberia, securing sufficient commitments to finance the IMF's debt relief to Liberia. These bilateral contributions were facilitated by a partial distribution by the IMF of resources that were previously contributed by member countries to provide financial security in the face of arrears by Liberia and other countries.
The IMF and the World Bank on March 18 jointly announced that Liberia has reached the so-called "Decision Point" under the Heavily Indebted Poor Countries (HIPC) Initiative. This is the first step towards securing debt relief covering all Liberia's creditors including bilateral, multilateral, and private creditors. Liberia had a stock of debt of about $4.7 billion in 2007 (or about $1,200 dollars per person). Most of this debt is clearly unpayable and needs to be forgiven.
Liberia could reach the conclusion of the HIPC debt relief process in just two or three years. It is important that all Liberia's other creditors—including bilateral and private creditors—agree to provide debt relief consistent with the HIPC Initiative. IMF officials say the Fund intends to go beyond the requirements of the HIPC Initiative and provide full debt relief on an amount equivalent to the arrears that were outstanding prior to the March 14 Board meeting.
Liberia will start receiving debt relief on debt service payments falling due to the Fund immediately. At the same time, the Fund will be providing Liberia with new financial resources on concessional terms under the PRGF, equivalent to about $63 million over three years. The cost of the IMF's debt relief to Liberia is estimated at $867 million in net present value terms.
"Debt relief is not a panacea. Liberia has not been making significant payments on its debt for many years, so the debt relief itself cannot free up many resources directly. However, the program should catalyze private investment and financial support from the donor community, and we encourage donors to ensure new support is on grant terms," Lipsky said.
The government will also need to work closely with the Liberian legislature. The recently proposed legislation to establish an independent anti-corruption commission will be important in cementing the President's vision of zero tolerance for corruption. This and other reforms included in the program will help to ensure that the Poverty Reduction Strategy is implemented as planned.
Note: All dollar figures related to Liberia's arrears and IMF's financing and debt relief in this article are based on amounts in SDRs (Special Drawing Rights) converted into U.S. dollars using the exchange rate of March 14.
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