## 1lbrea2019001 ## Source details **Canonical URL:** [1lbrea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1lbrea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1lbrea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1lbrea2019001.pdf.json) --- ### Context and recent developments - Pro-Poor Agenda for Prosperity and Development (PAPD) launched October 2018 to guide 2018–23, focus on physical and human capital accumulation. - Liberia described as fragile, post-conflict with weak capacity; GDP per capita US$663 in 2018; poverty: 50.9 percent below the poverty line. - External assistance: - External assistance peaked at US$624 million (19.3 percent of GDP) in FY2016. - External assistance declined to US$461 million (14.3 percent of GDP) in FY2019. - Macroeconomic deterioration in 2018: - Exchange rate depreciated by 26 percent (twelve months to December). - Inflation rose to 28 percent (twelve months to December). - Growth slowed to 1.2 percent in 2018 despite higher mining output. - Fiscal and monetary developments: - Fiscal deficit widened from 4.8 percent of GDP in FY2017 to 5.5 percent of GDP in FY2018. - Government deposits were US$90 million at end-FY2017 and were depleted by end-2018. - CBL introduced central bank bills on February 15, 2019; initial uptake low. - CBL used US$49 million in 2018 for FX market intervention, operations, and lending to government. - Gross international reserves declined to US$358 million (3 months of imports) at end-2018 from US$407 million at end-2017. - CBL claims on government (end-2018): US$355 million (up from US$260 million at end-2016). - CBL projects U.S. dollar deficits of US$29.1 million (2019) and US$30.1 million (2020); if realized they will drain US$49.2 million from reserves over two years. ### Outlook and scenarios - Baseline scenario (unchanged policies): - Growth projected about 0.4 percent in 2019 and remain below 2 percent into the medium-term. - Risk of a forced, abrupt adjustment when financing options are exhausted. - Selected calendar-year GDP growth (2019–2024): 0.4; 1.6; 1.3; -1.3; -0.5; 3.7. - Selected fiscal-year indicators (2019–24, percent or levels as presented): - Real GDP annual percent change: 0.4 (2019). - Consumer prices (annual average): 11.7 (2018), 20.4 (2019), 10.5 (2020), 24.5 (2021). - Consumer prices (end of period): 11.0 (2018), 27.0 (2019), 10.0 (2020), 22.0 (2021). - Nominal GDP (millions of U.S. dollars): 3,284 (2018 act.), 3,341 (2019 est.), 3,499 (2021), 3,712 (2024). - Gross official reserves (millions of U.S. dollars): 407 (end-2017), 358 (end-2018), projected 429 (2019), then declining to 85–87 in later years. - Current account balance including grants: -23.4 (2018), projected -22.4 (2019). - Public external debt: 22.7 (2018), projected 26.3 (2019), rising to 55.4 (2024). - Public domestic debt (percent of GDP): 12.7 (2019), 8.0 (2020), 14.4 (2021). - M2/GDP: 19.9 (2018), 19.9 (2019), 21.3 (2020), 19.9 (2021). - Reform scenario (proactive fiscal and monetary tightening): - Near-term growth weakens somewhat, but medium-term growth picks up to exceed 5 percent by 2024. - Selected calendar-year GDP growth (2019–2024): -1.4; 1.4; 3.4; 4.2; 4.9; 5.4. - Inflation (annual average) under reform: 18.5 (2019), 8.5 (2020), 6.5 (2021), 5.0 (2024). - Gross official reserves (millions of U.S. dollars) under reform: 310 (2019), 316 (2020), 311 (2021), 331 (2022), 356 (2023), 381 (2024). - Reform scenario still leaves a financing gap in early years, requiring external support. ### Executive Board and Directors’ assessment — main findings - Directors noted major economic challenges and welcomed authorities’ efforts to bolster macroeconomic stability. - Stressed well-sequenced policies and structural reforms to enhance macro stability and promote higher, sustainable, and inclusive growth. - Welcomed PAPD focus on physical and human capital and agreed international community support will be important. ### Policy recommendations and priorities - Short-term priority: restore macroeconomic stability via monetary tightening and a realistic fiscal program for remainder of FY2019 and FY2020. - Fiscal policy: - Significant fiscal adjustment needed; mobilize domestic revenue and rationalize spending, especially the wage bill, while preserving social and capital spending. - Formulate realistic budgets and implement a sound borrowing plan ensuring debt sustainability; exercise caution with non-concessional borrowing. - Further PFM reforms to improve spending quality. - Specific revenue and PFM actions: - Base FY2020 budget on realistic revenue projections (previous year’s outturn). - If borrowing unavoidable, limit it and source from domestic private sector rather than the central bank. - Accelerate civil service reform: clean up payroll, centralize hiring at the Civil Service Agency (CSA), explore taxing consolidated income from wages and allowances. - Mobilize domestic revenue: expand base for goods and services, excise, and customs; introduce VAT as medium-term goal; LRA to secure appropriate IT system, implement compliance risk strategy, cleanse taxpayer register, review exemptions. - Accelerate PFM reforms: stabilize IFMIS and LRA IT, certify procurement officers, publish public investment dashboard, resume monthly liquidity management committee meetings, reconcile clearing accounts. - Monetary and exchange rate policy: - CBL should tighten monetary policy aiming to reduce inflation to single digits by 2021. - Suspend further issuance of CBL bills until cost is included in government budget and fiscal financing gap closed without CBL financing. - Allow greater exchange rate flexibility to improve external position. - Financial sector: - Enhance supervisory efforts despite adequate capitalization; strengthen supervisory, regulatory, and resolution frameworks given elevated NPLs; improve loan underwriting standards. - Monitor issuance of CBL bills to safeguard AML/CFT; banks acting as agents should apply AML/CFT measures. - Develop financial market infrastructure; automate collateral management; set appropriate interest rates for standing facilities. - Ensure availability of Liberian dollars during peak demand; evaluate printing buffer stock if warranted. - Structural and governance reforms: - Improve business environment and competitiveness; safeguard social sector spending for human capital accumulation. - Strengthen governance and reduce corruption; upgrade anticorruption and AML/CFT frameworks in line with international standards. - Data and statistics: - Continue to improve quality and availability of data for Fund surveillance and policymaking. ### Fiscal sector — background, findings, and advice - FY2019 revenue outturn estimated US$475 million (14.7 percent of GDP), close to US$100 million lower than approved budget of US$570 million (17.6 percent of GDP). - Expenditure projected at 34.1 percent of GDP for FY2019; if not adjusted, fiscal deficit remains at or above 6 percent of GDP. - Structural rigidities: - Wage bill about 10 percent of GDP (regional peers ~7 percent); almost two thirds of total budget expenditure accounted for by wage bill. - Over 40 percent of compensation paid as discretionary allowances; core clinical health workers and qualified teachers receive small fraction. - Key fiscal recommendations (selected): - Mobilize domestic revenue; rationalize wage bill; protect social spending. - Use debt-stabilizing primary balance as fiscal anchor. - Recast budget when significant deviations occur; limit central bank financing; accelerate civil service reform; cleanse payroll; centralize hiring. - Review tax exemptions; prioritize existing tax bases; secure LRA IT and compliance reforms. - Avoid non-concessional and risky collateralized agreements; ensure transparency in new debt. ### Monetary policy, exchange rate, and CBL operations - CBL introduced new monetary policy framework on February 15, 2019: selling CBL bills to public; introduced Standing Deposit Facility (SDF) and Intra-Day Liquidity Facility (ILF); replaced 2016 SCF guideline. - SDF expected to increase retail deposit rates and bring Liberian dollar into banking system. - CBL prepared to absorb up to LD5 billion via CBL bills (banks up to LD2 billion; remainder for retail investors); bills indexed to U.S. dollar; initial interest rate set at 7 percent. - Costs and vulnerabilities: - Interest cost on CBL bills indexed to U.S. dollar; cost rises with further exchange rate depreciation. - CBL’s net foreign exchange position showed significant deterioration in recent years (selected values in monetary tables). - Policy advice on operations: - Preconditions for new framework: tightened fiscal policy to avoid CBL financing; keep SCF interest rate high enough to prevent arbitrage; include cost of monetary operations in government budget; close fiscal gaps without central bank credit. - Staff advised CBL to cease certain operations until preconditions met; stop issuing foreign currency credit to government as per CBL Act. - Prioritize passage of CBL Act amendments to strengthen operational independence, governance, recapitalization plan, prohibition of USD lending to government, creation of monetary policy committee, prohibition of uncollateralized liquidity assistance to commercial banks, and strengthened audit framework. - Keep restrictive measures (e.g., surrender requirement on remittances) minimal and temporary; return all foreign currency acquired through surrender requirement to auction. - Authorities’ position: - Broad agreement on need for monetary tightening but not on risks of U.S. dollar-indexed CBL bills; CBL views issuance necessary to mop up liquidity. - CBL agrees on need for amendments to CBL bill but has not finalized internal review. - Authorities commit to consolidating CBL budget and addressing weaknesses from Kroll and PIT reports. ### External sector — vulnerabilities, competitiveness, and policy advice - External vulnerabilities: - Current account deficit: 23.4 percent of GDP in 2018. - Gross international reserves: US$358 million at end-2018 (3.0 months of imports); staff view this as below reserve adequacy (model suggests around 3.3 months). - Real effective exchange rate depreciation in 2018: 8.5 percent; nominal depreciation: 23.7 percent. - EBA-Lite indicates current account weaker than norm by between 5 and 10 percent of GDP and REER overvaluation between 21 and 42 percent (staff judgment). - Competitiveness and business environment: - Liberia ranked 132nd out of 140 in Global Competitiveness Index. - Little progress on Ease of Doing Business; problems include Port of Monrovia delays, import costs, legal redress difficulties, and fuel pricing uncertainty. - Policy advice: - Facilitate REER depreciation alongside fiscal and monetary tightening; allow nominal exchange rate flexibility. - Improve importation process efficiency; review effects of import permit declarations (Executive Order removed import permit declarations). - Adopt greater flexibility in fuel pricing: re-examine retail/wholesale margins, implement transparent fuel pricing formula, consider using daily/weekly CBL exchange rate for conversion. - Rebuild reserves above adequacy level to increase resilience. ### Financial sector — soundness, risks, and advice - Financial soundness indicators (Dec 2018): - NPLs to total loans: 13.8 percent (regulatory threshold 10 percent). - One bank breached minimum capital requirement of US$10 million (but CAR far above minimum). - Payment arrears exposure to government: about US$65 million (14 percent of total loans). - Correspondent banking relationships average about 2 CBRs per bank (two largest banks have 5 or more). - Shortage of Liberian dollars acute in Dec 2018; demand for banknotes increased; shortage eased subsequently. - Policy recommendations: - Amend Financial Institutions Act to strengthen bank supervision, resolution, and AML/CFT compliance; accelerate full implementation of CBL Action Plan. - Ensure adequate loan provisioning and improve underwriting standards. - Maintain strong oversight of emergency liquidity facility use. - Monitor CBL bills issuance for AML/CFT risks; agents (banks) must apply AML/CFT measures. - Develop financial market infrastructure and collateral management; set appropriate interest rates for standing facilities. - Develop plan to guarantee availability of Liberian dollars during peak demand. - Authorities’ view: - Aware of banking risks; working to resolve undercapitalized bank; implementing risk-based supervision and recovery efforts. ### Governance, anti-corruption, and institutional reforms - Governance weaknesses noted: CPIA score stagnated at 3.1; LACC, GAC, and PPCC underfunded and capacity constrained; enforcement and asset declaration regime weak. - Prioritized recommendations: - Develop new anti-corruption strategy; amend anti-corruption laws to criminalize bribery of foreign officials and illicit enrichment; give LACC prosecutorial powers. - Amend Anti-Corruption Commission Act and Code of Conduct to centralize asset declarations at LACC, grant verification powers, enable publication without court order, and impose sanctions. - Upgrade AML framework: enact revised AML and Financial Intelligence Agency laws; issue PEP account regulations; strengthen fit and proper provisions; improve beneficial ownership information access. - Implement Land Rights Act properly to strengthen property rights and encourage investment. - Authorities committed to enhancing anti-corruption and AML/CFT efforts and preparing draft amendments. ### Debt sustainability analysis (DSA) and public debt outlook - DSA coverage: central government debt, central government guaranteed debt, and central bank debt contracted on behalf of government; SOE guaranteed debt included; non-guaranteed SOE debt largely excluded due to data constraints. - Recent stocks and composition: - Total public external debt at end-FY2018: US$859 million (29.3 percent of GDP). - Total public and publicly guaranteed debt at end-FY2018: estimated 42 percent of GDP. - Structure of external public debt (June 2018): Multilateral total 805 USD millions (93.8 percent of total); IMF 231 USD millions (12.6 percent of total; 7.9 percent of GDP); World Bank 356 USD millions (41.5 percent; 12.2 percent of GDP). - Key assumptions and projections: - Real GDP growth revised down from 4.7 percent to 0.4 percent in 2019. - Inflation average headline increased to 20.4 percent in 2018. - Fiscal deficit widened to 5.5 percent of GDP in FY2018, partially financed by central bank credit. - CBL reserves staff estimate: CBL will use around US$80 million of its reserves in 2019 to finance deficits, operations, and FX interventions; reserves expected to decline in medium-term to below 1 months of imports under baseline. - Baseline assumes public external debt increases by about $1.24 billion over medium term. - Debt indicators and projections (selected): - Public external debt (percent of GDP) projected under baseline: 34.1; 38.6; 42.2; 47.5; 52.5; 55.4 (2019–2024 sequence presented). - PV of public debt-to-GDP ratio projected to increase from 35.3 percent in FY2019 to 46.6 percent in FY2023. - PV of debt-to-revenue ratio peaks at 168.5 percent in FY2025. - Debt-service-to-revenue ratio peaks at 16.8 percent in FY2023. - Stress tests: - Standard stress tests (shocks to primary balance, nominal export growth, other non-debt creating flows, one-time depreciation) result in breaching policy-dependent thresholds on PV debt-to-GDP and PV debt-to-exports. - Contingent liability shock estimated to cause one-off increase in debt-to-GDP of 10.5 percent. - Overall DSA assessment: moderate risk of debt distress. - Policy implications: - Prioritize concessional financing; cancel non-concessional loans that threaten sustainability; avoid central bank financing; monitor borrowing terms and absorptive capacity. - Use stress-test outcomes to guide borrowing composition and timing. ### Risks — key vulnerabilities highlighted - Risk of forced, abrupt fiscal adjustment if domestic and external financing exhausted under baseline. - External vulnerability from declining reserves and reduced external assistance. - Continued inflation and currency depreciation if monetary policy remains accommodative. - Governance and capacity constraints that could undermine reform implementation and PAPD priorities. - External risks: large swings in energy prices; weaker global growth; rising protectionism; sharp decrease in aid flows. - Liberia-specific risks: delayed fiscal consolidation; increasing debt distress from non-concessional loans; reduced correspondent banking relationships (“de-risking”); security or public health shocks. ### Data, statistics, and capacity-building - Data shortcomings significantly hamper surveillance; national accounts, government finance, and balance of payments need improvement. - Progress: - Rebasing GDP to 2016 in progress; 2016 HIES and NEC used; NAAS conducted in 2018; SUT framework started. - CPI basket re-weighted using 2014 HIES; updated CPI published January 2019 using 2016 HIES. - Sectoral balance sheets prepared for Jan 2007–Dec 2018; monetary data based on SRFs compiled; BOP compiled quarterly since Aug 2016. - Needed actions: - Finalize GDP rebasing and SUT population; recruit national accounts staff (current staff 40 percent under strength). - Improve GFS coverage and timely reporting to STA; resume submissions and publish FSIs. - Continue technical assistance in PFM, MFS, GFS, and monetary policy. - Capacity-building: - Liberia part of Capacity Building Framework pilot; large fraction of IMF CD resources allocated; about 50 TA missions delivered in year through April 2019. ### Authorities’ views and commitments - Authorities agree on need to reduce fiscal risk; consider reasonable short-term fiscal adjustment feasible. - Draft FY2020 budget projections revised downward but remain above staff estimates; preferred not to pass a recast budget for remainder of FY2019. - Government committed to advancing PFM reforms, launching Domestic Revenue Mobilization strategy, and identifying measures to increase tax yields starting FY2020. - Authorities committed to CBL autonomy, monetary tightening as needed, improving CBL internal controls, prioritizing recapitalization, and submitting amended CBL Act to Legislature before recess in August 2019. - Seek concessional financing and international community support (budget support, grants, infrastructure financing) to advance PAPD while maintaining debt sustainability. - Authorities aim to negotiate an extended credit facility (ECF) arrangement with the Fund to anchor reforms. *Source: IMF staff report for the 2019 Article IV Consultation (Liberia), May 16, 2019.* ### 2016. To address pressing needs, the government launched its Pro-Poor Agenda for Prosperity ### 2016. To address pressing needs, the government launched its Pro-Poor Agenda for Prosperity ### Context and recent developments - The administration launched the Pro-Poor Agenda for Prosperity and Development (PAPD) in October 2018 to guide development efforts for 2018–23, with a focus on physical and human capital accumulation. - Liberia is described as a fragile, post-conflict country with weak capacity and limited physical and human capital accumulation. GDP per capita remains low at US$663 in 2018. Poverty is widespread: 50.9 percent of the population lives below the poverty line. - External assistance is winding down: - External assistance peaked at US$624 million (19.3 percent of GDP) in FY2016. - External assistance declined to US$461 million (14.3 percent of GDP) in FY2019. - Policy uncertainty and slippages in 2018 contributed to macroeconomic deterioration: - Exchange rate depreciated by 26 percent (twelve months to December). - Inflation rose to 28 percent (twelve months to December). - Growth slowed to 1.2 percent in 2018 despite higher mining output, driven by falling demand (slower tax base growth, import volume, and credit). - Fiscal and monetary developments: - Fiscal deficit widened from 4.8 percent of GDP in FY2017 to 5.5 percent of GDP in FY2018. - Government deposits were US$90 million at end-FY2017 (a third in Liberian dollars) and were depleted by end-2018. - The monetary stance was passively accommodative; the CBL introduced central bank bills on February 15, 2019, but initial uptake was low. - External buffers and reserves: - The CBL used US$49 million in 2018 to intervene in the foreign exchange market, finance operations, and lend to government. - Gross international reserves declined to US$358 million (3 months of imports) at end-2018 from US$407 million at end-2017. ### Outlook and scenarios - Baseline scenario: - Growth is projected to slow further to about 0.4 percent in 2019 and remain below 2 percent into the medium-term. - Under the baseline, authorities face the risk of a forced, abrupt adjustment when domestic and external financing options are exhausted. - Alternative reform scenario: - Under a reform path with proactive fiscal and monetary tightening, growth is expected to weaken somewhat in the near term but pick up significantly over the medium term to exceed 5 percent by 2024. - Key projections and indicators (selected from staff table and text; figures preserved as in source): - Real GDP: projected 0.4 percent in 2019. - Consumer prices (annual average): 11.7 (2018), projected 20.4 (2019), 10.5 (2020), 24.5 (2021). - Consumer prices (end of period): 11.0 (2018), projected 27.0 (2019), 10.0 (2020), 22.0 (2021). - Nominal GDP (millions of U.S. dollars): 3,284 (2018 act.), 3,341 (2019 est.), projections through 2024 include 3,499 (2021) and 3,712 (2024). - Gross official reserves (millions of U.S. dollars): 407 (end-2017), 358 (end-2018), projected 429 (2019), then declining to 85–87 in later years. - Current account balance including grants: -23.4 (2018), projected -22.4 (2019). - Public external debt: 22.7 (2018), projected 26.3 (2019), rising to 55.4 (2024). - Public domestic debt (percent of GDP): projected 12.7 (2019), 8.0 (2020), 14.4 (2021). - M2/GDP: 19.9 (2018), projected 19.9 (2019), 21.3 (2020), 19.9 (2021). ### Executive Board and Directors’ assessment — main findings - Directors noted major economic challenges and welcomed authorities’ efforts to bolster macroeconomic stability. - They stressed that well-sequenced policies and structural reforms are essential to enhance macroeconomic stability and promote higher, sustainable, and inclusive growth. - They welcomed the PAPD focus on physical and human capital and agreed international community support will be important. ### Policy recommendations and priorities - Short-term priority: restore macroeconomic stability through a combination of monetary tightening and a realistic fiscal program for the remainder of FY2019 and FY2020. - Fiscal policy: - Significant fiscal adjustment is needed. - Focus on mobilizing domestic revenue and rationalizing spending, especially the wage bill, while preserving needed space for social and capital spending. - Formulate realistic budgets and implement a sound borrowing plan that ensures debt sustainability; exercise caution with non-concessional borrowing. - Further progress in public financial management reforms to improve spending quality. - Monetary and exchange rate policy: - The Central Bank of Liberia (CBL) should tighten monetary policy with the objective of reducing inflation to single digits by 2021. - Directors emphasized that further issuance of CBL bills should be suspended until the cost of the operation is included in the government budget, and the fiscal financing gap is closed without CBL financing. - Allow for greater exchange rate flexibility as part of improving the external position. - Financial sector: - Although banking sector indicators suggest adequate capitalization, the CBL should enhance supervisory efforts. - Prioritize strengthening supervisory, regulatory, and resolution frameworks given an elevated level of nonperforming loans; focus on improving loan underwriting standards. - Structural and governance reforms: - Improve the business environment to raise competitiveness and encourage private sector physical capital accumulation. - Safeguard social sector spending to support human capital accumulation required for medium-term growth. - Strengthen governance and reduce corruption; upgrade anticorruption and AML/CFT frameworks in line with international standards. - Data and statistics: - Continue efforts to improve the quality and availability of data for Fund surveillance and policymaking. ### Key risks highlighted - Risk of a forced, abrupt fiscal adjustment if domestic and external financing options are exhausted under the baseline. - External vulnerability from declining reserves and reduced external assistance. - Continued inflation and currency depreciation if monetary policy remains accommodative. - Governance and capacity constraints that could undermine implementation of reforms and PAPD priorities. *Source: IMF staff report for the 2019 Article IV Consultation (Liberia), May 16, 2019.* ### 6. Under the baseline scenario (unchanged policies), the near- and medium-term outlook ### 6. Under the baseline scenario (unchanged policies), the near- and medium-term outlook ### Outlook and risks - Growth for 2019 has been revised down from 4.7 percent to 0.4 percent. Both mining and non-mining growth are projected to contract due to continued policy uncertainty and a slower expansion of private sector credit. - The slow pace of factor accumulation will continue to hinder medium-term growth; the rapid increase in the working-age population may spur expansion, but low human capital and slow job creation will undermine the full potential (Annex I). - Private sector investment may be held back due to an inadequate and uncompetitive business climate, policy uncertainty, and concerns about governance and corruption (Annex II). - External position: the External Sector Assessment indicates Liberia’s external position is substantially weaker than consistent with medium-term fundamentals and desirable policy settings (Annex III). - Current account deficit: 23.4 percent of GDP in 2018. - Using the External Balance Assessment (EBA) Lite methodology, the current account is judged to be weaker than the norm by between 5 and 10 percent of GDP. - Debt Sustainability Analysis (DSA): Liberia will remain at moderate risk of debt distress. - External debt at end-FY2018: US$859 million (29.3 percent of GDP). - Baseline scenario assumes an increase of about $1.24 billion over the medium term. - Liberia would edge closer to an elevated risk of debt distress with only minor change in the terms of debt. - Risks are tilted toward the downside (Annex IV). - Main upside risks: increases in commodity prices, iron ore production, and donor grants to finance PAPD projects. - Main downside risks: insufficient fiscal consolidation (failure to mobilize additional resources or cut nonproductive spending), continued central bank financing elevating inflation and deteriorating living standards of the poor and vulnerable; over-reliance on high-cost external loans increasing risk of debt distress; external risks include a drop in commodity prices and deterioration in trading partners’ economies. ### Scenarios and macroeconomic projections - Two scenarios presented: Baseline (unchanged policies) and Reform. - Baseline scenario characteristics: - Government continues to borrow in local and foreign currencies from the Central Bank of Liberia (CBL) and abroad to finance fiscal deficits until authorities face an abrupt forced adjustment (trigger example: significant loss of gross official reserves). - CBL is a passive agent without active monetary policy. - Under this scenario, the annual average growth rate would remain below 2 percent over the medium term, leading to forced, rapid, and disruptive adjustment. - Reform scenario (Text Table 1, Annex V) assumptions: - Implementation of 2018 Article IV consultation policy recommendations (limited traction to date, Annex VIII). - Comprehensive package of reforms (fiscal and monetary tightening and structural policies) yields growth exceeding 5 percent by 2024. - Financing gap remains even in the reform scenario, highlighting need for external support. - Selected indicators (calendar year GDP growth and fiscal-year variables) — Baseline scenario (2019–24): - Real GDP annual percent change: 0.4; 1.6; 1.3; -1.3; -0.5; 3.7 (2019–2024) - non-mining sector growth: -1.4; 0.2; 0.3; -2.7; -1.7; 3.3 - Inflation (annual average): 24.5; 20.5; 17.5; 24.5; 24.0; 13.5 - Revenue and grants: 28.0; 28.4; 28.7; 28.2; 28.6; 28.3; Adjustment (2019-24): 0.3 - Revenue: 13.7; 14.1; 14.5; 14.7; 14.8; 14.9; Adjustment: 1.2 - Expenditure: 34.0; 35.2; 35.6; 34.2; 34.7; 34.3; Adjustment: 0.2 - Off-budget expenditure: 18.1; 18.8; 19.5; 19.6; 20.1; 19.7; Adjustment: 1.5 - On-budget primary expenditure: 14.9; 15.0; 15.0; 13.1; 12.6; 12.5; Adjustment: -2.4 - Interest payment: 1.0; 1.3; 1.1; 1.5; 1.9; 2.0; Adjustment: 1.0 - Overall balance: -6.1; -6.8; -6.9; -6.0; -6.1; -6.0; Adjustment: 0.1 - Primary balance: -5.1; -5.5; -5.8; -4.4; -4.1; -4.0; Adjustment: 1.1 - Fiscal financing gap (percent of GDP): -0.9; -1.1; -0.6; -0.9; -0.7; -0.6 - Fiscal financing gap (millions of U.S. dollars): -30; -35; -20; -30; -25; -20 - Public external debt (percent of GDP): 34.1; 38.6; 42.2; 47.5; 52.5; 55.4 - Public domestic debt (percent of GDP): 14.4; 15.8; 16.5; 15.8; 14.1; 12.2 - Gross official reserves (millions of U.S. dollars): 261; 173; 87; 84; 85; 87 - Months of imports of goods and services: 2.1; 1.3; 0.8; 0.7; 0.7; 0.6 - CBL's net foreign exchange position (millions of U.S. dollars): -3; -61; -113; -77; -36; 2 - Selected indicators — Reform scenario (2019–24): - Real GDP annual percent change: -1.4; 1.4; 3.4; 4.2; 4.9; 5.4 - non-mining sector growth: -3.4; 0.0; 2.7; 3.8; 4.8; 5.3 - Inflation (annual average): 18.5; 8.5; 6.5; 5.5; 5.0; 5.0 - Revenue and grants: 27.9; 27.9; 27.6; 27.1; 26.4; 25.9; Adjustment (2019-24): -2.0 - Revenue: 13.7; 14.2; 15.2; 15.8; 16.4; 16.8; Adjustment: 3.1 - Expenditure: 34.0; 33.6; 30.7; 29.6; 29.2; 28.5; Adjustment: -5.5 - Off-budget expenditure: 18.1; 18.1; 16.1; 15.1; 14.2; 12.9; Adjustment: -5.3 - On-budget primary expenditure: 14.9; 14.6; 13.7; 13.7; 13.9; 14.5; Adjustment: -0.4 - Interest payment: 1.0; 0.9; 0.9; 0.8; 1.0; 1.1; Adjustment: 0.1 - Overall balance: -6.1; -5.7; -3.0; -2.5; -2.8; -2.6; Adjustment: 3.5 - Primary balance: -5.1; -4.8; -2.2; -1.7; -1.7; -1.5; Adjustment: 3.6 - Fiscal financing gap (percent of GDP): -0.9; -1.7; -0.7; 0.0; 0.0; 0.0; Adjustment: 0.9 - Fiscal financing gap (millions of U.S. dollars): -30; -55; -25; 0; 0; 0 - Public external debt (percent of GDP): 34.0; 37.2; 39.2; 40.4; 41.8; 43.1 - Public domestic debt (percent of GDP): 14.4; 15.7; 15.1; 13.5; 11.9; 10.4 - Gross official reserves (millions of U.S. dollars): 310; 316; 311; 331; 356; 381 - Months of imports of goods and services: 2.7; 2.6; 2.4; 2.5; 2.5; 2.5 - CBL's net foreign exchange position (millions of U.S. dollars): 38; 59; 69; 107; 151; 192 - Source: IMF staff projections. - Note: GDP growth and gross official reserves are calendar year whereas other variables are fiscal year. ### Fiscal policy — background, findings, and policy advice - Background and findings: - FY2019 revenue outturn estimated at $475 million (14.7 percent of GDP), close to US$100 million lower than approved budget of US$570 million (17.6 percent of GDP). - Risk of deficit spending accommodated by central bank financing or arrears accumulation is elevated. - Decision not to seek a Legislature-approved recast budget may have undermined budget credibility and increased risk of ad hoc lobbying affecting resource allocation. - In absence of significant policy action, fiscal stance will remain loose in FY2019 and FY2020. - External assistance projected to decline by 1 percentage point of GDP over the medium term (from 14.3 percent in FY2019 to 13. 4 percent in FY2024). - Domestic revenue projected to increase from 13.7 percent in FY2019 to 14.9 percent in FY2024 (assumes effectiveness of revenue collection remains intact). - If expenditure (projected at 34.1 percent of GDP for FY2019) does not adjust downward, fiscal deficit will remain at or above 6 percent of GDP. - Structural rigidities: almost two thirds of total budget expenditure are accounted for by the wage bill (about 10 percent of GDP vs. 7 percent of GDP among regional peers). - Over 40 percent of compensation payments are paid as discretionary allowances, creating inequity and inefficiency; core clinical health workers and qualified teachers receive only a small fraction of the wage bill. - Policy advice (key recommendations): - Significant fiscal adjustment needed: mobilize domestic revenue, rationalize the wage bill, and secure social and capital spending; consider the debt-stabilizing primary balance as a fiscal anchor (Text Table 1). - Base FY2020 budget on realistic revenue projections (previous year’s outturn) to enhance budget credibility; when significant deviations occur, use a Legislature-approved recast budget. - If borrowing to fill financing gap is unavoidable, limit it and source from domestic private sector rather than the central bank. - Accelerate long-overdue civil service reform: - Clean up payroll by removing identified ghost workers (starting with education sector) and extend across sectors. - Centralize employment hiring at the Civil Service Agency (CSA). - Explore taxing consolidated income from wages, general allowances, and special allowances. - Safeguard social spending to build human capital: improve school enrollment (elementary level), secure sufficient qualified teachers and core clinical health workers, and improve quality of spending (Annex I, Annex VII). - Mobilize domestic revenue given declining external assistance; near-term tax policy reforms should be limited to existing taxes (expand base for goods and services, excise, and customs); introduction of VAT should be a medium-term goal. - On tax administration, the Liberia Revenue Authority (LRA) should: (i) secure an appropriate IT system; (ii) fully implement compliance risk strategy; (iii) cleanse taxpayer register and ledger. - Conduct comprehensive review of tax exemptions and concessions. - Accelerate public financial management (PFM) reforms: - Amended PFM Act submitted November 2018 to streamline responsibilities. - Continue stabilizing IFMIS and LRA IT system; certify public procurement officers; publish dashboard tracking public investment projects. - Resume monthly liquidity management committee meetings; reconcile remaining clearing account balances; prioritize implementation of past audit and technical assistance reports. - Borrowing can be viable for infrastructure needs, but avoid non-concessional and risky collateralized agreements; ensure transparency in new debt; avoid extension of central bank credit to prevent widening macroeconomic imbalances. - Authorities’ views: - Authorities broadly agree on need to reduce fiscal risk and consider reasonable short-term fiscal adjustment feasible. - Draft FY2020 budget projections revised downward but remain above staff estimates. - For remainder of FY2019, authorities preferred not to pass a recast budget; they opted to discuss budget execution strategies with line ministries and agencies to streamline expenditure. - Authorities hope to minimize additional domestic borrowing but accept some borrowing may be inevitable. - Government committed to advancing PFM reforms and launching Domestic Revenue Mobilization strategy; identifying measures to increase tax yields starting FY2020. - Authorities recognize burden of wage bill and are exploring reductions and resource shifts toward social and infrastructure expenditure. ### Monetary policy and exchange rate policies - Background and recent policy actions: - CBL introduced a new monetary policy framework on February 15, 2019: started selling CBL bills to the public; introduced the Standing Deposit Facility (SDF) and the Intra-Day Liquidity Facility (ILF); and replaced the 2016 guideline on the Standing Credit Facility (SCF). - These changes aim to allow CBL to tighten monetary conditions and move towards an interest rate-based framework. - Introduction of SDF expected to increase retail deposit rates over time, giving Liberian dollar the “store of value” function and bringing currency in circulation into the banking system. - CBL initially prepared to absorb up to LD5 billion using CBL bills, of which banks can buy up to LD2 billion and remainder reserved for retail investors; bills sold through commercial banks on commission for broad market access. - CBL in advanced stages of introducing a monetary policy advisory committee to advise the CBL Board in advance of policy decisions. - Costs and vulnerabilities: - Cost of mopping up liquidity can be significant: interest rate on CBL bills initially set at 7 percent and is indexed to the U.S. dollar; cost rises if exchange rate continues to depreciate. - Exchange rate classification and interventions: - Liberian exchange rate is now classified as a de facto “crawl like” peg, rather than “other managed”. - In July 2018, CBL mandated to use US$25 million of its reserves, over and above proceeds from 25 percent surrender requirement on remittances, to support the exchange rate; US$17 million of reserves have been used for this purpose. _Italic: Source: IMF staff projections and IMF staff assessment as presented in the provided content._ ### 26. The CBL’s claims on the government in U.S. dollar significantly increased in the last ### 1lbrea2019001 - 26. The CBL’s claims on the government in U.S. dollar significantly increased in the last ### CBL claims on the government and U.S. dollar exposure - As of end-2018, the CBL’s claims on the government in U.S. dollar is US$355 million. - This is a significant increase from US$260 million at end-2016. - The amount of checks government issued in the absence of adequate funds increased in recent years in the form of balances outstanding in the suspense/clearing accounts. ### U.S. dollar-denominated budget deficits and reserve impact - The CBL projects deficits of US$29.1 million and US$30.1 million in 2019 and 2020, respectively. - If deficits turn out as projected, they will drain US$49.2 million from reserves over the next two years with the balance financed in local currency. - Past deficits posted over 2017 and 2018 were significantly higher than the 3-year budget prepared in 2015 for 2016–18. ### Safeguards and governance at the CBL - Previous safeguards assessments highlighted serious governance and control issues at the central bank. - Some recommendations were addressed through: - a forensic audit of CBL losses stemming from the failure of the First International Bank of Liberia Limited (FIBLL); - steps to strengthen the investment policy for reserves management; - monitoring of foreign exchange inflows to and outflows from the CBL. - Other long-standing recommendations, including those related to currency operations and internal audit, are included in the Action Plan from the FIBLL investigation. - New risks emerged in autonomy, governance, and currency operations: - The CBL Board continues to operate with acting members without stable appointments, undermining their personal autonomy. - Lending to the government has been in breach of legal provisions. - Advancement of the Action Plan has been slow. - Two investigative reports by the Presidential Investigative Team (PIT) and Kroll Associates on currency operations (released in February 2019): - did not find hard evidence of large-scale theft of newly printed banknotes as reported in local media; - noted significant discrepancies and weak controls at all stages of the currency procurement and storage process. ### Policy advice on monetary operations and framework - Preconditions for the new monetary policy framework to function properly: - Fiscal policy must be tightened to avoid CBL financing. - The CBL should keep the interest rate of the SCF high enough to prevent banks from arbitraging CBL instruments, while keeping it low enough to be accessible for banks. - Government should include the cost of monetary operations in the budget. - Close fiscal gaps without using central bank credit. - Staff advised the CBL to cease certain operations until required preconditions are in place if conditions in (i) and (ii) are not met. - In line with the CBL Act, the CBL should stop issuing foreign currency credit to the government: - Current main lending channels to the government are U.S. dollar denominated loans and advances. - Use of these instruments depletes foreign reserves and leaves excess Liberian dollar liquidity intact, necessitating costly CBL absorption operations. - Alternative: government borrow Liberian dollars from the market and buy U.S. dollars — stock of reserves would still decline, but operation would tighten overall liquidity conditions. - Liberia should prioritize passage of the CBL Act amendments to strengthen operational independence; final bill should include amendments that: - strengthen the governance structure of the CBL; - create a plan for the recapitalization of the CBL; - clarify the prohibition of USD lending to the government; - foster operational independence through creation of a monetary policy committee; - prohibit uncollateralized liquidity assistance to commercial banks; - strengthen the external and internal audit framework. - Restrictive measures in the exchange system should be kept to a minimum and, if tolerated, contain a credible exit strategy: - The surrender requirement on remittances inflows is classified by the Fund as a capital flow management measure and staff recommends authorities consider it temporary. - In the past, not all foreign currency received from the surrender requirement was reinjected through the auction; this increased CBL reserves but resulted in a net injection of Liberian dollar liquidity. - Recommendation: all foreign currency acquired through the surrender requirement be returned through the auction. - Safeguards framework needs substantial strengthening: - Credible steps needed to address governance issues and strengthen institutional safeguards. - Staff encouraged authorities to use international community support for remedial actions. - Staff called for restoration of term appointments of non-executive CBL Board members. - Considering declining level of foreign exchange reserves, staff recommended CBL revisit its budget for the next two years: - Efforts to increase CBL revenue should be accompanied by a strong commitment of the CBL Board and management to control expenditure. ### Authorities’ views on monetary recommendations - Authorities broadly agree on need for monetary policy tightening, but not on risks of using U.S. dollar-indexed CBL bills: - CBL views issuance of these bills as necessary to mop up liquidity outside the banking system, even if the government does not absorb the cost on its budget. - They consider exchange rate stability resulting from mopping-up would limit indexation cost. - They intend to use other instruments, such as the standing deposit facility and the reserve requirement. - The CBL agrees with IMF recommendations on amendments to the CBL bill but has yet to complete internal review to determine final amendments for submission. - CBL agrees need to consolidate its budget to reduce drain on foreign exchange reserves, noting additional costs may be unavoidable to address weaknesses highlighted in recent Kroll’s Scoping Assessment, the Presidential Investigative Committee, and the General Auditing Commission’s reports. ### External sector: vulnerabilities and competitiveness - External vulnerabilities remain elevated; staff assess the external sector position to be substantially weaker than warranted by fundamentals and desirable policies (¶7). - Current account deficit: 23.4 percent of GDP in 2018. - Gross international reserves declined to US$358 million at end-2018, equal to 3.0 months of imports. - Real effective exchange rate depreciation in 2018: 8.5 percent. - Nominal effective exchange rate depreciation in 2018: 23.7 percent. - EBA Lite current account model indicates a real effective exchange rate overvaluation between 21 and 42 percent. - Business environment and competitiveness: - Liberia ranked 132nd out of 140 economies in the Global Competitiveness Index. - Little progress in Ease of Doing Business indicators; key complaints include delays and uncertainty at the Port of Monrovia, extraneous costs in importing, difficulties securing legal redress, and uncertainty in fuel pricing mechanism. ### Policy advice on external sector - Improve competitiveness and business environment; government should: - Examine efficiency and costs of the importation process and impact on competitiveness. - Review detrimental effects of import permit declarations (Executive Order issued in April 2019 removed import permit declarations). - Greater flexibility in fuel prices to minimize supply disruptions; government should: - (i) consider re-examining retail and wholesale margins and updating them in-line with current cost structure; - (ii) adopt a policy to transparently follow and implement the fuel pricing formula; - (iii) consider using the daily or weekly CBL exchange rate to convert the U.S. dollar price of fuel to Liberian dollars. - Strengthen external position by facilitating real effective exchange rate depreciation in tandem with fiscal and monetary tightening and focus on rebuilding reserves above reserve adequacy level. ### Authorities’ views on external sector - Authorities agree the real effective exchange rate is overvalued and stress improving business climate as key remediation. - They are reviewing reforms with the Business Climate Working Group and cited progress in speeding-up and increasing transparency of the importation process and funding for SMEs. - Executive Order 96 was issued to address structural challenges and stimulate the Liberian economy. - Authorities believe current fuel pricing system helps prevent sharp changes but accept persistent deviations from international prices can hurt fuel importers and threaten fuel security. ### Financial sector: soundness, risks, and policy advice - Financial soundness indicators (December 2018): - NPLs to total loans for the banking sector: 13.8 percent at end-December 2018 (regulatory threshold is 10 percent). - One bank reported to have breached the minimum capital requirement of US$10 million (though capital adequacy ratio is far above minimum requirement). - Payment arrears exposure to government estimated at about US$65 million (14 percent of total loans). - Correspondent banking relationships average about 2 CBRs per bank (excluding 2 of the largest banks that have 5 or more CBRs). - Banking sector faced an acute shortage of Liberian dollars in December 2018: - Demand for banknotes increased with rising inflation and long time required for Legislative approval and printing new banknotes. - CBL suspended the surrender requirement temporarily so it did not have to exchange 25 percent of remittances into Liberian dollars. - The shortage of banknotes has since eased. Policy recommendations for the financial sector: - Enhance supervision to deal with risks: - Amendments to the Financial Institutions Act (FIA) are needed to strengthen legal framework for bank supervision and resolution, including compliance with AML/CFT regulations and Basel III. - Accelerate full implementation of the CBL Action Plan to address regulatory and governance weaknesses from the collapse of FIBLL. - Ensure adequate provisioning of loans and improve underwriting standards to address elevated NPLs. - Maintain strong oversight of emergency liquidity facility use. - Monitor issuance of CBL bills closely to safeguard against AML/CFT concerns: - Selling through banks minimizes AML/CFT concerns for bank customers but does not address non-regular customers; banks (acting as agents) should apply the same AML/CFT measures they normally apply to customers. - Develop financial market infrastructure to support interbank market and monetary instruments: - Automate collateral management system and ensure appropriate legal environment. - Set appropriate interest rates for Standing Deposit and Standing Credit facilities (¶29). - Develop a plan to guarantee availability of Liberian dollars during peak demand: - Examine likely evolution of demand for Liberian dollar cash and evaluate whether printing additional currency to hold as a buffer stock is warranted. Authorities’ views on financial sector - Authorities are aware of banking sector risks and determined to resolve them. - With full implementation of risk-based supervision, more resources are being devoted to oversight of weaker banks. - For the one bank below minimum capital requirement of US$10 million, authorities expect engagement with shareholders will result in recapitalization up to statutory limits. ### Governance and anti-corruption priorities - Liberia should step up efforts to strengthen governance and reduce corruption; PAPD recognizes this need across government activities. - Recommended actions: - Upgrade anti-corruption and AML/CFT frameworks in line with international standards. - Enhance Liberia Anti-Corruption Commission’s (LACC) powers of investigation and prosecution. - Effectively implement an asset disclosure regime for senior public officials in line with best practices. - LACC should develop an anti-corruption strategy for the next four years. - Prioritize AML/CFT measures to tackle proceeds of corruption, including: - strengthening fit and proper provisions when licensing financial institutions; - improving requirements for competent authorities to access adequate, accurate, and timely information concerning legal persons; - continuing to improve implementation of risk-based supervision; - issuing a regulation on opening and managing accounts of politically exposed persons. - Proper implementation of the Land Rights Act to ensure robustness of property rights and encourage foreign investment. Authorities’ views on governance - Authorities committed to enhance anti-corruption and AML/CFT efforts and improve governance. - Draft amendments to anti-corruption laws and anti-money laundering laws and regulations are being prepared. - PAPD sets out institutional reform agenda including enhancements of LACC enforcement powers, full implementation of asset declaration requirements, and recommendations from GAC audits. *Source: IMF staff report excerpt provided in the content unit.* ### 54. The authorities have expressed that they remain committed to the autonomy of the ### The authorities have expressed that they remain committed to the autonomy of the Central Bank ### Central Bank autonomy - The authorities remain committed to the autonomy of the Central Bank (CBL) in the pursuit of its objectives and the performance of its functions. - The CBL shall remain autonomous and accountable as provided for in its Act. - The CBL and the members of its decision-making body and staff, in the exercise of their functions, are not taking instructions from any person or entity, including Government entities. ### Statistical issues - Quality of statistics remains a concern, partly driven by capacity constraints (Annex IX). - Recent efforts to improve classification of monetary and fiscal data are encouraging and should be sustained. - Misclassification of some items on the CBL’s balance sheet makes it difficult to quantify the CBL’s lending to government. - The authorities are reclassifying the CBL balance sheet in line with the IMF’s Monetary and Financial Statistics Manual and Compilation Guide (2016), with IMF technical assistance. - The CBL is working on improving the sectoral balance sheet of the banking system and intends to start publication of the new monetary survey in June 2019, starting with series stretching from January 2007 to December 2018. - Much improvement is also needed in Government Financial Statistics, including the coverage of financial statements of the State-Owned Enterprises. ### Staff appraisal — recent macroeconomic developments - Policy uncertainty and slippages adversely affected the economy in 2018. - Exchange rate depreciation: 26 percent y-o-y as of December 2018. - Inflation accelerated to 28 percent (as of December 2018). - Overall economic growth slowed to 1.2 percent in 2018, largely driven by declining demand. - On current policies, growth is projected to slow further to about 0.4 percent in 2019. ### Medium-term outlook and scenarios - Baseline scenario: medium-term outlook is challenging; slow pace of factor accumulation due to lack of private and public investment will continue to hinder expansion. - Main risks to the outlook: delayed fiscal consolidation, overreliance on high-cost external loans, and a deterioration in the economies of major trading partners/donors. - Reform scenario: fast tracking the policies outlined in the reform scenario could bring about macroeconomic stabilization and raise growth above 5 percent over the medium-term. - Essential precondition: commitment to create the fiscal space needed for the government to function effectively in FY2020 and beyond, including through significant adjustments to the wage bill and a sound borrowing plan anchored on debt sustainability. - Formulation of realistic budgets (based on economic fundamentals, realistic revenue estimates, and past budget outturns) combined with efforts to raise more domestic revenue would be key. ### Monetary and fiscal policy guidance - The CBL should tighten monetary policy. - The use of U.S. dollar-indexed bills should be suspended until the fiscal financing gap is closed without CBL financing. - If executed properly, the sale of central bank bills, combined with the use of other facilities, has potential to: - Mop up excess liquidity; - Influence the level of excess demand and supply of Liberian dollars; - Ultimately control inflation. - Further issuance of CBL bills should be suspended until: - The cost of the operation is included in the government budget, and - The fiscal financing gap is closed without CBL financing. ### Public investment, social sectors, and governance - Launch of the PAPD is welcome; implementation should balance physical with human capital accumulation. - Decisive policy action is required to have children aged 6 to 14 attend school regularly and to secure sufficient qualified teachers. - Liberia’s low per capita health care spending calls for rationalization to increase the health sector budget and improve quality of spending, including securing sufficient core clinical health workers. - Fighting corruption as envisaged in the PAPD is critical; urgency in delivering election promises risks institutional integrity, best practice, process, and anti-corruption objectives. ### Financial sector supervision and stability - Financial soundness indicators show the banking sector appears adequately capitalized. - The CBL should enhance its supervision to deal with risks by: - Prioritizing the development of the Financial Institutions Act to strengthen supervisory, regulatory, and resolution frameworks; - Focusing on improving loan underwriting standards to reduce NPLs; - Guaranteeing availability of Liberian dollars during festive seasons when demand for local currency surges, to maintain confidence in the banking system and safeguard stability. ### External position and reserve management - The external position is substantially weaker than the level implied by economic fundamentals and desirable policies. - Improving the external position requires: - Tightening of monetary and fiscal policies while allowing for greater flexibility in the exchange rate; - Reforms to improve competitiveness and the business environment, including greater flexibility in fuel prices to avoid fuel shortages; - Rebuilding reserves above the reserve adequacy level to increase resilience to external shocks. - The surrender requirement on inflows of remittances, a capital flow management measure, is appropriate only as a temporary measure to address extraordinary pressure on inflation and reserves. ### Data and surveillance - Data provided to the Fund have serious shortcomings that significantly hamper surveillance. - Quantity and availability of statistics have improved, especially in monetary and fiscal statistics, but efforts should continue in all areas of statistics, national accounts, and balance of payments data. - Recommendation: next Article IV consultation to take place on the standard 12-month cycle. ### Key statistics and figures (as presented) - Exchange rate depreciation: 26 percent y-o-y as of December 2018. - Inflation: 28 percent (2018). - Real GDP growth: 1.2 percent (2018). - Projected growth: about 0.4 percent (2019) on current policies. - Reform scenario growth: raise growth above 5 percent over the medium-term. - Gross international reserves as of end-November: US$365 million (2.9 months of imports). - Decline in reserves: $64 million (from peak in March 2018). - FX interventions: $47 million (contributed to the decline). *Source: Content unit 1lbrea2019001 — IMF staff appraisal excerpt.* ### 28.5 percent y-o-y in December 2018, which closely follows ### 1lbrea2019001 - 28.5 percent y-o-y in December 2018, which closely follows ### Prices and inflation - Headline inflation: "28.5 percent y-o-y in December 2018." - Fuel price inflation in Liberian dollars: "39 percent in December 2018." - Imported fuel and transportation price indices drove part of inflation dynamics (figures in figures labeled "Imported fuel price index" and "transportation price index"). - Price developments are closely linked to developments in the foreign exchange market. ### Money and credit - Cash in Circulation (CIC): "grew at 21 percent in December 2018." (CIC is highly correlated with the exchange rate.) - M2: "grew at 26 percent." - Private sector credit: "largely trade credit, also collapsed in the second half of 2018." - Broad money (M2) annual change in USD and LD (Table summaries): - Broad money (annual change) in USD: figures include "-5.2", "-2.5", "5.9", "9.7", "3.5", "2.8", "2.7", "0.8", "-9.8" (as presented in the monetary table). - Broad money (annual change) in LD: figures include "9.8", "19.3", "32.9", "40.4", "24.2", "13.1", "32.5", "13.9", "-0.8". ### External sector, reserves, and exchange rate links - Developments in prices and CIC "closely follows developments in the foreign exchange market." - CBL's gross official foreign reserves (selected values from monetary survey): "453", "407", "358", "261", "173", "87" (millions of U.S. dollars, across years shown). - CBL's net foreign exchange position: "165", "128", "106", "-3", "-61", "-113", "-77", "-36" (millions of U.S. dollars, across years shown). - Gross official reserves (months of imports) declined to "0.8", "0.7", "0.7", "0.6" in later projections (Table 2 memorandum items). ### Trade, imports, and real activity indicators - Imports of staple goods: - Rice imports: "20 percent decline in imports of rice in 2018." - Fuel imports: "close to 50 percent decline in imports of fuel." - Some declines offset by running down inventories of domestic rice and fuel. - Leading indicators of activity: - Tax base on international trade: "has declined since 2018Q2." - Cement and beverage indicators: "show no significant change in consumption or construction." - Quarterly production/import volumes and petroleum imports charts presented for 2016–18 indicate marked declines in petroleum and rice import volumes (thresholds and quarterly series shown in figures). ### Fiscal performance and public finances - Revenue collection: By end-December 2018, authorities had collected "$228.5 million (7.3 percent of GDP)," "in line with Staff’s year-end projections." - Tax base on goods and services: "has declined in recent months in line with the economic downturn." - Expenditure in FY2019: "is tracking Staff’s projections, but in the absence of a recast budget, concerns about expenditure controls and cash management have risen." - Composition and pressures: - "The increasing wage bill is coming at the expense of capital expenditure and much-needed social spending." - "The resulting financing gap from expenditure pressure is being financed with CBL financing." - Fiscal tables (select indicators): - Overall fiscal balance, including grants (percent of GDP): values include "-4.2", "-2.7", "-4.8", "-5.2", "-5.5", "-5.1", "-6.1", "-6.8", "-6.9", "-6.0", "-6.1", "-6.0" across FYs. - Total revenue and grants (percent of GDP): "52.0", "33.3", "31.0", "28.2", "26.0", "28.3", "28.0", "28.4", "28.7", "28.2", "28.6", "28.3" (across FYs shown). - Grants (percent of GDP): "30.2", "19.3", "16.7", "15.2", "13.0", "14.7", "14.3", "14.2", "14.2", "13.5", "13.8", "13.4". ### Monetary survey and banking sector indicators (selected) - Monetary base (M0) values shown across years (millions of U.S. dollars and in Liberian dollars). - Net foreign assets (Central Bank): "166", "70", "26", "-58", "-117", "-170", "-136", "-135", "-133" (selected years). - Broad money (M2): "672", "655", "693", "760", "787", "809", "831", "838", "755" (selected years, millions of U.S. dollars). - L$ Currency in circulation and L$ denominated deposits series shown; L$ component of M2 and US$ component (deposits only) shown. - Financial soundness indicators (Table 5, selected): - Regulatory capital to risk-weighted assets: "20.3", "15.5", "21.5", "18.0", "27.6" (Dec. series). - Non-performing loans to total loans: "18.7", "15.7", "14.8", "14.7", "13.8" (Dec. series). - Return on assets: "0.1", "-1.0", "0.2", "-0.2", "1.1" (Dec. series). ### Key risks and policy-relevant observations (as presented in the text) - Exchange rate developments are a key driver of headline inflation and currency-denominated fuel price inflation. - Large declines in staple and fuel imports indicate both demand compression and inventory run-downs, with implications for food security and transport costs. - Tax base erosion from reduced trade volumes and declines in goods and services tax collection pose fiscal risks. - Rising wage bill and expenditure pressures are crowding out capital and social spending, increasing reliance on CBL financing and raising concerns about cash management and expenditure control. - Collapse in private sector trade credit in H2 2018 signals a tightening of financial conditions for businesses. *Sources: Central Bank of Liberia; and IMF staff calculations.* ### Annex I. Medium-Term Outlook: Factor Accumulation ### Annex I. Medium-Term Outlook: Factor Accumulation ### Demographics and labor force - United Nations estimates annual population growth at 3 percent. - Working-age population is projected to grow at 4.2 percent, driven by over 50 percent of the population younger than 15 years. - Liberia is projected to benefit from the demographic dividend only after 2045, about 10 years after some peers. - Dependency ratio chart notes (from source): 2018 = 1.24; 2018 = 1.34; 2018 = 1.40 (series for Liberia, Rwanda, Ghana shown). ### Physical capital - Basic infrastructure and public service facilities were severely damaged during the two civil wars. - Only 5 percent of the total length of roads are paved. - Current administration prioritizes rehabilitation of the road network; absorption capacity and financing are major challenges. ### Human capital - Conflict had a long-term impact on human capital. - Younger children are attending school at a lower rate than older generations. - 51 percent of the school-age children are not attending school. - A sizable proportion of those attending are overage and/or will not complete primary school. - Consequence: weakened ability of the young cohort to become active economic participants and reduce poverty. ### Productivity and governance linkages - To improve productivity, Liberia should improve its public financial system for better delivery of services (Annex II). - Making the country more competitive in agriculture and other sectors is key to economic growth and diversification (Annex III). - Authorities need to strengthen governance in several institutions, including the CBL, and bolster the anti-corruption framework (Annex II). --- ### Annex II. Governance Issues and Prioritized Recommendations ### Key governance findings - World Bank’s CPIA for 2019: Liberia stagnated at a score of 3.1, on par with the Sub-Saharan average. - Underperformance relative to regional peers on financial sector policies and public-sector management and institutions. - Independence and effectiveness of institutions hampered by political interference and limited resources. - LACC, GAC, and PPCC are severely underfunded, have capacity constraints, and are not independent. - Enforcement against corruption: investigations and prosecutions occur but lack dedicated resources and expertise; prosecutions not advanced expeditiously; delays in adjudication in the judicial system. - Asset declaration regime not strictly enforced: - 2018 LACC Asset Declaration Report: 92 public officials from the executive branch representing 20%; 333 officials from the judicial branch representing 88% of all the senior officials in the judiciary; no declarations from the legislative branch. - Submission is decentralized; Asset Declaration Unit in LACC is significantly under-resourced and lacks necessary powers. - Asset declarations can only be made public with a court order and sanctions for non-compliance are weak. - Government recognizes need to improve governance and reduce corruption; PAPD includes a wide-ranging agenda that requires aggressive implementation. ### Prioritized recommendations — Anti-corruption Regime - Develop a new anti-corruption strategy to guide prevention, investigation, prosecution, national and international cooperation, and public–civil sector partnerships. - Amend anti-corruption laws to address deficiencies identified in the United Nations Convention against Corruption peer review conducted in 2012; specifically criminalize bribery of foreign officials and illicit enrichment. - Prioritize PAPD action plan item: give the LACC prosecutorial powers (requires amendments to the anti-corruption law). - Enhance governance and capacity of the LACC and the Ministry of Justice by increasing financial and human resources and strengthening expertise among investigators, prosecutors, and judges. - Note: The last anti-corruption strategy ended in 2017. ### Prioritized recommendations — Asset Declaration Regime - Amend the Liberian Anti-Corruption Commission Act and the Code of Conduct to: - Centralize submission of asset declarations to the LACC. - Provide the LACC with necessary verification powers. - Include dissuasive and proportionate sanctions for non-compliance. - Allow publication of declarations without the need of a court order. - Interim actions: implement current asset declaration requirements and provide adequate resources to the LACC. ### Prioritized recommendations — AML and related measures - Upgrade AML framework in line with international standards by: - Enacting the revised draft Anti-Money Laundering, Preventive Measures and Proceeds of Crime and the Financial Intelligence Agency laws. - Issuing regulations when opening and managing accounts of politically exposed persons (PEPs). - Strengthening fit and proper provisions when licensing financial institutions. - Improving requirements to ensure authorities have access to adequate, accurate and timely information on beneficial ownership (BO) of legal persons and arrangements. - Enhance risk-based AML/CFT supervision over regulated entities and ensure compliance with PEPs and BO requirements. ### Prioritized recommendations — Property rights - Enactment of the Land Rights Act noted as an important step to improve the business environment and encourage foreign investment. - Proper implementation with donor assistance will ensure robustness of property rights. --- ### Annex III. External Sector Assessment ### Overview and key indicators - Staff judge external position in 2018 was substantially weaker than fundamentals. - Current account deficit remained high at 23.4 percent of GDP in 2018. - Modest improvement in trade balance driven by increased exports, particularly of gold and iron ore. - Services balance improved because of a decline in imports. - Fall in net income and decline in net transfers following the UNMIL withdrawal offset improvements. - Real effective exchange rate continued to depreciate in 2018. - Nominal exchange rate depreciated by 23.7 percent in 2018, following a 16.7 percent depreciation in 2017. - Real depreciation: 8.5 percent depreciation in 2018, following an 8.2 percent depreciation in 2017. - Liberia ranked 132nd out of 140 economies in the Global Competitiveness Index; ICT adoption, market size and innovation capability identified as severe constraints. - World Bank Ease of Doing Business indicators suggest little progress in improving the regulatory environment. ### Assessment using EBA-Lite models - EBA-Lite current account (CA) model: - CA-Actual: -23.4% - Cyclical Contributions (from model): -0.1% - Cyclically adjusted CA: -23.4% - CA-Norm: -12.3% - Cyclically adjusted CA Norm: -12.2% - Multilaterally Consistent Cyclically adjusted CA Norm: -11.7% - CA-Gap: -11.7% - of/which Policy gap: -3.79% - Elasticity: -0.26 - REER Gap: 45% - Conclusion: CA deficit of -23.4 percent of GDP in 2018 was weaker than the multilaterally consistent cyclically adjusted CA norm by 11.7 percent of GDP. - Around 3.8 percent of this gap can be explained by ‘policy gaps’, with loose fiscal policy identified as one of the largest contributors. - Given the current account is weaker than the norm, import and export elasticities suggest the REER is overvalued by 45 percent. - EBA-Lite REER model: - REER Gap: -24.5% - of/which Policy gap: -9.8% - Suggests REER is undervalued by 24.5 percent; around 10 percent of this undervaluation can be accounted for by ‘policy gaps’, with a very low real interest rate identified as the predominant contributor. - Staff judgment: - Consider the current account model most informative for Liberia; on balance, assess external sector position to be substantially weaker than warranted by fundamentals and desirable policies. - Acknowledge the REER model’s differing implication given small sample and structural change; staff judge the current account is weaker than the norm by between 5 and 10 percent of GDP, implying REER overvaluation between 21 and 42 percent. ### Reserves - Gross international reserves forecasted to have fallen to US$358 million at the end 2018, equal to 3.0 months of imports. - Decline driven by FX interventions, drawdown of government deposits and central bank credit to the government. - Reserve adequacy model for credit constrained economies suggests adequate level is around 3.3 months of imports. - Assessment: gross international reserves at end-2018 equal to 3.0 months of imports are judged to be below reserve adequacy levels. ### Policy implications - Strong policies recommended to strengthen the external position: - Facilitate a real effective exchange rate depreciation in tandem with required fiscal and monetary tightening (to mitigate inflationary effects of depreciation). - Promote competitiveness and allow the nominal exchange rate to adjust flexibly. - Focus on rebuilding reserves above the reserve adequacy level to increase resilience to external shocks. --- ### Annex IV. Risk Assessment Matrix (February 2019) - RAM purpose: shows events that could materially alter the baseline path; relative likelihoods: “low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent. “Short term” and “medium term” indicate risks could materialize within 1 year and 3 years, respectively. ### External risks - Large swings in energy prices - Likelihood: Medium - Potential Impact: High. Protracted low commodity prices could delay natural resource sector recovery, lowering medium-term growth and fiscal revenue; U.S. economic slowdown could reduce U.S. aid. - Policies to minimize impact: Accumulate international reserve buffers; diversify economy and export markets; seek additional financing and prioritize expenditure. - Weaker-than-expected global growth - Likelihood: Medium - Potential Impact: (noted) - Policies: (noted) - Rising protectionism and retreat from multilateralism - Likelihood: High - Potential Impact: Low. Strong isolationism and protectionism could lower trade, remittances, and aid flows. - Policies: Prioritize public projects; develop contingent spending plans for sudden stop of aid flows; accumulate fiscal and external buffers; diversify economy and export markets. - Sharp decrease in aid flows - Likelihood: Medium - Potential Impact: High. Could weaken domestic economy and reduce foreign exchange inflow. - Policies: Identify linkage between foreign aid and domestic economy; develop accurate estimates of impact of aid shortfall on fiscal and balance of payments for adequate policy reactions. ### Liberia-specific risks - Delayed fiscal consolidation and rationalization of the CBL’s budget - Likelihood: Medium - Potential Impact: High. Continued loss of foreign reserves, spiraling inflation, continued depreciation. - Policies: Realistic budgets beginning with realistic resource envelope; engage legislature and stakeholders for consolidation and reforms. - Slowdown or discontinuation of ongoing structural reforms - Likelihood: Medium - Potential Impact: Medium. Delay in structural reforms could keep government operations’ performance and quality low. - Policies: Continue and accelerate existing structural reforms. - Increasing debt distress from non-concessional loans with single sourcing and central bank financing - Likelihood: Medium - Potential Impact: High. Non-concessional loans could lead to debt overhang; central bank financing could deplete reserves, cause monetary expansion, depreciation, and inflation. - Policies: Prioritize externally financed public projects with concessional terms and seek grant financing; limit borrowing to projects with high social return; do not use reserves to finance fiscal deficits. - Deterioration of security conditions after UNMIL withdrawal coupled with macro deterioration - Likelihood: Low - Potential Impact: High. Security vacuum or high youth unemployment undermines investor and consumer confidence. - Policies: Ensure smooth transition from UNMIL to national security; ensure inclusive growth and diversification. - Large-scale public health incidence - Likelihood: Low - Potential Impact: High. Would reverse socio-economic recovery, depress growth, worsen living standards of vulnerable groups. - Policies: Strengthen health and social protection systems and communication channels between central government and rural communities. - Reduced financial services by correspondent banks (“de-risking”) - Likelihood: Low - Potential Impact: High. Loss of CBRs could reduce/slow foreign exchange inflow (trade, remittances, aid). - Policies: Strengthen AML/CFT supervisory framework; address legislative gaps including terrorist financing; improve tax system transparency. - Withdrawal of large concessions - Likelihood: Medium - Potential Impact: High. Lower economic growth and loss of social services provided by concessionaires. - Policies: Strengthen rule of law; fiscal consolidation and monetary tightening to stabilize the economy. *Source: Annexes I–IV, IMF staff report content provided in the source document.* ### Annex V. Reform Versus Baseline Scenarios ### Annex V. Reform Versus Baseline Scenarios ### Baseline scenario: assumptions and dynamics - The government continues to borrow both from the Central Bank of Liberia (CBL) and abroad to finance its fiscal deficits in the short- to medium-term. - The CBL is a passive agent without active monetary policy and it accommodates demand for cash. - Currency in Circulation (CIC) growth, the inflation rate, and the rate of depreciation remain high at around 25 percent in the near term. - In the medium term, as the CBL’s gross official reserves deplete and the CBL’s USD credit declines, inflation decelerates, but only to about 10 percent with no change in the real exchange rate and no change in net exports through the relative price effect. - The baseline assumes that the authorities will muddle through until they face an abrupt forced adjustment, triggered for example by a significant loss of gross official reserves. The timing and the impact of the abrupt adjustment is unknown. - The medium-term growth in the baseline is projected to be in line with factor accumulation (i.e., fast growth in the working population and capital accumulation) with some caveat discussed in Annex I. ### Reform scenario: assumptions and outcomes - The reform scenario assumes that the authorities will implement fiscal and monetary adjustments recommended in the 2018 Article IV consultation (see details in Text Table 1). - The cost of adjustments will be felt in 2019-20 and the economy will start to recover towards steady state. - The duration and the magnitude of the impact of the planned adjustment is considered moderate relative to the abrupt adjustment in the baseline. - Improvements in private capital inflows are also assumed. - Growth in CIC, the rate of inflation, and the rate of nominal depreciation quickly go down to single digit in the near term and the inflation rate settles to about 5 percent throughout the medium term. - Various reforms in rice production, public infrastructure (though may take a while), improvements in governance, trade facilitation and doing business more broadly lead to higher productivity. - Some improvement in the real exchange rate is assumed towards the end of the medium term. ### Comparative implications and policy-relevant points - Timing and modality of adjustment matter: - Baseline: continued accommodation and eventual abrupt forced adjustment with unknown timing and impacts. - Reform scenario: planned fiscal and monetary adjustments impose costs in 2019-20 but lead to a moderated and more predictable recovery trajectory. - Inflation and exchange rate: - Baseline: high near-term inflation and depreciation at around 25 percent; medium-term inflation only decelerates to about 10 percent with no real exchange rate improvement. - Reform scenario: near-term inflation and nominal depreciation fall to single digits; inflation settles to about 5 percent in the medium term; some real exchange rate improvement by end of medium term. - External and financial buffers: - Baseline: depletion of CBL gross official reserves and declining USD credit precede deceleration in inflation, increasing vulnerability to abrupt adjustment. - Reform scenario: assumes improved private capital inflows, implying stronger external financing dynamics. - Growth: - Baseline: medium-term growth aligned with factor accumulation (fast growth in the working population and capital accumulation). - Reform scenario: productivity-enhancing reforms (agriculture, infrastructure, governance, trade facilitation) support higher medium-term productivity and partial real exchange rate recovery. *Source: IMF staff calculations.* ### Annex VIII. Status of Key Recommendations for the ### Annex VIII. Status of Key Recommendations for the 2018 Article IV Consultation ### Fiscal Sector - Deepen domestic revenue mobilization efforts — In progress. - Various revenue measures were introduced, including an increase in goods and services tax. - Administration reforms with donor support are ongoing. - Ensure medium term debt sustainability by securing favorable terms and conditions on loans — In progress. - The government is in the process of cancelling two loans amounting to US$1 billion that did not meet the concessionality threshold. - Recently, however, the government announced it was pursuing a natural resources swap to raise US$2.5 billion for various development projects. The terms of this swap arrangement are not yet clear. - Advance the Treasury Single Account — Delayed. - IMF TA is helping the authorities to set up oversight of government accounts and to define TSA coverage and structure. - Adopt a comprehensive program to clear domestic arrears and prevent the emergence of new ones — Delayed. - Preliminary analysis suggests that new arrears emerging in FY2018 were large. - The reconciliation process is on-going which will help to quantify the size of the arrears. - The authorities have yet to develop a plan to clear the arrears. - Enhance monitoring of SOEs — Delayed. - Due to limited resources of the SOE unit and limited capacity in both the government and SOEs themselves, reforms of SOE monitoring has been delayed and audits are taking longer to be completed than in the past. - Contain the growth of the wage bill — Delayed. - On coming to power, Government reduced the salaries of top-level civil servants. - The on-going civil service reform is regularizing employment contracts of civil servants in a manner that is creating an initial increase of the wage bill (for example, as health and education workers are turned into permanent employees). - Strong political will is needed to reduce the wage bill to more sustainable levels. - Enhance monitoring of both domestically and externally financed public investment — Delayed. - Despite the authorities’ intention to ramp-up infrastructure investment, implementation of public investment projects decelerated in the transition year. - The authorities have sought financing from questionable enterprises for infrastructure projects—sometimes in violation of procurement laws—and this has raised concerns about the viability of these projects and potential risks for debt sustainability. - However, none of these projects have yet materialized. ### Monetary and Exchange Rate Sector - Safeguard reserves by complying with financial plan and reviewing operational costs — Delayed. - The Central Bank of Liberia stepped up intervention in the foreign exchange market to smooth the volatility of the exchange rate. - Operational costs have not been reviewed yet in line with the Safeguards recommendations. - Recapitalize the CBL — Delayed. - The CBL has not yet been recapitalized. - Based on the low discount rates used by the authorities, the CBL was adequately recapitalized by their own estimates, but a fair value assessment reveals the need for recapitalization. - Provision for automatic recapitalization of the CBL is included in the amendments to the CBL law. - At end-2017, an amount of L$3.4 billion is needed to make up for the deficit in capital in compliance with Section 46 (5) (a) and (6) of the CBL Act. - Preserve governance and independence of the CBL — In progress. - The Board of Governors of the CBL still includes non-executive members who have not yet been confirmed by the senate. - Despite not extending new bridge loans to the GOL for FY2018, the CBL lent to the GOL by allowing positive USD lending to commercial banks to accumulate in the suspense accounts. - The amendments to the CBL Act seek to foster the operational independence of the CBL by setting up a monetary policy committee and ensuring operational independence, including to print local currency without legislative approval and restricting CBL’s lending to the government. - Lift the surrender requirement on remittances — Delayed. - The surrender requirement was temporarily lifted during the festive season in December 2018 and January 2019 to reduce demand for local currency. - However, the policy was re-introduced in February 2019. - The remittance split is one of the key sources of foreign exchange for the CBL since the government is yet to resume the sales of foreign exchange to the Bank. ### Financial Sector - Address arrears to the banking sector — In progress. - The government has agreed to issue a bond to resolve the arrears given the potential systemic risk to the financial sector, but the bond is yet to be issued. - Enhance CBL’s bank resolution framework — In progress. - The CBL is amending the Financial Institutions Act to strengthen the Act, including a resolution framework, with TA support from IMF. - Complete implementation of the CBL’s Action Plan — In progress. - Slow progress has been registered. Many items in the CBL Action Plan are outstanding. - Semi-annual external audits of foreign currency reserves are being conducted with a delay. - The monthly submission of foreign exchange flows to the CBL Board has not been met. ### Annex IX. Capacity Building - Liberia is part of the pilot phase of the Capacity Building Framework (CBF). - In May 2015, the Executive Board endorsed a proposal to pilot a more structured approach for Capacity Development (CD) activities in fragile states referred to as Capacity Building Framework (CBF). - The Central African Republic, Liberia, Mali, and Sierra Leone are part of the pilot phase. - For these countries, CBF Strategies were prepared, in consultation with the World Bank and other Capacity Development (CD) partners, and discussed with country authorities. - The Resource Allocation Plan (RAP), including the resource available through the Africa Regional Technical Assistance Center West 2 (AFRITAC W2) is fully aligned with this strategy. - Priority CD areas covered in the past year: - Fiscal issues: budget execution and controls, treasury single account, fiscal reporting of State-Owned Enterprises, arrears management, tax policy, and tax administration. - Monetary issues: central bank governance, banking law, banking supervision, monetary policy, AML/CF. - Statistics: national accounts, consumer price index, balance of payment statistics, government finance statistics (GFS), monetary financial statistics (MFS), and financial soundness indicators (FSI). - CD resourcing and absorptive capacity: - A large fraction of the Fund’s CD resources is allocated to Liberia: Liberia is one of the largest recipients of capacity development (CD) assistance at the Fund, exceeding 5 full-time equivalents (FTE, person years), as opposed to the Sub-Saharan Africa region average of about 2 FTE. - In the year through April 2019, there were close to 50 Technical Assistance missions delivered in Liberia, of which 30 were led by the Fiscal Affairs Department (FAD). - Traction on CD, however, has been low partly because of capacity constraints to implement the array of recommendations provided by the TA experts. - Recommendations to improve CD efficiency: - Greater flexibility in the modality of TA activities (e.g., long- versus short-term experts, training versus TA) and in the areas of TA activities (e.g., fiscal versus statistics) to respond to changing nature of CD needs. - Improve government finance statistics, and monetary and financial statistics which are critical for better surveillance in Liberia, but are not adequately provided for in the existing projects. - Examples of FY2019 TA (select highlights from Table A9.1) - Public Financial Management (PFM): strengthening expenditure controls and cash management - PFM missions in 2018 and early 2019 provided support on (i) budget execution processes; (ii) cash management; (iii) the treasury single account (TSA); and (iv) the integrated financial management information system (IFMIS). - Going forward: strengthen budget execution by linking allotments to updated cash forecasts; improve cash flow forecasting and integrate treasury and cash management; finalize TSA framework; improve IFMIS data quality and technological infrastructure. - Government Finance Statistics (GFS) - A STA mission visited Monrovia in March 2019. Key issues: source data largely aligned to international guidelines but data compilation suffers from accuracy, comprehensiveness, and classification issues; debt statistics are not exhaustive as they currently exclude debt securities, debt assumptions, and certain loans (e.g., the CBL bridge loan). - Going forward: focus first on improving quality of budgetary central government (BCG) data; regularly update the excel work file developed for compilation of GFS and PSDS for the BCG. - Monetary and Financial Statistics (MFS) - The mission worked with the staff of the CBL to develop monetary statistics consistent with international methodologies, reviewing CBL trial balance, preparing sectoral balance sheets (CBL and ODC), and preparing SRFs 1SR and 2SR. - The mission prepared the monetary survey for Liberia for use in surveillance and reporting to STA. - The sectoral balance sheet of the CBL has been finalized in accordance to the MFS Manual and Compilation Guide for monthly periods January 2007–December *LIBERIA INTERNATIONAL MONETARY FUND* ### 2018. Overall, enough information is ### 1lbrea2019001 - 2018. Overall, enough information is ### National accounts — progress, gaps, and ongoing work - Objective: rebasing GDP to base year 2016. - Progress: - The 2016 Household Income Expenditure Survey (HIES) is being used to produce household final consumption expenditure and to indicate GDP evolution until the rebase is completed in 2020. - The National Establishment Census (NEC) conducted between July and September 2017 provided the basis for the business list of formal establishments. - The National Accounts Annual Survey (NAAS) was conducted in 2018; IT specifications for deriving output, intermediate consumption (IC) and gross value added (GVA) from the NAAS have been prepared and data entry (and entry checks) had started. - Preliminary work to establish the Supply and Use Table (SUT) framework has started, but the SUT still has to be populated. - Remaining tasks and shortcomings: - LISGICS needs to obtain administrative data for areas not covered by the NAAS, but some key contributors have not provided it. - GDP by production in current and constant prices: finalize data entry of the various surveys and administrative data and define strategy for ongoing annual GDP production. - GDP by expenditure: to be commenced. - GDP by income: to be commenced. - SUT: framework started but not populated. - National accounts staff is currently 40 percent under strength; urgent recruitment needed. - The NAAS for 2016 has results available but data for key contributors remain outstanding due to low response rates. ### Price statistics - CPI developments: - The CPI basket has been re-weighted using the 2014 HIES data. - An updated CPI was introduced from the January 2019 publication using expenditure weights and an updated market basket based on the 2016 HIES. - Currently prices are collected only in Monrovia; LISGIS plans to introduce national collection once enhancements are sustained. - Producer Price Index: - LISGIS does not currently compile a PPI because this requires an Economic Census. ### Monetary and financial statistics (MFS) and sectoral data - Monetary statistics: - Sectoral Balance Sheet of the Other Depository Corporations (ODCs) has been prepared for monthly periods January 2007–December 2018 to observe international standards as closely as possible, but shortcomings were highlighted and should be addressed. - Liberia has recently completed the compilation of monetary data based on STA Standardized Report Forms (SRFs) and needs to finalize implementation of the January 2019 TA recommendations. - Regular compilation of monetary data based on the SRFs is critical for surveillance. - Financial sector surveillance: - The CBL submits some supervisory ratios to AFR; an STA TA mission was scheduled end-April 2019 to assist with the FSI workbook preparation. - External sector statistics: - Balance of payments statistics are compiled quarterly since August 2016 on a BPM6 basis and have been submitted to STA since start of 2017. - Preliminary annual International Investment Position (IIP) compilation has started. - In 2018 the CBL implemented an International Transactions Reporting System (ITRS) and a Direct Investment survey. ### Government finance statistics and data reporting - Current status: - Data reporting to STA for dissemination has lapsed; the last available data covered the budgetary central government and corresponds to 2013. - Compiled GFS largely aligns to GFSM 2001/14 guidelines but gaps remain in comprehensiveness of transactions in the statement of operations and institutional coverage. - Not all external flows on grants and loans and associated expenditure are comprehensively captured; data coverage limited to budgetary central government. - Expenditure transactions are currently recorded on a commitment basis, while other transactions in the statement of operations are recorded largely on a cash basis; no adjustment is made to bridge timing differences. - Needed improvements: - Improve coordination and data sharing between producing and using units. - Resume timely data reporting to STA. ### Data adequacy for surveillance and dissemination - General assessment: - Data provision has serious shortcomings that significantly hamper surveillance; most affected areas are national accounts, government finance, and balance of payments statistics. - Participation and metadata: - Participant in the enhanced General Data Dissemination System (e-GDDS) since October 2005. Metadata for most data categories were updated in November 2013. - No Data ROSC mission has been conducted. - Reporting to STA: - Authorities report quarterly balance of payments data and annual IIP for the IFS and BOPSY. - Liberia does not submit FSIs to STA for publication on the IMF website; annual government finance statistics submissions for the GFSY have lapsed. ### Relations with the Fund — membership, accounts, and financial arrangements (as of April 30, 2019) - Membership Status: Joined: March 28, 1962. - General Resources Account (SDR Million; %Quota): - Quota 258.40 100.00 - Fund holdings of currency 226.08 87.49 - Reserve Tranche Position 32.33 12.51 - SDR Department (SDR Million; %Allocation): - Net cumulative allocation 123.98 100.00 - Holdings 150.80 121.64 - Outstanding Purchases and Loans (SDR Million; %Quota): - RCF Loans 32.30 12.50 - ECF Arrangements 122.14 47.27 - Latest Financial Arrangements (Date of Arrangement — Expiration Date — Amount Approved (SDR Million) — Amount Drawn (SDR Million)): - ECF Nov. 19, 2012 — Nov. 17, 2017 — 111.66 — 111.66 - ECF Mar. 14, 2008 — May 17, 2012 — 247.90 — 247.90 - EFF Mar. 14, 2008 — Sep. 25, 2008 — 342.77 — 342.77 - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming Principal and Total: - 2019 Principal 8.83 — Total 8.83 - 2020 Principal 20.04 — Total 20.04 - 2021 Principal 22.97 — Total 22.97 - 2022 Principal 26.28 — Total 26.29 - 2023 Principal 27.32 — Total 27.32 ### Safeguards, governance, and exchange rate arrangement - Safeguards assessment: - 2013 and 2015 update safeguards assessments highlighted weak governance and control environment at the Central Bank of Liberia (CBL). - Program measures addressed some concerns: strengthening investment policies, approving CBL’s financial plan, establishing an ELA framework. - Forensic audit of First International Bank of Liberia Limited (FIBLL) in 2017 confirmed supervisory and governance failures leading to financial losses at the CBL; authorities developed an action plan but many items remain outstanding. - Interim measures: semi-annual external audits of foreign currency reserves are being conducted; monthly submission of foreign exchange information to the CBL Board has not been met. - Governor was replaced; new Board in place since 2018 with members on temporary appointment terms. - New risks have emerged in domestic currency operations per recent forensic investigation. - Key remaining recommendations: legal amendments to align the CBL Act with best practices, reconciling suspense accounts, strengthening internal audit function, enhancing governance and audit and control oversight. - Exchange rate arrangement: - The currency of Liberia is the Liberian dollar. The U.S. dollar is also legal tender. - De jure exchange rate regime classification: ‘managed floating’. - CBL intervenes to smooth volatility. - Since July 2018, the exchange rate followed a depreciating trend within a 2 percent band against the U.S. dollar. - De facto exchange rate arrangement reclassified to “crawl-like” from “other managed”, effective July 23, 2018. - Liberia maintains an exchange rate system free of restrictions on payments for current transfers. ### Technical assistance 2014–19 — select topics and timing - Fiscal Affairs Department: Revenue Administration (multiple missions spanning February–December 2015, 2016–2019 including long-term residential advisor since January 2016). - Statistics Department: Balance of Payments (July 2014; January–February, June–July 2016; January, July 2017; Feb 2018; September 2018), Government Financial Statistics (September 2016, October 2017, March 2019), National Accounts and CPI (extensive missions through 2014–2019), Monetary and Financial Statistics (January 2019). - Monetary and Capital Markets Department: Central Bank Governance (November 2017), Banking Supervision (missions 2014–2019), Monetary Policy (July 2018, October 2018, February-March 2019), AML/CFT framework (November 2017, August 2018, February-March 2019), Central Bank Accounting (August 2016, March 2017), Monetary Analysis and Payment System (November 2016, November-December 2017), Liquidity Forecasting (May 2014, August 2015, January–February 2016), Crisis Preparedness and Management Framework (multiple missions through 2018). - Legal and Finance Departments: Safeguards and Fiscal Investment (September 2017), AML/CFT framework (multiple missions), CBL Act (January 2018), Tax Law (October 2017). ### Debt sustainability analysis (Joint Bank-Fund) - Risk ratings: - Risk of external debt distress Moderate - Overall risk of debt distress Moderate - Observations: - The DSA suggests Liberia remains at moderate risk of debt distress with limited space to accommodate shocks. - The country’s debt carrying capacity remains medium, but the rating has declined from 3.1 to 2.77. - The authorities have pursued non-concessional loans, but none has been disbursed yet. - The government borrowed U.S. dollars from the CBL to close the financing gap in FY2018; such new borrowing and legacy U.S. dollar debt from civil war time are incorporated in the new DSA. - State-owned Enterprises (SOE) guaranteed debt is also incorporated. - Liberia would edge closer to high risk of debt distress with a small change in the terms of both domestic and external debt or a failure to adjust primary expenditure to the available revenue envelope over the medium-term. *Prepared by the African Department (In consultation with other departments); Information as in the STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (May 16, 2019).* ### 1. The DSA covers central government debt, central government guaranteed debt, and ### 1lbrea2019001 - 1. The DSA covers central government debt, central government guaranteed debt, and ### Coverage of public sector debt - The DSA covers central government debt, central government guaranteed debt, and central bank debt contracted on behalf of the government (Text Table 2). - The bulk of State-Owned Enterprise (SOE) debt is guaranteed by the central government and is included in DSA. - Government borrowing from the Central Bank of Liberia (CBL) included in the current DSA analysis: - $254.5 million (7.8 percent of GDP) in legacy U.S. debt from the war time. - $65 million (1.5 percent of GDP) in credit from the CBL in the form of bridge loans and advances used to cover the fiscal financing gap of FY2018. - The DSA includes $65 million in arrears to the construction sector which took advances from banks to carry out public road projects. - The largest debt of SOEs is a World Bank loan to the Liberia Electricity Corporation (LEC) for the rehabilitation of Mt. Coffee hydropower station. - Other elements of public sector debt are not included in the analysis because of data constraints. - Contingent liabilities shock from non-guaranteed SOE debt is kept at the default value of 2 percent to reflect risks associated with non-guaranteed SOE debt, currently excluded from the analysis due to data availability constraints. - Current coverage summary (Text Table 2): central government, central bank (borrowed on behalf of the government), and guarantees are included; non-guaranteed SOE debt is not included. ### Recent stock and composition of debt - Total public external debt stock at end-FY2018: $859 million (29.3 percent of GDP). - Total public and publicly guaranteed debt at end-FY2018 is estimated at 42 percent of GDP (Text Figure 1). - Structure of external public debt as of June-2018 (Text Table 3): - Multilateral total: 805 USD millions; Percent of Total: 93.8; Percent of GDP: 27.5 - IMF: 231 USD millions; Percent of Total: 12.6; Percent of GDP: 7.9 - World Bank: 356 USD millions; Percent of Total: 41.5; Percent of GDP: 12.2 - AfDB: 92 USD millions; Percent of Total: 10.7; Percent of GDP: 3.1 - EIB: 55 USD millions; Percent of Total: 6.4; Percent of GDP: 1.9 - Other Multilateral: 72 USD millions; Percent of Total: 8.4; Percent of GDP: 2.5 - Bilateral (Non-Paris Club): 54 USD millions; Percent of Total: 6.2; Percent of GDP: 1.8 - China: 50 USD millions; Percent of Total: 6.0; Percent of GDP: 0.2 - Kuwait: 15 USD millions; Percent of Total: 1.7; Percent of GDP: 0.5 - Saudi Arabia: 34 USD millions; Percent of Total: 3.9; Percent of GDP: 1.1 - Total: 859 USD millions; Percent of Total: 100.0; Percent of GDP: 29.3 ### Background and recent policy context - DSA prepared in context of the 2019 Article IV consultation. The last LIC-DSA considered by the Executive Board was June 2018. - Liberia does not have a Fund-supported program but is subject to the IDA Non-Concessional Borrowing Policy (NCBP). - In May 2018 the government ratified two external loan agreements totaling US$957.2 million (29 percent of GDP); authorities later indicated they were in process of cancelling them. - External grants inflows expected to decline from 16.7 percent of GDP in FY2017 to 13.4 percent of GDP in FY2024. - Post-HIPC (2010) debt accumulation driven by scaled-up infrastructure spending and adverse shocks. ### Key macroeconomic and model assumptions (Underlying assumptions) - Real GDP growth path revisions and forecasts: - Revised down from 4.7 percent to 0.4 percent in 2019. - Projected to contract by 1.3 percent in 2022 and 0.5 percent in 2023. - Medium-term growth revised down from 5.3 percent to 3.7 percent. - Long-run growth estimated to increase to 4.3 percent by 2028 and remain stable thereafter. - Inflation: average headline inflation increased to 20.4 percent in 2018 (compared to 11.7 estimated previously) and is expected to remain in double digits in the medium-term. - Fiscal position: fiscal deficit widened to 5.5 percent of GDP in FY2018, partially financed by credit from the central bank. - Current account: deficit for 2019 widened from 22.3 to 23.3 percent of GDP. External sector position assessed as substantially weaker than implied by fundamentals and desirable policies. - CBL foreign reserves: staff estimate the CBL will use around US$80 million of its reserves in 2019 to finance fiscal deficits, operations, and FX interventions; reserves expected to decline in the medium-term to below 1 months of imports. ### Financing mix and borrowing terms assumptions - External borrowing: public external debt assumed to increase by about $1.24 billion in the medium-term. Baseline assumes large non-concessional loans even if the two ratified May 2018 loans (US$957.5 million) were officially canceled. - Average grant element of new borrowing estimated to decline from 43.6 percent FY2019 to 31.2 percent in FY2022, then increase as engagement with traditional donors rises. Previously assumed average grant element was 45 percent at 2018 Article IV. - Domestic borrowing: baseline assumes central bank credit during 2019–21 at a negative real interest rate to fulfil central government’s budget needs. Examples provided: government currently pays -2.2 percent in real terms on the legacy debt of $250 million and zero nominal interest rate on the credit extended in 2018. Financing gap assumed to be filled with additional central bank financing; amortization of CBL credit for budget support will be deferred to the long-term. ### Realism checks, drivers of past debt dynamics, and classification - Drivers of debt dynamics: downward revisions to real GDP growth explain most of the increase in external-debt-to-GDP in coming years; inclusion of CBL credit and assumption of additional CBL credit explain differences in domestic debt dynamics compared with the previous DSA. - Unexpected past debt accumulation: an unexpected increase in debt of about 12 percent of GDP observed over the significant adverse shocks period (Ebola, commodity price shock). Drivers shared among unexpected increases in primary fiscal deficits, unexpected decline in growth, and unexpected depreciation of real exchange rate. - Fiscal realism: fiscal primary deficit projected to increase by about 1.0 percentage point of GDP in the next three years (just below the mode in realism tool). - Fiscal multiplier used in consistency checks: 0.67. - Country debt-carrying capacity: classified as medium based on a Composite Indicator (CI) of 2.77. CI components and contributions (Text Table 4): - CPIA coefficient contribution: 0.385 * 3.103 = 1.194 (43%) - Real growth rate contribution: 2.719 * 3.358 = 0.093 (3%) - Import coverage of reserves contribution: 4.052 * 21.268 = 0.863 (31%) - Import coverage of reserves^2 contribution: -3.990 * 4.523 = -0.18 (-7%) - Remittances contribution: 2.022 * 15.020 = 0.301 (11%) - World economic growth contribution: 13.520 * 3.660 = 0.491 (18%) - CI Score: 2.77 (100%); CI rating: Medium. - Liberia was downgraded to “weak quality of debt monitoring” in line with the country’s debt recording capacity; deteriorating macro outlook could reduce borrowing space and the CI in next 1–2 years. ### Risk assessment and stress tests - Overall classification: Liberia remains at moderate risk of external debt distress. - Key threshold outcomes (Text Table 5 / DSF thresholds): - PV of debt-to-GDP peaks at 34.6 percent in 2027 (remains below policy-dependent threshold). - PV of debt-to-exports remains below 150 percent in the medium-to-long-term. - Debt-service to revenue ratio will reach levels just below the threshold of 18 percent in 2023 and 2024, creating risk of crowding out spending and buildup of arrears. - Debt-service to exports ratio remains below threshold, peaking in 2023 and 2024 when economy is forced to adjust. - Probability of debt distress increases substantially under shocks to exports or depreciation (Figure 6). - Standard scenario stress tests and a contingent liability test were conducted and discussed. ### Key implications and policy considerations (from analysis) - Financing constraints: identifying viable external financing remains challenging; government tolerance to contracting large non-concessional loans risks exceeding absorptive capacity. - Revenue and spending: shrinking external grants and limited domestic revenue mobilization constrain delivery of public services consistent with macro stability and long-term growth. - Central bank financing risks: continued reliance on CBL credit at negative real rates and delayed amortization raises macro-stability concerns and exposes the central bank to absorbing government-related losses. - Monitoring and data gaps: non-guaranteed SOE debt and other elements of public sector debt are excluded due to data constraints; amended PFM Act strengthens SOE debt reporting and monitoring, and planned inclusion of SOE non-guaranteed debt into public sector debt coverage going forward. *Italic: Source — IMF staff and Liberian authorities, DSA prepared in context of the 2019 Article IV consultation (text as provided).* ### 15. Standard stress tests show that a further deterioration of the macroeconomic outlook ### 15. Standard stress tests show that a further deterioration of the macroeconomic outlook ### Summary of stress-test findings - All standard stress tests considered (a shock of one-standard deviation in the primary balance, nominal export growth, other non-debt creating flows, and a one-time depreciation of the size needed to close the real exchange overvaluation) result in breaching the policy dependent thresholds on the stock of debt (the PV of debt-to-GDP ratio and the PV of debt-to-exports ratio). (Table 3) - A one-standard deviation shock to real GDP growth does not breach the threshold on the stock of debt, but it does breach the threshold on debt services. ### Public sector debt outlook and risk rating - The PV of public debt-to-GDP ratio is projected to increase from an estimate of 35.3 percent in FY2019 to 46.6 percent in FY2023 and continue on an upward trend thereafter. (Table 2 and Figure 2) - The PV of debt-to-revenue ratio will peak at 168.5 percent in FY2025 and decline slowly to 156.9 percent in the long-term. - The debt-service-to-revenue ratio will peak at 16.8 percent in FY2023 and decline in subsequent years. - Overall assessment: Liberia remains at moderate risk of public debt distress. ### Sensitivity analysis and contingent liabilities - Standard sensitivity analysis shows the PV of Debt-to-GDP breaches the relevant threshold under deterioration of real GDP, the primary balance, exports, and other flows. (Table 4) - The debt service-to-revenue ratio reaches close to 20 percent (or above 20 percent in some cases) under stress scenarios. - The contingent liability stress test is estimated to lead to a one-off increase in the debt-to-GDP ratio of 10.5 percent, capturing the combined shock of SOE’s external debt default, PPPs’ distress, and financial market vulnerabilities not included in the covered data. ### Alternative scenario: higher interest payments without primary expenditure crowding-out - A scenario in which debt service increases because of a rise in the interest rate or additional borrowing that must be serviced, but the GOL does not adjust primary expenditure, is analyzed. - Under this scenario, Liberia will eventually breach the PV of debt-to-GDP ratio if additional revenue is not mobilized and the GOL is forced to borrow to meet its increased debt service obligations. ### Borrowing space, absorptive capacity, and fiscal implications - Liberia’s borrowing space is limited; careful consideration is needed regarding the terms of new external borrowing and the country’s absorptive capacity. (Figure 4) - The authorities’ ambitious infrastructure program to rehabilitate the national road network will raise the PV of debt relative to foreign exchange earning capacity. - The projected disbursement path for FY2019–24 is beyond what authorities have been able to absorb in the past but reflects ambition to secure large infrastructure loans expected to be disbursed in the short-term. - Under the projected disbursement scenario, limited space to absorb shocks is almost non-existent for the debt-service-to-revenue ratio. - Borrowing beyond capacity will not generate enough GDP growth to compensate for the increase in nominal debt levels; the effect of road rehabilitation on aggregate demand is expected to be limited because only a small part of the total cost would likely be sourced locally. ### Domestic debt and central bank solvency - Most domestic debt is intra-government borrowing, but fiscal adjustment is warranted to ensure macroeconomic stability and solvency of the Central Bank. - Currently, the CBL is absorbing the losses of the credit it is providing to the GOL and no repayment plan has been agreed; resources of the Central Bank are being depleted. - A repayment profile of domestic debt with a positive real interest rate will put additional pressure on spending needs, crowding out primary expenditure or leading to a further increase of the fiscal imbalance. ### Risks and upside scenarios - Risks to the outlook are tilted to the downside. - Upside factors that could ease macroeconomic pressures: an increase in commodity prices, an increase in iron ore production, and an increase in donor grants. - If non-concessional borrowing planned in the baseline scenario beyond absorptive capacity does not materialize, debt will remain at more sustainable levels. - Downside risks: a drop in commodity prices or a failure to mobilize fiscal resources to close the financing gap could further deteriorate macroeconomic conditions and increase the risk of debt distress. *Source: PUBLIC DSA chapter excerpt.* ### 22. The authorities broadly agreed with the importance of maintaining debt sustainability ### 1lbrea2019001 - 22. The authorities broadly agreed with the importance of maintaining debt sustainability ### Authorities' stance and policy intentions - The authorities broadly agreed with the importance of maintaining debt sustainability in the medium term. - Reiterated preference for concessional financing because "borrowing space is limited and sensitive to the terms of new loans." - Noted they are in the process of cancelling the non-concessional ETON and EBOMAF loans. - If assistance from traditional donors is delayed, the authorities remain tolerant to the possibility of contracting non-concessional loans and securing financing from non-traditional donors, given the commitment to fulfill the Pro-Poor Agenda. - Emphasized the pressing need to advance their development agenda and sought international community assistance via provision of budget support, project grants, and financing for infrastructure projects. ### Debt sustainability projections and indicators (selected) - External debt (nominal) (percent of GDP): 18.8; 25.1; 29.3; 34.1; 38.6; 42.2; 47.5; 52.5; 55.4; 56.0; 39.2; 12.4; 50.5. - PV of PPG external debt-to-GDP ratio (selected projection points): 16.2; 18.7; 21.5; 24.6; 27.3; 29.9; 32.3; 33.7; 24.7. - PV of PPG external debt-to-exports ratio (selected projection points): 68.3; 74.7; 80.0; 87.8; 102.1; 110.3; 115.2; 122.1; 98.6. - PPG debt service-to-exports ratio (selected projection points): 0.7; 1.3; 2.8; 4.1; 6.3; 6.8; 8.5; 9.7; 9.4; 7.6; 9.3. - PPG debt service-to-revenue ratio (selected projection points): 1.2; 2.1; 5.1; 7.5; 11.9; 13.2; 15.6; 17.7; 17.7; 14.0; 15.4. - Gross external financing need (Million of U.S. dollars): 375.8; 530.8; 487.5; 427.4; 386.6; 414.0; 213.2; 255.1; 235.2; 73.4; -92.9. - Nominal GDP (Million of US dollars) (selected points): 3,226; 3,244; 3,267; 3,235; 3,219; 3,241; 3,352; 3,468; 3,606; 5,010; 9,913. - Real GDP growth (in percent) (selected): -1.6; 2.5; 1.2; 0.4; 1.6; 1.3; -1.3; -0.5; 3.7; 4.3; 4.3; 3.9; 2.4. - Government revenues (excluding grants, in percent of GDP) (selected): 14.0; 14.3; 13.0; 13.7; 14.1; 14.5; 14.7; 14.8; 14.9; 15.1; 15.1; 14.7; 14.8. - Aid flows (in Million of US dollars) (total): 736.6; 663.4; 549.7; 556.4; 566.4; 584.2; 589.4; 653.0; 671.0; 772.5; 1,416.1. - of which: Grants: 623.6; 541.6; 425.5; 461.3; 457.9; 460.1; 453.9; 478.6; 482.7; 627.8; 1,266.4. - of which: Concessional loans: 113.0; 121.8; 124.2; 95.1; 108.6; 124.1; 135.5; 174.5; 188.3; 144.8; 149.7. - Grant element of new public sector borrowing (in percent) (selected): 43.6; 34.3; 33.0; 31.2; 35.1; 36.5; 46.7; 32.7; 39.1. - Effective interest rate (percent) (selected): 0.9; 0.9; 1.2; 1.6; 2.3; 1.7; 2.5; 3.2; 3.22; 1.4; 1.1; 2.4. - PV of external debt (in percent of exports) (memorandum): 68.3; 74.7; 80.0; 87.8; 102.1; 110.3; 115.2; 122.1; 98.6. - Total external debt service-to-exports ratio (selected): 0.7; 1.3; 2.8; 4.1; 6.3; 6.8; 8.5; 9.7; 9.4; 7.6; 9.3. ### Risks, stress tests, and qualifiers - Stress-test framework presents historical, baseline, and "most extreme shock" scenarios for 2019–29 across indicators including debt service-to-revenue, PV of debt-to-exports, PV of debt-to-GDP, and debt service-to-exports. - Figures show the "most extreme shock" drivers including one-time depreciation and export shocks depending on the indicator. - Figure 4 qualifies the "Moderate" category for 2019–29 with thresholds: for PV debt/GDP and PV debt/exports thresholds x = 20 percent and y = 40 percent; for debt service/Exports and debt service/revenue thresholds x = 12 percent and y = 35 percent. - Probability-of-distress tool presented for Public and Publicly Guaranteed external debt under alternative scenarios, showing trajectories for Baseline, Historical scenario, Most extreme shock, and Threshold for 2019–29. ### Policy implications and recommendations (implied by authorities' statements and DSA results) - Prioritize concessional financing to preserve limited borrowing space and favorable debt terms. - Proceed with cancellation of identified non-concessional loans (ETON and EBOMAF). - If donor budget support or grants are delayed, consider calibrated engagement with non-traditional creditors or non-concessional financing while monitoring debt sustainability indicators. - Seek international assistance in the form of budget support, project grants, and infrastructure financing to advance the Pro-Poor Agenda without undermining medium-term debt sustainability. - Use stress-test outcomes and probability assessments to guide borrowing terms, composition (concessional vs non-concessional), and timing of financing operations. *Source: IMF staff report excerpt and associated Debt Sustainability Analysis tables and figures.* ### 1. Our Liberian authorities appreciate the candid discussions during the recent 2019 Article ### 1lbrea2019001 - 1. Our Liberian authorities appreciate the candid discussions during the recent 2019 Article IV Consultations ### Overview - Authorities value the Fund’s policy advice and seek continued collaboration to restore macroeconomic stability and achieve sustainable and inclusive economic growth. - The administration launched the Pro-poor Agenda for Prosperity and Development (PAPD 2019–23) in October 2018 with objectives including: macroeconomic empowerment and job creation; promotion of a cohesive society; provision of basic social services; creation of an enabling environment to foster peace and security; enforcement of the rule of law; and promotion of the private sector as the driver of growth. ### Recent Economic Developments and Outlook - Economic growth slowed from 2.5 percent in 2017 to 1.2 percent in 2018, driven by subdued demand for rubber and iron ore; gold production improved due to a slight increase in global prices. - Inflation accelerated from 13.9 percent in 2017 to 28 percent end 2018, triggered by a 27 percent depreciation of the Liberian dollar. - Current account deficit remained high at 23 percent of GDP in 2018 despite improvements in gold exports. - Declines in current transfers were driven mainly by lower aid flows and the withdrawal of the United Nations Mission in Liberia (UNMIL). - Foreign exchange reserves are projected to decline to 2.1 months of import cover by end 2019, from 3 months of imports at end 2018. - Authorities aim to accelerate economic growth beyond the 2 percent projected by staff for 2020 through prudent fiscal, monetary and structural policies, mobilizing additional fiscal resources, cutting non-productive recurrent spending, eliminating borrowing from the Central Bank, and avoiding reliance on high-cost external financing, with complementary support from the international community. ### Fiscal Policy and Debt Management - Fiscal reform program anchored on increased revenue collection and expenditure efficiency, including management of the wage bill. - Domestic Revenue Mobilization Strategy aims to raise revenue by 3 percent of GDP over the medium term, starting with a 0.25 percent increase in the next fiscal year. - New revenue measures: a new excise law passed in December 2018; introduction of electronic tax filing; establishment of a platform for payment of taxes via mobile money. - Additional tax measures: simplify the tax code; improve collection of property taxes; strengthen tax compliance and risk management; improve integrity of the taxpayer’s registry; improve processing of customs declarations. - Authorities instituted across-the-board cuts on goods and services including subsidies while preserving health, education, and security expenditure. - Rationalization of salaries for high-income public servants, including those in the SOE sector, and a hiring freeze; initiated payroll reforms to harmonize wages and remove discretionary management of allowances; TA requested from the Fund to evaluate social impact. - Reforms to public investment management to enhance implementation of donor-supported projects and align them to the national development plan; a donor database developed based on PIMA recommendations. - FY19/20 budget preparation prioritized: revenue estimates to be based on the previous year’s outturn reflecting macroeconomic fundamentals; intensified consultations among the three branches of government to achieve consensus. - Continued commitment to PFM reforms and development partner cooperation for IPFMRP II to address core PFM challenges including procurement capacity, investment in tax IT infrastructure, and improving cash management. - Amendments to the PFM Law submitted to the National Legislature to strengthen budget execution, arrears management, transparency and accountability. - Commitment to maintain debt at sustainable levels and preserve a moderate risk of debt distress; all new development projects to be financed using grants or concessional financing; new debt management strategy to be developed with TA support. - Authorities plan to cancel two loans that would have led to debt sustainability breaches. ### Monetary Policy - Central Bank of Liberia (CBL) committed to tightening monetary policy as necessary to ensure price and exchange rate stability while safeguarding foreign exchange reserves. - Fiscal and monetary authorities agreed on a policy coordination framework to implement recommendations of the last safeguards assessment, including promotion of the integrity of the CBL. - Commitments to strengthen internal controls, improve budget effectiveness and efficiency at the CBL, address Government obligations to the CBL, and prioritize recapitalization of the Central Bank. - Strengthening of the Liquidity Working Group (LWG) to improve liquidity forecasting and management framework. - New monetary instruments launched: Standing Credit Facility (SCF), Standing Deposit Facility (SDF), Intra-day Facility (IDF) and CBL bills, intended to help manage monetary conditions and pave the way toward an interest-based monetary framework. - Draft amendments to the CBL Act completed, including provisions for a monetary policy committee, expansion of the Bank’s mandate, restriction of CBL lending to government, a currency regime and assignment of the right to print the currency solely to the CBL; plan to submit the amended Act to the National Legislature for passage before the Legislature goes into recess in August 2019. - FX surrender requirement viewed as temporary; to be removed as foreign exchange inflows improve. Authorities will ensure recipients get the fair value of their Liberian dollar receipts based on the market exchange rate to mitigate negative impacts of the remittance split policy. ### Financial Sector Policies - Financial sector remains adequately capitalized with all banks operating above the 10 percent capital adequacy ratio (CARs), except one bank which remains below the minimum capital requirement of US$10 million. - CBL working with the undercapitalized bank to resolve the breach in an orderly and timely manner. - Ratio of non-performing loans (NPLs) to total loans declined from 14.7 percent in 2017 to 13.8 percent in 2018. - Authorities stepped up recovery efforts; banks have written-off a number of bad loans based on the CBL write-off policy; credit reference system being upgraded. - CBL coordinating with fiscal authorities to resolve direct and indirect Government of Liberia (GOL) obligations to commercial banks through issuance of 7-year bonds. - Draft AML/CFT Act completed and to be validated by stakeholders; when passed it will address FATF and regional concerns through legal framework for timely access to beneficial ownership and control of trust information and non-profit organizations. - CBL conducted an AML/CFT risk assessment and developed an AML/CFT on-site examination manual with IMF TA. - CBL and Fund TA working on revision of the Financial Institutions Act (FIA) to strengthen legal framework for banking regulation and supervision. - Measures taken to enhance transparency and disclosure standards via implementation of the International Financial Reporting Standards (IFRS). ### Structural Policies - Authorities committed to structural reforms to improve the business climate and deliver inclusive growth. - Business Climate Working Group (BCWG) comprising private sector, donor community, and government representatives established to identify binding constraints and propose improvements. - Executive Order issued to reduce administrative and processing requirements for businesses, concessionaires, and real property owners. - Abolished the import permit declaration system (IPD). - New Land Rights Act passed to provide certainty of ownership to agricultural concessionaires. - Drafted amendments to anti-corruption legislation in line with PAPD objectives to strengthen integrity of institutions, including the Judiciary. ### Conclusion - Authorities remain committed to PAPD objectives and enhancing sustainable and inclusive growth. - To anchor the reform agenda and address short- to medium-term macroeconomic challenges, authorities signaled a desire to negotiate an extended credit facility (ECF) arrangement with the Fund. - Authorities look forward to continued Fund engagement to address macroeconomic challenges and achieve sustainable and inclusive growth. *IMF Article IV Consultation—Liberia (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1lbrea2019001.pdf_