## 1lbrea2022002

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### Climate projections and global context
- IPCC projection under Shared Socio-economic Pathway (SSP) 1‒2.6: average global temperatures likely to rise and then stabilize at 1.8°C above preindustrial levels by mid-century.
- SSP 1‒2.6 assumptions: carbon emissions reduced to zero in the second half of this century.
- Sea level rise: likely to rise by 30‒60 cm (projections subject to considerable uncertainties).
- Climate change dimensions: rising temperatures, precipitation pattern changes, higher frequency of extreme weather events, and sea level rise.

### Climate change in Liberia — projections and exposure
- Historical and projected temperatures:
  - Warming in the 20th century in Liberia rose by about 0.7°C since the 1970s, reaching an average of 25.8°C.
  - Under SSP 1‒2.6, Liberia’s temperatures projected to increase by another 0.9°C to an average of 26.7°C through 2080‒2100.
  - The same SSP projects a global average increase of 0.6°C over the same period.
  - In less optimistic scenarios, Liberia’s average temperature could reach as high as 30°C.
- Precipitation and extremes:
  - Mean annual precipitation during 1991‒2020: 2,467 mm.
  - Higher frequency of heavy rains and flooding expected; some regions remain at risk of local droughts.
- Coastal exposure and displacement:
  - Coastline length: 560 km.
  - Liberia has the world’s 8th largest percentage of population living in low elevation coastal zones.
  - Past decade: 800 homes swallowed by the sea and 6,500 people displaced in West Point township of Monrovia.
  - World Bank (2021) Climate Risk Assessment: expected sea-level rise of 16 cm by 2030 in the Greater Monrovia area would put 675,000 people and 9,500 ha of land at risk.

### Vulnerability and readiness (ND-GAIN)
- ND-GAIN (Notre Dame Global Adaptation Initiative, 2022) rankings:
  - Overall rank: 174th (out of 182).
  - Vulnerability rank: 177th.
  - Readiness rank: 165th.
- ND-GAIN sector vulnerability scores (higher = higher vulnerability):
  - Vulnerability: 0.605
  - Health: 0.755
  - Human Habitat: 0.686
  - Food: 0.633
  - Ecosystem Services: 0.554
  - Water: 0.399
  - Infrastructure: -
- Drivers of low readiness: unfavorable business climate, low levels of education, pervasive corruption.
  - New business density and expected years of schooling among the lowest globally (World Bank, 2020).
  - Some 90 percent of Liberian people think that corruption is high (Center for Transparency and Accountability in Liberia).

### Expected sectoral impacts and livelihoods
- Health:
  - Stressed health sector; more frequent heavy rains and poor sanitation likely to increase vector-borne disease spread.
  - Low medical insurance coverage and low immunization rates.
- Agriculture and food security:
  - Agriculture: roughly one third of the economy and around 40 percent of employment.
  - Poverty rate in 2021: 51 percent.
  - Rice mostly imported; food import dependence raises exposure to foreign climate impacts.
  - Export composition (2020): cocoa 3.5 percent and rubber 11.5 percent of export earnings.
  - Low agriculture productivity likely to decline further due to more frequent extremes, underdeveloped irrigation and forecasting, increased pests and weeds.
- Fisheries:
  - Two thirds of animal protein intake comes from fish.
  - Higher temperatures tend to reduce fish populations and increase bacterial contamination.
- Water resources and sanitation:
  - Currently 70 percent of the population has access to improved water sources.
  - Heavier rains may overwhelm sanitation systems and worsen water quality; regional disparities could worsen.
- Coastal areas:
  - Coastal areas host almost 60 percent of the population and most economic activity.
  - Coastal flooding and beach erosion are occurring; growing coastal lowland settlement increases future displacement risk.
  - Tourism prospects may be damaged.

### Institutions and national policy framework
- Institutional arrangements:
  - National Climate Change Steering Committee (NCCSC): established 2010, chaired by the office of the President (or designate); supported by National Climate Change Secretariat (NCCS) housed in the Environment Protection Agency (EPA).
  - NCCSC and NCCS initially hardly operational; reinvigorated in 2014 with NAPA implementation.
  - EPA is Liberia’s Designated National Authority under the UNFCCC; MFDP chairs EPA’s Board.
  - EPA collaborates with MFDP, Forestry Development Authority, Ministry of Agriculture, National Disaster Management Agency, Ministry of Mines and Energy, and Ministry of Internal Affairs.
- National Policy and Response Strategy on Climate Change (NPRSCC) 2018:
  - Covers mitigation and adaptation; based on 27 existing national policy and strategy documents including initial NDC (Liberia 2015) and Liberia National Vision 2030.
  - NPRSCC Action Plan total cost: US$1,939.2 million (US$1,939.2 = US$700.0 adaptation + US$1,072.0 mitigation + US$167.3 cross-cutting).
    - Adaptation: US$700.0
    - Mitigation: US$1,072.0
    - Cross-cutting: US$167.3
  - Only US$700.0 million allocated to adaptation; majority allocated to mitigation.

### NPRSCC Action Plan — cost breakdown by category (US$ millions)
- Agriculture: Adaptation 30.1; Mitigation 57.0; Total 87.1
- Capacity development and training: Cross-cutting 58.0; Total 58.0
- Coastal areas: Adaptation 162.0; Total 162.0
- Communication, education, and awareness: Cross-cutting 2.1; Total 2.1
- Energy: Adaptation 30.1; Mitigation 32.0; Total 62.1
- Fishery: Adaptation 8.9; Total 8.9
- Forestry and Wildlife: Adaptation 13.0; Mitigation 156.0; Total 169.0
- Gender, HIV and AIDS: Cross-cutting 1.8; Total 1.8
- Health: Adaptation 21.5; Total 21.5
- Industry: Adaptation 15.4; Mitigation 32.0; Total 47.4
- Infrastructure: Adaptation 251.4; Total 251.4
- Mining: Adaptation 0.4; Mitigation 6.0; Total 6.4
- Research and development: Cross-cutting 47.0; Total 47.0
- Technology transfer: Cross-cutting 58.4; Total 58.4
- Tourism: Adaptation 45.2; Mitigation 20.0; Total 65.2
- Transport: Adaptation 53.8; Mitigation 593.0; Total 646.8
- Urbanization and settlement: Adaptation 35.0; Total 35.0
- Waste management: Mitigation 176.0; Total 176.0
- Water Resources: Adaptation 33.3; Total 33.3

### Key climate takeaways and implications
- Multidimensional risks: rising temperatures (potentially to 26.7°C or as high as 30°C), heavier precipitation events despite abundant mean rainfall (2,467 mm during 1991‒2020), and significant coastal exposure (560 km coastline; high share of population in low elevation coastal zones).
- High vulnerability (ND-GAIN vulnerability rank 177th) with low readiness (ND-GAIN readiness rank 165th) implies large potential economic and social costs.
- Priority adaptation areas: agriculture, fisheries, health, water, and coastal infrastructure due to importance for livelihoods and macroeconomic stability.
- Financing gap: NPRSCC Action Plan costed at US$1,939.2 million but only US$700.0 million allocated to adaptation, highlighting potential funding shortfalls for resilience.

### Liberia’s emissions profile and mitigation commitments
- Emissions and carbon sink:
  - Per capita CO2 emissions in 2018: 0.27 metric ton (mt).
  - Comparative per capita CO2 emissions in 2018: 0.76 mt in SSA, 6.42 mt in the European Union (EU), and 15.24 mt in the U.S.
  - Total emissions in 2018: 1,320 kt — equivalent to 0.0039 percent of global emissions and to the emissions of 87,000 U.S. residents.
  - Forest carbon uptake (INC and 2015 NDC): forest cover estimated to absorb 96,811 kt of CO2 per year.
  - Outlook: Liberia expected to remain a net carbon sink as long as deforestation is prevented.
- Revised NDC commitment (2030):
  - Reduce economy-wide GHG emissions by 64% below projected BAU by 2030 through:
    - unconditional GHG reductions of 10% below BAU => absolute emissions level of 11,187Gg CO2e in 2030;
    - additional 54% reduction conditional on international support => absolute emissions level of 4,537Gg CO2e in 2030.

### High-impact mitigation measures and energy/waste priorities
- Forest conservation and reforestation: largest mitigation impact; requires strict enforcement of forest protection laws and rigorous verification processes.
- Ongoing initiative: LiberTrace (DFID and EU funded Forestry Development Authority program) to reduce illegal logging via monitoring.
- Energy and waste mitigation priorities:
  - Improve energy efficiency and “leapfrog” the energy transition with international support.
  - Move away from traditional fuels (firewood and charcoal).
  - Produce palm-oil diesel to reduce petroleum product use.
  - Expand and rehabilitate hydro-electric power plants.
  - Improve waste management to mitigate methane emissions.
- Co-benefits: reduced import dependence and lower exposure to international fuel price volatility.
- Financing implication: forest protection could yield substantial income once carbon credit markets are developed, contingent on credible verification.

### Adaptation planning, barriers, and ongoing projects
- Adaptation milestones:
  - NAPA (2008).
  - NAP process initiated in 2010s; NAP (2020-2030) published in 2022.
  - Liberia’s first Adaptation Communications (AdCom) to the UNFCCC issued November 2021.
- NAPA priority projects and example costs:
  - Agriculture: Integrated Crop/Livestock Farming — duration: twenty-four months; estimated costs: US$5 million.
  - Meteorological: Improved Monitoring of Climate Change.
  - Coastal defense: Coastal Defense System for the Cities of Buchanan and Monrovia.
- Barriers to implementation (AdCom):
  - Financial: high costs, limited access to funding, lack of national budgetary support.
  - Information and Awareness: limited/inadequate information in rural areas.
  - Technical: limited technical expertise and technologies.
  - Legal and Regulatory: limited specific adaptation policies in some sectors.
  - Political: lack of political will.
- Externally supported projects:
  - Green Climate Fund (GCF) grants:
    - Monrovia Metropolitan Climate Resilience Project: approved 2021; expected completion 2027; implemented by UNDP; focuses on coastal defense structures, coastal zone management plan, and livelihood diversification.
    - Enhancing Climate Information Systems for Resilient Development in Liberia: promotes interlinked community and national early warning systems.
  - African Development Bank (AfDB): approved a grant-financed project in February 2022 with GCF as accredited agency.

### Climate finance, international support, and policy priorities
- To unlock international finance, Liberia should:
  - establish national entities accredited by the GCF;
  - meet transparency and governance standards required for climate finance and carbon credit verification;
  - address widespread corruption to increase partners’ willingness to provide financing.
- Allocation guidance:
  - Additional resources should primarily go toward adaptation, given Liberia’s status as a minimal emitter and net carbon sink but highly vulnerable.
  - Prioritize dual-purpose measures with low incremental cost (example: increasing access to electricity to replace polluting private generators).
  - Near-term priorities: enhance coastal protection and sanitation systems.
- Integration into national planning:
  - Revise the Pro-Poor Agenda for Prosperity and Development (PAPD) and public investment planning to systematically incorporate climate considerations (irrigation, drainage, upgraded extension services, climate-aware project evaluation, zoning, wetland protection, tackling illegal sand mining).
- International instruments:
  - Carbon markets: global emission trading systems could transfer resources to countries like Liberia that are large carbon sinks.
  - Interim financial recognition: development partners could reward Liberia’s mitigation contribution prior to a global trading system, conditional on credible verification and governance.
  - Technical assistance: support capacity building (e.g., Climate Public Investment Management Assessments) and preconditions for international climate financing (public financial management, governance, transparency).
  - IMF Resilience and Sustainability Trust (RST):
    - RST approved by IMF Executive Board in April 2022 to address long-term structural challenges including climate change.
    - RST expected to commence lending once a critical mass of resources is secured (expected for end-2022).
    - Liberia eligible for long-term RST loans on favorable terms, conditional on preparing high-quality policy measures, having a concurrent IMF-supported program, and demonstrating debt sustainability.

### Conclusions and recommended priorities on climate
- Liberia likely to be among the most climate-affected countries due to reliance of almost half the population on climate-sensitive sectors and weak defenses.
- Government actions recommended:
  - create preconditions for attracting more climate finance (GCF accreditation, carbon credit verification, anti-corruption measures);
  - allocate additional resources primarily to adaptation (currently receives less funding than mitigation);
  - sharpen prioritization of adaptation projects, focusing on immediate needs such as coastal protection and sanitation;
  - systematically integrate climate considerations into public investment, sectoral policies (notably agriculture), and administrative planning (zoning, wetland protection).
- International community role:
  - better recognize Liberia’s mitigation contribution in aid allocations or future carbon markets, subject to verification and governance assurances;
  - provide technical assistance to build adaptation capacity and meet preconditions for climate finance;
  - make RST resources available to Liberia once operational and preconditions met.

### Monetary policy modernization — context and recent performance
- Institutional reform:
  - Amended and restated CBL Act of 2020: enhanced independence; price stability as primary mandate; generally disallows financing the budget; provides for Monetary Policy Committee (MPC).
  - Modernization toward interest rate-based system initiated in 2019 with a policy rate, interest rate corridor, standing facilities, and CBL bills usage increased since 2019.
- Macroeconomic turbulence and stabilization:
  - 2019: inflation and exchange rate depreciation climbed to 30 percent; gross official reserves dropped to 2.2 months of imports; economy slid into recession.
  - Under IMF-supported ECF Arrangement signed December 2019:
    - Inflation declined from about 30 percent at program inception to 5.5 percent in December 2021.
    - Economy estimated to have expanded by 5.0 percent in 2021.
    - Projected growth: 3.7 percent in 2022 and 4.7 percent in 2023.
- Currency changeover to address banknote shortages:
  - Emergency order for LD 100 bills already received.
  - All other denominations to be introduced in the second half of 2022.
- Financial sector constraints:
  - Shallow markets; government securities issued only occasionally; no active secondary market.
  - Thin interbank market and limited intermediation weaken monetary transmission.
- Dollarization (over 2007–20 averages):
  - Deposit dollarization: 84 percent.
  - Credit dollarization: 91 percent.
- Dollarization consequences: weak transmission of domestic LD interest rates to dollar rates, higher exchange rate pass-through to domestic prices, constraints on lender-of-last-resort function, and loss of seigniorage.

### Ambiguities and operational issues in monetary framework
- CBL appears to follow both reserve money and interest rate operating targets, creating tensions when targeted interest rate does not generate targeted reserve money aggregate.
- CBL bills issued in fixed amounts and at fixed interest rates, limiting price discovery and money market development.
- Standing facilities underutilized; standing deposit facility (SDF) abandoned in 2020.
- Despite a 10-percentage points policy rate reduction from 30 percent in 2019 to 20 percent in November 2021, retail deposit and lending rates remained broadly unchanged.

### Empirical findings on indicators for inflation (VAR analysis, Jan 2007–Dec 2020)
- Data and method:
  - VAR on monthly data January 2007–December 2020; all data in natural logs and seasonally adjusted; VAR lag order by AIC; Granger causality tested with maximum lag length of 12 months (AIC).
- Correlations with CPI (Table 1):
  - Exchange rate (ER) correlation with CPI: 0.6708***.
  - Currency in circulation (CIC) correlation with CPI: 0.1924***.
  - Monetary base (MB) correlation with CPI: 0.0183.
  - M1 correlation with CPI: 0.2222***.
  - M2 correlation with CPI: 0.0984.
  - Aggregates including foreign-currency components are not significantly correlated with inflation.
- VAR Granger causality test results (Table 2):
  - VAR(CPI,CIC,ER): Money p-value 0.4555; ER p-value 0.0409**.
  - VAR(CPI,MB,ER): Money p-value 0.1133; ER p-value 0.0026***.
  - VAR(CPI,M1,ER): Money p-value 0.2696; ER p-value 0.0161**.
  - VAR(CPI,M2,ER): Money p-value 0.3675; ER p-value 0.0034***.
  - Interpretation: only the exchange rate has a statistically significant Granger effect on inflation in the baseline VAR (lag sensitivity noted).
- Impulse response analysis:
  - Shocks to exchange rate, domestic-currency component of narrow money, and currency in circulation have significant positive effects on inflation.
  - Exchange rate shock has the largest and most persistent effect.
  - Shock to currency in circulation becomes significant only after 13 months.
  - Shocks to other monetary aggregates have positive but statistically insignificant effects.
- Indicator guidance:
  - Primary indicator: exchange rate.
  - Secondary indicators: domestic-currency component of narrow money and currency in circulation.
  - Once flexible-rate CBL bill auctions are introduced, short-term interest rates could become valuable indicators.

### Recommended operational reforms for monetary policy
- Adopt a flexible reserve money targeting framework:
  - Reserve money as a medium-term indicative operating target while using interest-rate based instruments short term.
  - Allow short-term deviations to accommodate seasonality and autonomous factors.
  - Requires adjustment to IMF program conditionality that sets end-quarter point targets for NFA and NDA.
- Implement interest rate corridor system:
  - Resuscitate standing deposit and credit facilities; ensure accessibility and overnight operation with no quantity limits (SCF subject to collateral/haircuts).
  - Realign corridor if short-term rates persist near ceiling or floor; corridor repositioning signals stance.
- Improve CBL bills operations:
  - Variable rate tenders for two-weeks, 1-month, and 3-month maturities to promote price discovery and build LD yield curve.
  - Flexible-rate fixed-quantity auctions to offset autonomous factors on excess reserves.
- Streamline standing facility procedures:
  - Reduce administrative burden (delegate approvals), ensure free access to facilities to incentivize limited excess reserves.
- Liquidity management steps (Appendix I summary):
  - Step 1: Set reserve money target consistent with inflation path and policy objective.
  - Step 2: Derive target path for total bank reserves.
  - Step 3: Prepare short-term liquidity forecasts (weekly/monthly).
  - Step 4: Determine excess reserves = forecasts for total bank reserves − target path.
  - Step 5: Conduct monetary operations (announce CBL bills amount; let market determine price; allow multiple bids).
  - Step 6: Reassess assumptions quarterly/semi-annually and restart cycle if needed.
- Foreign exchange interventions:
  - Allow exchange rate flexibility; intervene only for disorderly conditions and to build international reserves; avoid using FX intervention for liquidity management where possible.
- Reserve requirements:
  - Use as supplementary tool while ensuring compliance and strict enforcement; review penalties for non-compliance.

### De-dollarization strategy and sequencing
- Background:
  - Authorities committed to raising share of wage bill paid in Liberian dollars from 20 percent to 50 percent; CBL committed to similar for its spending.
  - Progress: wage bill share rose from 20 percent to 35 percent but backtracked late 2020 due to insufficient sensitization and banknote shortages.
  - De-dollarization setback late 2019; share of foreign currency loans and deposits trending upward from 2021.
  - With macro stabilization and currency changeover rollout, re-initiation of de-dollarization is timely.
- Strategy principles:
  - Gradual, market-based de-dollarization; avoid forced measures (U.S. dollar legal-tender status constrains forced measures).
  - Requires government leadership, central bank support, public buy-in, patience and persistence.
- Policy package elements:
  - Build track-record of macroeconomic and price stability.
  - Execute orderly currency changeover and guard against excessive currency injection.
  - Improve monetary policy framework, liquidity analysis, monitoring, and operational tools.
  - Prudential regulations to reduce banks’ incentives for foreign currency liabilities and lending:
    - Short term: harmonize reserve requirement ratios on Liberian dollar and U.S. dollar liabilities.
    - Medium/long term: consider higher reserve requirements on U.S. dollar liabilities than on Liberian dollar liabilities.
    - Other measures: higher liquidity requirements on U.S. dollar liabilities, higher capital requirements, provisions against FX exposure, extra capital on open FX positions.
  - Financial market development and local-currency instruments: rebalance debt from U.S. dollar to Liberian dollar; consider variable-rate auctions, price-indexed instruments, regular issuance of short- to medium-term local-currency debt.
  - Government operations in Liberian dollars where possible: progressively raise wage bill share in LD to 50 percent; collect taxes increasingly in LD; encourage LD-denominated contracts with careful sensitization.
  - Complementary administrative measures and public sensitization.
- Cross-country lessons: macro stability, market-based prudential measures, and domestic-currency market development critical; forced conversions historically failed.

### Public investment, infrastructure, and growth potential
- Growth and poverty context:
  - Real GDP per capita in 2021: US$680 (35th lowest out of 43 SSA countries; SSA average US$1,600).
  - Poverty rate in 2021: 51 percent (SSA average 44 percent).
  - Government target: at least 5.8 percent per year by 2023 (PAPD).
- Growth record 2003–2021:
  - Average real GDP growth: 4.2 percent (2003–2021); per capita 1.1 percent.
  - 2003–2013: strong phase — 6.7 percent annual growth.
  - 2014–2021: weak phase — economy contracted by -0.6 percent per year.
- Sources of growth (growth accounting, 2003–2019):
  - Annualized GDP growth: 4.5%
  - Contributions:
    - Capital: 0.9%
    - Employment: 1.7%
    - Human Capital: 0.4%
    - TFP: 1.5%
  - Subperiods:
    - 2003-2014: GDP 6.5% — Capital 0.5%; Employment 1.8%; Human Capital 0.4%; TFP 3.8%
    - 2014-2019: GDP -0.1% — Capital 1.6%; Employment 1.5%; Human Capital 0.4%; TFP -3.6%
- Human capital and education indicators:
  - Net enrollment: 51 percent.
  - Expected years of schooling: 4.2 years (lowest in SSA; SSA average 8.3 years).
  - Learning-adjusted years of schooling: 2.2 years.
  - Public expenditure on education: about half SSA or LIC averages.
  - Teacher qualifications (2016): 50 percent of early childhood staff, 62 percent of primary teachers, 34 percent of junior and senior high school teachers have minimum qualifications.
  - Matching SSA spending ratio would cost 1.4 percent of GDP; matching SSA spending per student (PPP-adjusted) would cost almost 2.5 percent of GDP.
  - Efficiency recommendations: reallocate resources to education, shift spending from wages to materials/infrastructure, scale up teacher training and school feeding, clean EMIS data to remove ghost learners.
- Physical capital and public investment:
  - Lowest percentage of paved roads among selected ECOWAS countries.
  - Electricity production/consumption extremely low; tariffs extremely high (tariff cut of about one third in December 2021).
  - Total public investment around 10 percent of GDP in 2021; only 0.2 percent of GDP financed from central government budget; remainder by development partners.
  - ICOR indicates productivity of new investment fell sharply and is now the third lowest in SSA.
  - IMF’s 2016 PIMA: overall efficiency gap of 38 percent vs SSA and LIC averages.
  - PIMA institutional shortcomings: weak multi-year budgeting, poor central-local project coordination, insufficient project selection alignment, lack of project monitoring (~60 percent of donor projects omitted), low transparency, insufficient national co-financing, mismanaged public entities (example: LEC).
- SECRAMP case:
  - Original financing expectation: US$118 million.
  - Funding mechanism: private financing repaid with National Road Fund revenues from a US$0.30 per gallon fuel levy (estimated annual yield ~US$30 million).
  - Timeline: approved December 2018; construction expected 2019; restructured; new full completion scheduled for 2026 (2 years later than originally planned).

### Business climate, financial sector, and reform priorities
- Key constraints:
  - Bank credit: 17 percent of GDP (SSA average ~40 percent).
  - Large gender gap in access to finance.
  - Access to finance, electricity availability, taxation, access to land, customs/trade regulations are top constraints (World Bank Enterprise Survey, 2017).
  - Only 20 percent of land deeded.
  - Absence of bankruptcy legislation; difficult access to laws/regulations; regulatory adoption without consultation; excessive import inspections; Supreme Court case backlogs.
- Reforms underway and recommended:
  - Business Climate Working Group (BCWG) and Executive Order No. 96 to streamline administrative requirements.
  - Digitalization: national electronic payments switch; digital credit and collateral registry at CBL.
  - Priority IMF-supported program reforms: facilitate trade, digitalize business registration, strengthen Commercial Court; implementation plan target by December 2022.
  - Financial sector recommendations: resolve NPLs using existing tools (exclude delinquent borrowers), strengthen courts to induce lending, financial literacy programs, connect Village Saving Associations to formal banking.
  - Other reforms: land titling, bankruptcy legislation, improve regulatory processes, risk-based import inspections, reduce administrative burdens and corruption.

### Growth outlook and central illustrative scenario
- Assessment:
  - Liberia can return to better growth performance; negative shocks of the last decade unlikely to repeat.
  - Decline in TFP, policy slippages, declining investment efficiency, and slow educational progress were key drags.
- Central illustrative potential growth scenario:
  - Potential GDP growth: 5.5 percent per year.
  - Assumptions:
    - TFP growth reverts to post-war average (1.5% contribution).
    - Employment grows at same pace as population.
    - Capital grows at historical pace.
    - Educational attainment gradually catches up with Ethiopia level.
- Table 2 drivers (growth contributions):
  - 2.6% population growth (UN) — 1.4% contribution
  - 3.1% capital accumulation (historical) — 1.4% contribution
  - 2.1% human capital growth (catching up with Ethiopia) — 1.2% contribution
  - 1.5% TFP growth (2003-19 average) — 1.5% contribution
  - GDP growth — 5.5% growth
- Key policy recommendations (summary):
  - Prioritize and implement business climate reform package with concrete actions, milestones, and responsibilities by December 2022.
  - Advance financial sector reforms to raise bank credit above 17 percent of GDP and reduce gender gap in finance access.
  - Fully apply existing tools to resolve non-performing loans (including exclusion of delinquent borrowers).
  - Strengthen Commercial Court and judicial appeals mechanisms.
  - Implement financial literacy programs and link Village Saving Associations with formal banking.
  - Address land titling, adopt bankruptcy legislation, improve access to laws/regulations, require consultation and impact assessment for regulations, and adopt risk-based import inspection approaches.
  - Mobilize additional resources for human capital and public investment while addressing inefficiencies and no-cost reforms.

*Source: 1lbrea2022002 - IMF country chapter content on Liberia’s climate, mitigation and adaptation priorities, and macroeconomic/monetary policy analysis.*

### 1. Annual Average Temperatures Under Different Global Scenarios, 1900-2100 ________________  3

### 1. Annual Average Temperatures Under Different Global Scenarios, 1900-2100

### A. Overview and global context
- The Intergovernmental Panel on Climate Change projects average global temperatures are likely to rise and then stabilize at 1.8°C above preindustrial levels by mid-century in the “Shared Socio-economic Pathway (SSP) 1‒2.6 scenario.”
- The SSP 1‒2.6 scenario assumes carbon emissions are reduced to zero in the second half of this century.
- Sea levels are likely to rise by 30‒60 cm (projections subject to considerable uncertainties).
- Climate change involves multidimensional changes: rising temperatures, precipitation pattern changes, higher frequency of extreme weather events, and sea level rise.

### B. Climate change in Liberia — key projections and observations
- Historical and projected temperature changes:
  - Warming in the 20th century in Liberia rose by about 0.7°C since the 1970s, reaching an average of 25.8°C.
  - In the SSP 1‒2.6 scenario, Liberia’s temperatures are projected to increase by another 0.9°C to an average of 26.7°C through 2080‒2100.
  - The same SSP projects a global average increase of 0.6°C over the same period.
  - In less optimistic scenarios, Liberia’s average temperature could reach as high as 30°C.
- Precipitation and extreme events:
  - Mean annual precipitation during 1991‒2020: 2,467 mm.
  - Liberia is likely to face a higher frequency of heavy rains and flooding, with some regions still at risk of local droughts.
- Sea level rise and exposure:
  - Liberia has 560 km of coastline.
  - Liberia has the world’s 8th largest percentage of population living in low elevation coastal zones.
  - Over the past decade, 800 homes have been swallowed by the sea and 6,500 people displaced in the West Point township of Monrovia.
  - World Bank’s 2021 Climate Risk Assessment: expected sea-level rise of 16 cm by 2030 in the Greater Monrovia area would put 675,000 people and 9,500 ha of land at risk.

### C. Vulnerability and readiness (ND-GAIN)
- ND-GAIN Country Index (Notre Dame Global Adaptation Initiative, 2022) ranks 182 countries using 20 years of data across 45 indicators.
  - Liberia overall rank: 174th.
  - Vulnerability rank: 177th.
  - Readiness rank: 165th.
- ND-GAIN sector scores for Liberia (higher number = higher vulnerability):
  - Vulnerability: 0.605
  - Health: 0.755
  - Human Habitat: 0.686
  - Food: 0.633
  - Ecosystem Services: 0.554
  - Water: 0.399
  - Infrastructure: -
- Drivers of low readiness include an unfavorable business climate, low levels of education, and pervasive corruption.
  - New business density and expected years of schooling are among the lowest in the world (World Bank, 2020).
  - Some 90 percent of Liberian people think that corruption is high (Center for Transparency and Accountability in Liberia).

### D. Expected impacts on sectors and livelihoods
- Health:
  - The health sector is already stressed; more frequent heavy rains and poor sanitation will likely increase spread of vector-borne diseases.
  - Most people are not covered by medical insurance; immunization rates are low.
- Agriculture and food security:
  - Agriculture comprises roughly one third of the economy and accounts for around 40 percent of employment.
  - Poverty rate in 2021: 51 percent.
  - Rice is mostly imported; food import dependence raises exposure to climate impacts in exporting countries.
  - Export composition (2020): cocoa 3.5 percent and rubber 11.5 percent of export earnings.
  - Agriculture productivity is very low and likely to decrease further due to more frequent extreme weather, underdeveloped irrigation and weather forecasting, and increased pest and weed pressures.
- Fisheries:
  - Two thirds of animal protein intake in Liberia comes from fish.
  - Higher temperatures tend to reduce fish populations and increase contamination by bacteria.
- Water resources:
  - Currently 70 percent of the population has access to improved water sources.
  - Regional disparities exist and could worsen; heavier rains may overwhelm sanitation systems and worsen water quality.
- Coastal areas and displacement:
  - Coastal areas host almost 60 percent of the population and most economic activity.
  - Coastal flooding and beach erosion are already occurring, with growing population in coastal lowlands attracting settlers despite risks.
  - Tourism prospects may be damaged.

### E. Institutions and policy framework
- Institutional arrangements:
  - National Climate Change Steering Committee (NCCSC): established 2010, chaired by the office of the President (or designate); supported by the National Climate Change Secretariat (NCCS) housed in the Environment Protection Agency (EPA).
  - NCCSC and NCCS were hardly operational initially due to funding and capacity constraints; reinvigorated in 2014 with NAPA implementation.
  - EPA is Liberia’s Designated National Authority under the UNFCCC; MFDP chairs EPA’s Board.
  - EPA collaborates with MFDP, Forestry Development Authority, Ministry of Agriculture, National Disaster Management Agency, Ministry of Mines and Energy, and Ministry of Internal Affairs.
- National policy:
  - National Policy and Response Strategy on Climate Change (NPRSCC) of 2018 covers mitigation and adaptation and is based on 27 existing national policy and strategy documents, including the initial NDC (Liberia 2015) and Liberia National Vision 2030.
  - NPRSCC Action Plan total cost: US$1,939.2 million (US$1,939.2 = US$700.0 adaptation + US$1,072.0 mitigation + US$167.3 cross-cutting).
    - Adaptation: US$700.0
    - Mitigation: US$1,072.0
    - Cross-cutting: US$167.3
  - Only US$700 million allocated to adaptation; majority allocated to mitigation (transport emission containment and rainforest preservation).
- Action Plan cost breakdown by category (US$ millions):
  - Agriculture: Adaptation 30.1; Mitigation 57.0; Total 87.1
  - Capacity development and training: Cross-cutting 58.0; Total 58.0
  - Coastal areas: Adaptation 162.0; Total 162.0
  - Communication, education, and awareness: Cross-cutting 2.1; Total 2.1
  - Energy: Adaptation 30.1; Mitigation 32.0; Total 62.1
  - Fishery: Adaptation 8.9; Total 8.9
  - Forestry and Wildlife: Adaptation 13.0; Mitigation 156.0; Total 169.0
  - Gender, HIV and AIDS: Cross-cutting 1.8; Total 1.8
  - Health: Adaptation 21.5; Total 21.5
  - Industry: Adaptation 15.4; Mitigation 32.0; Total 47.4
  - Infrastructure: Adaptation 251.4; Total 251.4
  - Mining: Adaptation 0.4; Mitigation 6.0; Total 6.4
  - Research and development: Cross-cutting 47.0; Total 47.0
  - Technology transfer: Cross-cutting 58.4; Total 58.4
  - Tourism: Adaptation 45.2; Mitigation 20.0; Total 65.2
  - Transport: Adaptation 53.8; Mitigation 593.0; Total 646.8
  - Urbanization and settlement: Adaptation 35.0; Total 35.0
  - Waste management: Mitigation 176.0; Total 176.0
  - Water Resources: Adaptation 33.3; Total 33.3

### F. Key takeaways and implications
- Liberia faces multidimensional climate risks: rising temperatures (potentially to 26.7°C or as high as 30°C), heavier precipitation events despite abundant mean rainfall (2,467 mm during 1991‒2020), and significant coastal exposure (560 km coastline; high share of population in low elevation coastal zones).
- High vulnerability (ND-GAIN vulnerability rank 177th) combined with low readiness (ND-GAIN readiness rank 165th) implies large potential economic and social costs from climate change.
- Agriculture, fisheries, health, water, and coastal infrastructure are priority areas for adaptation due to their centrality for livelihoods and macroeconomic stability.
- The NPRSCC Action Plan is costed at US$1,939.2 million but allocates only US$700.0 million to adaptation, highlighting potential funding gaps for resilience-building measures.

*Source: 1lbrea2022002 - 1. Annual Average Temperatures Under Different Global Scenarios, 1900-2100*

### 21.      Liberia is a net carbon sink, emitting less GHG than it absorbs. In 2018, Liberia’s per

### Liberia is a net carbon sink, emitting less GHG than it absorbs.

### Emissions profile and carbon sink
- Liberia’s per capita CO2 emissions in 2018: 0.27 metric ton (mt).
- Comparative per capita CO2 emissions in 2018: 0.76 mt in SSA, 6.42 mt in the European Union (EU), and 15.24 mt in the U.S.
- Total emissions in 2018: 1,320 kt — equivalent to 0.0039 percent of global emissions and to the emissions of 87,000 U.S. residents.
- Forest carbon uptake (Initial National Communication (INC) and 2015 NDC): forest cover estimated to absorb 96,811 kt of CO2 per year.
- Outlook: Liberia is expected to remain a net carbon sink as long as deforestation is prevented, even as economic development raises emissions.

### Mitigation commitments (NDC)
- Liberia’s revised NDC commitment: “reducing its economy-wide greenhouse gas emissions by 64% below the projected business-as-usual (BAU) level by 2030, through a combination of the following:
  - unconditional GHG reductions of 10% below BAU, resulting in an absolute emissions level of 11,187Gg CO2e in 2030;
  - with an additional 54% reduction conditional upon international support, which would result in an absolute emissions level of 4,537Gg CO2e in 2030.”

### Highest-impact mitigation measures and implementation needs
- Forest conservation and reforestation are identified as having the largest mitigation impact.
- Required actions to achieve goals:
  - strict implementation and rigorous enforcement of forest protection laws;
  - establishment of rigorous verification processes to credibly document preservation and reforestation achievements.
- Ongoing initiatives:
  - LiberTrace (DFID and EU funded Forestry Development Authority program) to reduce illegal logging by monitoring logging activity.
- Financing implication: protecting forests could yield substantial income once carbon credit markets are developed, contingent on credible verification.

### Mitigation from the energy and waste sectors
- Priority energy-related mitigation actions:
  - improve energy efficiency and “leapfrog” the energy transition with international support;
  - move away from traditional fuels (firewood and charcoal);
  - produce palm-oil diesel to reduce petroleum product use;
  - expand and rehabilitate hydro-electric power plants;
  - improve waste management to mitigate methane emissions.
- Co-benefits: reduced import dependence and lower exposure to international fuel price volatility.

### Adaptation strategy and plans
- Adaptation urgency: despite mitigation efforts, scaling up adaptation is urgent due to high vulnerabilities and low preparedness.
- Key adaptation documents and milestones:
  - NAPA (2008);
  - National Adaptation Plan (NAP) process initiated in 2010s; NAP (2020-2030) published in 2022;
  - Liberia’s first Adaptation Communications (AdCom) to the UNFCCC issued in November 2021.
- NAPA prioritized projects across eight vulnerable sectors; top priorities include:
  - Agriculture: Integrated Crop/Livestock Farming — duration: twenty-four months; estimated costs: US$5 million.
  - Meteorological: Improved Monitoring of Climate Change.
  - Coastal defense: Coastal Defense System for the Cities of Buchanan and Monrovia.
- Table 3 priority-sector projects (NAPA): Agriculture (Integrated crop/livestock farming); Forestry and wetlands (Switching from fossil fuel based to biomass-based energy products); Fisheries (Promoting sustainable fishing practices); Energy (Promoting energy efficiency and conservation); Water (Awareness and sensitization about the importance of water resource management); Coastal zones (Development of an integrated coastal zone management plan); Meteorological (Rebuilding the national meteorological monitoring network); Public health (Use of insecticide treated materials).

### Barriers to adaptation implementation
- Reported barrier categories and specific barriers (AdCom):
  - Financial: High cost of implementation of adaptation plans and projects; Limited access to funding and lack of national budgetary support.
  - Information and Awareness: Limited and inadequate information and awareness in the rural areas of Liberia.
  - Technical: Limited technical expertise and technologies in most of the different adaptation sectors or disciplines.
  - Legal and Regulatory: Limited specific adaptation policies or frameworks for some sectors.
  - Political: Lack of political will.
- Observed implementation gaps: limited sense of urgency and limited political will; many NAPA proposals only started rollout years after initial proposal.

### Ongoing and recent externally supported adaptation projects
- Green Climate Fund (GCF) grants:
  - Monrovia Metropolitan Climate Resilience Project: approved in 2021; expected to be completed in 2027; implemented by UNDP; focuses on coastal defense structures, coastal zone management plan, and livelihood diversification.
  - Enhancing Climate Information Systems for Resilient Development in Liberia: promotes interlinked community and national early warning systems.
- African Development Bank (AfDB): approved a grant-financed project in February 2022 with the GCF as the accredited agency.

### Climate policy priorities and resource allocation
- To unlock additional international finance, Liberia should:
  - establish national entities accredited by the GCF to oversee climate-change projects;
  - meet transparency and governance standards required for climate finance and carbon credit verification;
  - address widespread corruption to increase partners’ willingness to provide financing.
- Allocation guidance:
  - additional resources should primarily go toward adaptation, since Liberia is a minimal emitter and a net carbon sink but highly vulnerable.
  - prioritize dual-purpose measures with low incremental cost (example: increasing access to electricity to replace polluting private generators).
  - prioritize among adaptation projects given constrained resources; suggested near-term priorities include enhancing coastal protection and sanitation systems.
- Integration into national planning:
  - revise the Pro-Poor Agenda for Prosperity and Development (PAPD) and public investment planning to systematically incorporate climate considerations (e.g., irrigation, drainage, upgraded extension services, climate-aware project evaluation, zoning, wetland protection, and tackling illegal sand mining).

### International support and financing instruments
- Carbon markets: development of global emission trading systems would create incentives to cut emissions cost-effectively and could transfer resources to countries like Liberia that are large carbon sinks.
- Interim financial recognition: development partners could reward Liberia’s mitigation contribution prior to a global trading system, conditional on credible verification, institutional quality, and low corruption.
- Technical assistance: development partners should support capacity building (e.g., Climate Public Investment Management Assessments) and help meet preconditions for international climate financing (public financial management, governance, transparency).
- IMF Resilience and Sustainability Trust (RST):
  - RST approved by IMF Executive Board in April 2022 to address long-term structural challenges including climate change;
  - RST expected to commence lending once a critical mass of resources is secured, expected for end-2022;
  - Liberia, as a low-income country, is eligible for long-term RST loans on favorable terms, conditional on: preparing a package of high-quality policy measures consistent with the RST’s purpose; having a concurrent IMF-supported program; and demonstrating that its debt is sustainable.

### Conclusions and recommended priorities
- Climate vulnerability: Liberia is likely to be one of the world’s most climate change affected countries due to reliance of almost half the population on climate-sensitive sectors and weak defenses (e.g., sanitation systems), compounded by high corruption, unfavorable business climate, and low educational attainment.
- Government actions recommended:
  - create preconditions for attracting more climate finance (GCF accreditation, carbon credit verification, anti-corruption measures);
  - allocate additional resources primarily to adaptation (which currently receives less funding than mitigation);
  - sharpen prioritization of adaptation projects, focusing on immediate needs such as coastal protection and sanitation;
  - systematically integrate climate considerations into public investment, sectoral policies (notably agriculture), and administrative planning (e.g., zoning, wetland protection).
- International community role:
  - better recognize Liberia’s mitigation contribution in aid allocations or future carbon markets, subject to verification and governance assurances;
  - provide technical assistance to build adaptation capacity and help meet preconditions for climate finance;
  - make RST resources available to Liberia once operational and preconditions are met.

*Source: IMF country chapter content on Liberia’s climate change mitigation and adaptation priorities.*

### 1.      Like many central banks in low-income countries, the Central Bank of Liberia (CBL) is

### 1lbrea2022002 - 1.      Like many central banks in low-income countries, the Central Bank of Liberia (CBL) is

### Background and context
- Liberia is modernizing its monetary policy framework to better anchor inflation and promote macroeconomic stability, amid legacy macroeconomic instability, severe dollarization, shallow financial markets, and previous shortages of usable Liberian dollar banknotes.
- Key institutional reforms:
  - Amended and restated CBL Act of 2020: enhanced institutional and operational independence; sets price stability as the primary mandate; generally disallows providing financing for the budget; provides for establishment of the Monetary Policy Committee (MPC).
  - Monetary policy modernization initiated in 2019 toward an interest rate-based system with a policy rate, an interest rate corridor, standing credit and deposit facilities, and increased use of CBL bills as a key instrument since 2019.

### Recent macroeconomic performance and constraints
- Macroeconomic turbulence in 2019:
  - Inflation and exchange rate depreciation climbed to 30 percent.
  - Gross official foreign reserves dropped to 2.2 months of imports.
  - Economy slid into recession.
- Stabilization under IMF-supported program (ECF Arrangement signed December 2019):
  - Inflation declined from about 30 percent at program inception to 5.5 percent in December 2021.
  - Economy estimated to have expanded by 5.0 percent in 2021.
  - Projected growth: 3.7 percent in 2022 and 4.7 percent in 2023.
- Currency changeover to address shortage of usable Liberian dollar banknotes:
  - Emergency order for LD 100 bills already received.
  - All other denominations to be introduced in the second half of 2022.
- Financial sector constraints:
  - Shallow financial markets; government securities issued only occasionally; no active secondary market.
  - Thin interbank market and limited financial intermediation weaken monetary transmission.
- Degree of dollarization (over 2007–20 averages):
  - Deposit dollarization: 84 percent.
  - Credit dollarization: 91 percent.
- Dollarization consequences: weak transmission of domestic LD interest rates to dollar rates and real exchange rate, higher exchange rate pass-through to domestic prices, constraints on lender-of-last-resort function, and loss of seigniorage.

### Ambiguities in current monetary policy framework
- CBL appears to follow both a reserve money and an interest rate operating target, creating tensions when the targeted interest rate does not generate the targeted reserve money aggregate.
- Monetary operations issues:
  - CBL bills issued in fixed amounts and at fixed interest rates, limiting price discovery and money market development.
  - Despite a 10-percentage points policy rate reduction from 30 percent in 2019 to 20 percent in November 2021, retail deposit and lending rates remained broadly unchanged.
  - Standing facilities underutilized; standing deposit facility (SDF) abandoned in 2020.

### Recommendations for enhancing the monetary policy framework
- Adopt a flexible reserve money targeting framework:
  - Reserve money as a medium-term indicative operating target while using interest-rate based instruments in the short term.
  - Allow short-term deviations from the reserve money path to accommodate seasonality and autonomous factors.
  - Requires adjustment to current IMF program conditionality that sets end-quarter point targets for net domestic assets and net foreign assets of the CBL.
- Implement the flexible reserve money target within an interest rate corridor system:
  - Resuscitate the interest rate corridor with standing deposit and credit facilities to limit short-term interest rate volatility and anchor market expectations.
  - Regularly realign the corridor if short-term rates persist near ceiling or floor; corridor repositioning signals policy stance.
- Streamline operational procedures for standing facilities:
  - Reduce administrative burden (e.g., delegate approval to directors’ level).
  - Ensure facilities are freely accessible and overnight with no quantity limits, except SCF subject to collateral availability and haircuts.
  - Accessibility incentivizes banks to hold limited excess reserves.
- Improve CBL bills operations:
  - Consider variable rate tenders for two-weeks, 1-month, and 3-month maturities to promote price discovery, build a Liberian dollar yield curve, and support money market development.
  - Use flexible-rate fixed-quantity auctions to offset autonomous factors on excess reserves and keep total reserves consistent with reserve money target.

### Indicator selection and empirical analysis for guiding policy
- Approach:
  - Use multiple indicator framework rather than rigid quantitative intermediate targets.
  - Evaluate predictive power of monetary aggregates (CIC, MB, M1, M2) with and without foreign currency components and the exchange rate for inflation (CPI) using VAR analysis on monthly data January 2007–December 2020.
  - All data in natural logs and seasonally adjusted; VAR lag order selected by AIC; Granger causality tested with maximum lag length of 12 months (AIC).
- Main empirical findings:
  - Correlation with CPI (Table 1):
    - Exchange rate (ER) correlation with CPI: 0.6708***.
    - Currency in circulation (CIC) correlation with CPI: 0.1924***.
    - Monetary base (MB) correlation with CPI: 0.0183.
    - M1 correlation with CPI: 0.2222***.
    - M2 correlation with CPI: 0.0984.
    - Note: aggregates that include foreign-currency components are not significantly correlated with inflation.
  - VAR Granger causality test results (Table 2):
    - For VAR(CPI,CIC,ER): Money p-value 0.4555; Exchange Rate (ER) p-value 0.0409**.
    - For VAR(CPI,MB,ER): Money p-value 0.1133; ER p-value 0.0026***.
    - For VAR(CPI,M1,ER): Money p-value 0.2696; ER p-value 0.0161**.
    - For VAR(CPI,M2,ER): Money p-value 0.3675; ER p-value 0.0034***.
    - Interpretation: only the exchange rate has a statistically significant Granger effect on inflation in the baseline VAR (lag length sensitivity noted).
  - Impulse response analysis:
    - Shocks to the exchange rate, domestic-currency component of narrow money, and currency in circulation have significant positive effects on inflation.
    - Exchange rate shock has the largest and most persistent effect.
    - Shock to currency in circulation becomes significant only after 13 months.
    - Shocks to other monetary aggregates have positive but statistically insignificant effects.
- Implication: Exchange rate is the strongest predictor of future inflation; domestic-currency narrow money and currency in circulation also contain useful information.

### Operational and policy implications
- Emphasize exchange rate monitoring as a key indicator for inflation risks in a highly dollarized economy.
- Use multiple indicators—exchange rate, domestic-currency narrow money, and currency in circulation—rather than relying on monetary aggregates that include foreign-currency components.
- Modernize monetary operations (interest rate corridor, variable-rate CBL bill auctions, accessible standing facilities) to improve price discovery, reduce short-term interest rate volatility, and strengthen transmission in a shallow financial market environment.
- De-dollarization efforts should be sequenced with currency changeover and strengthened monetary policy credibility; monitoring and further analysis needed as public confidence in macro stability deepens.

*Prepared by Thabang Molise. International Monetary Fund.*

### 18.      This empirical analysis suggests that the exchange rate, domestic-currency component

### 18.      This empirical analysis suggests that the exchange rate, domestic-currency component 
of narrow money and currency in circulation could serve as valuable indicator variables to guide the conduct of monetary policy in Liberia.

### Empirical findings and indicator guidance
- Exchange rate has greater predictive power for inflation than:
  - the domestic-currency component of narrow money, and
  - currency in circulation.
- Recommended indicator hierarchy:
  - Primary indicator variable: exchange rate.
  - Secondary indicator variables: domestic-currency component of narrow money and currency in circulation.
- Once flexible-rate CBL bill auctions are introduced, short-term interest rates could become valuable indicator variables.
- Indicator variables should be used as timely proxies for variables with limited data availability or long reporting lags (Masuch et al., 2003).
- Indicators can provide information on monetary conditions and the nature of shocks hitting the economy but:
  - They should not be viewed as target variables to be rigorously pursued by the CBL or as strict intermediate targets (Laurens et al., 2015).

### VAR and robustness of impulse-response analysis
- Identification: VAR impulse responses use Cholesky decomposition with ordering: money → exchange rate → inflation.
- Rationale: high exchange rate pass-through in Liberia makes it plausible that inflation responds contemporaneously to exchange rate and money.
- Robustness checks:
  - Results with different ordering schemes are qualitatively similar to reported results.
  - Impulse responses also estimated using local projections (Jordà, 2005).
- Monetary aggregates reported for impulse responses (MB, M1, M2) include only domestic-currency components for brevity.
  - Monetary aggregates that include foreign-currency components have a positive but statistically insignificant effect on inflation.
- Figure evidence: Impulse responses of CPI to one S.D. innovations in ER and money aggregates estimated with:
  - standard VAR (green dotted lines),
  - Jordà’s (2005) local projection method (blue solid lines),
  - 90 percent significance confidence bands shown (red dotted lines).

### Flexible reserve money targeting and transition to interest-rate framework
- Proposed flexible reserve money targeting framework:
  - Provides a seamless transition to a full-fledged interest-rate based approach.
  - Gives the CBL time to develop market infrastructure: money and interbank markets, yield curve, stronger interest rate channel, more predictable money demand.
  - Lowers the risk that banks invest in CBL bills in full-allotment auctions rather than lend.
- Transition mechanics:
  - As markets develop, CBL could deemphasize reserve money as the operating target and move to an interest rate-based framework.
  - Interest rates on short-term CBL bills auctioned on a full-allotment basis would serve as the monetary policy rate and be kept toward the mid-point of the interest rate corridor.
  - IMF-supported program would need redesign and drop any explicit or implicit reserve money targets when interest-rate framework adopted.

### Implementing monetary policy under reserve money operating-target framework
- Core objective: effective management of liquidity in the banking sector to ensure adequate liquidity at all times.
- Price stability promoted:
  - Directly via liquidity management operations’ impact on domestic component of money supply.
  - Indirectly via impact on exchange rate.
- Practical liquidity management steps:
  - Derive target path for total bank reserves consistent with medium-term reserve money target and forecasts for currency in circulation and cyclical patterns.
  - Compare with short-term forecast for bank reserves to compute excess reserves.
  - Use CBL-bill auctions to manage excess reserves so reserve money returns to target path over time.
- Capacity requirements:
  - Strong capacities for liquidity monitoring and forecasting are essential.
  - CBL should regularly review and upgrade its liquidity monitoring and forecasting framework.
  - Timely high-frequency data are needed; formalize data sharing within CBL and between CBL and Ministry of Finance and Development Planning.
  - IMF technical assistance provided on improving liquidity monitoring and forecasting framework (November 2021 TA Report).

### Foreign exchange interventions and reserve requirements
- Foreign exchange interventions:
  - CBL should continue to allow exchange rate flexibility.
  - Intervene only to address disorderly market conditions and to steadily build international reserves and inject domestic currency in line with economic needs.
  - FX purchases generally reserved for building reserves and injecting domestic currency; FX intervention for liquidity management should be avoided to the extent possible.
- Reserve requirements as a supplementary tool:
  - Appropriate where financial markets are underdeveloped and market-based tools are limited.
  - To be effective, ensure all banks comply and move away from viewing reserve requirements primarily as a supervisory tool.
  - Review penalties for non-compliance and strictly enforce them.

### De-dollarization: assessment and recommended policy package
- Background and status:
  - Authorities committed to raising share of wage bill paid in Liberian dollars from 20 percent until it reaches 50 percent; CBL made a similar commitment for its spending.
  - Progress: share of wage bill in Liberian dollars rose from 20 percent to 35 percent, but government backtracked in late 2020 due to insufficient sensitization and severe shortages of Liberian dollars.
  - De-dollarization set back from late 2019 as inflows of foreign exchange receipts could not be converted into Liberian dollars due to banknote shortages.
  - Share of foreign currency loans and deposits began trending upward again from 2021.
  - With macroeconomic stability improvements and currency changeover rollout, the time is ripe to re-initiate de-dollarization.
- Strategy principles:
  - Pursue gradual, market-based de-dollarization; avoid non-market-based and forced measures (legal-tender status of U.S. dollar constrains forced measures).
  - De-dollarization requires government leadership, central bank support, public buy-in, patience and persistence (examples: Peru, Bolivia, Israel took decades).
- Elements of a successful de-dollarization policy package:
  - Build a track-record of macroeconomic stability (price stability) as precondition.
    - Continue reforms to strengthen monetary policy’s role in promoting price stability, enhance monetary policy credibility and central bank independence.
    - Complement with fiscal discipline and avoidance of monetary financing of the budget.
  - Execute currency changeover in an orderly fashion and guard against excessive currency injection.
    - Adhere to CBL’s Currency Changeover Implementation Plan.
    - Monitor monetary aggregates closely through the planned new currency management system, the exchange rate, and other indicators.
  - Improve monetary policy framework and capacity for liquidity analysis, monitoring, and operational tools.
  - Prudential regulations to reduce banks’ incentives for foreign currency liabilities and lending:
    - Review reserve requirements regulation: current regulation requires higher required reserves on Liberian dollar liabilities than on U.S. dollar liabilities, which promotes dollarization.
    - Short term: harmonize reserve requirement ratios on Liberian dollar and U.S. dollar liabilities per CBL plans and commitments.
    - Medium to long term: consider higher reserve requirements on U.S. dollar liabilities than on Liberian dollar liabilities.
    - Other measures: higher liquidity requirements on U.S. dollar liabilities, higher capital requirements, provisions against foreign exchange exposure, extra capital requirements on open FX positions.
    - These measures would raise cost of financial intermediation in foreign currency and enhance banking system resilience against exchange rate, liquidity, and credit risks.
  - Financial sector reforms and risk-based supervision to internalize foreign-currency intermediation risks.
  - Financial market development and local-currency instruments:
    - Review government debt management strategy to rebalance debt from U.S. dollar to Liberian dollar denomination.
    - Consider selling government securities in variable-rate auctions or price-indexed instruments.
    - In medium term, issue short- to medium-term local-currency debt regularly and later medium- to long-term securities to establish domestic-currency yield curve and benchmark pricing.
  - Enhance efficiency of foreign exchange markets to reduce precautionary foreign currency holdings.
  - Conduct government operations in Liberian dollars where possible:
    - Progressively raise share of wage bill paid in Liberian dollars from currently 20 percent to 50 percent.
    - Collect taxes and levies increasingly in Liberian dollars.
    - Encourage contracts to be denominated in Liberian dollars over time, with careful sensitization.
  - Complementary administrative measures (examples from other countries):
    - Require listing prices in domestic currency (Peru, 2004).
    - Tobin-type tax on foreign-currency financial transactions (Bolivia).
    - Adequate and timely public sensitization to avoid resistance.

### Cross-country experience (Box 1) — lessons for Liberia
- Macroeconomic stability, especially price stability, is precondition for successful de-dollarization.
- Early-stage approaches in dollarized economies often combined restrictive monetary policy, monetary targeting frameworks, and managed floating exchange rate regimes to anchor inflation expectations.
- Market-based approaches combining prudential policies and domestic-currency financial market development were instrumental in de-dollarization successes: Bolivia, Peru, Israel, Uruguay.
  - Peru and Bolivia made substantial progress between 2000 and 2019 using macro stability, domestic-currency market development, and prudential measures (higher regulatory requirements on foreign-currency liabilities, higher provisions on foreign-currency assets, limits on open FX positions).
  - Israel progressed between 1984 and 2002 via macro stability, domestic-currency market development, and active banking supervision to fully cover FX positions.
- Non-market-based, forced conversions tended to fail (examples: Pakistan 1998, Argentina 2001, Bolivia and Mexico 1982, Peru 1985), often followed by capital flight, declines in financial intermediation, and spikes in inflation.

*Source: IMF staff estimates and chapter text from the Liberia country analysis in the provided PDF content.*

### 28.      Liberia has made good progress with re-establishing macroeconomic stability and the

### Liberia has made good progress with re-establishing macroeconomic stability and the unfolding currency changeover is addressing cash shortages and the poor banknote quality

### Macroeconomic stabilization and currency changeover — key finding
- Liberia has made good progress with re-establishing macroeconomic stability and the unfolding currency changeover is addressing cash shortages and the poor banknote quality.
- With that, key preconditions are in place for Liberia to push ahead with modernizing its monetary policy framework and de-dollarization.

### Modernization of the monetary policy framework — recommendations
- Adopt a flexible reserve money operating targeting framework as a transitional arrangement. Components include:
  - Setting a medium-term target path for reserve money consistent with price stability objectives.
  - Resuscitating the interest rate corridor system with standing deposit and credit facilities and revamped procedures.
  - Introducing variable rate tender auctions of CBL bills.
  - Using CBL bills as the main instrument to manage banks’ excess reserves to ensure adequate liquidity at all times while steering reserve money toward its medium-term target path.
- More generally, monetary policy should be guided by indicator variables rather than a rigid intermediate target. The analysis suggests:
  - The exchange rate, currency in circulation, and the domestic currency component of narrow money have the best predictive powers for inflation in Liberia and should serve as the prime indicator variables.
  - If the indicator variables signal an impending miss of price stability objectives, deviations from the targeted medium-term reserve money path should be allowed and, if signals persist, the path should be revisited.

### Transition to an interest-rate operating framework — sequencing and expectations
- The flexible reserve money operating targeting regime will prepare the ground and infrastructure for a transition to a modern monetary policy framework based on an interest-rate operating target.
- Expected developments under the transition:
  - Money and interbank markets will develop.
  - The interest rate channel of monetary policy will become stronger.
  - Money demand will grow more predictable.
  - Monetary policy will gain further credibility.
  - A yield curve will start to emerge.
- As these developments occur, the CBL could deemphasize reserve money as the operating target and transition to an interest rate-based framework. Short-term CBL bills auctioned on a full-allotment basis would serve as the monetary policy rate and be kept toward the mid-point of the interest rate corridor.

### De-dollarization — advantages and recommended package of measures
- Advantages of de-dollarization identified:
  - Give monetary policy much stronger traction.
  - Strengthen the CBL’s lender-of-last resort function.
  - Earn Liberia seigniorage.
  - Allow the exchange rate to serve as a shock absorber.
- Implementation note: Experiences from other countries suggest de-dollarization requires a package of market-based measures by the government and the central bank and that it takes time.
- Suggested measures for Liberia include:
  - Increasingly affecting government payments and revenue collection in Liberian dollars.
  - Stipulating government contracts progressively in Liberian dollars.
  - Gradually raising banks’ reserve and liquidity requirements for U.S. dollar liabilities above those for Liberian dollars.
  - Developing Liberian dollar debt markets.
  - Supporting administrative measures.
- Prerequisite: Macroeconomic stability and price stability would need to be preserved throughout to become more entrenched.

### Appendix I — Operational guideline for implementing monetary policy under reserve money operating targeting framework (summary of steps)
- Step 1: Setting of reserve money target.
  - Target based on assumptions regarding inflation path (consistent with the policy objective), real growth and exchange rate path given money multiplier and velocity of money.
  - In context of IMF-supported program with Liberia, the target is guided by monetary conditionality under the ECF program, which consists of a floor on net international reserves (NIR) (main component of net foreign assets (NFA)) and a ceiling on net domestic assets (NDA).
  - From quarterly targets, the central bank could derive indicative monthly targets; reserve money targets should serve as medium-term targets or benchmarks that guide medium-term evolution of daily liquidity management operations.
- Step 2: Deriving the target path for total bank reserves.
  - Derive a target path for total bank reserves (including required and excess reserves) consistent with the medium-term reserve money target (Step 1) and medium-term forecasts for currency in circulation.
- Step 3: Preparing short-term liquidity forecasts.
  - Produce short-term (weekly or monthly) liquidity forecasts based on evolution of main items of central bank balance sheet, focusing on forecasts for total bank reserves.
  - Forecasting horizon should cover at least reserve maintenance period and could be extended to quarterly.
  - Daily liquidity monitoring and coordination with the Ministry of Finance and Development Planning on government cashflow and domestic debt management are essential.
- Step 4: Determining excess reserves/liquidity to guide the size of monetary operations.
  - Excess reserves/liquidity = forecasts for total bank reserves (Step 3) minus derived target path for total bank reserves (Step 2).
  - Use excess reserves estimates to inform size of monetary operations: how much CBL bills should be issued; calibrate operations so CBL-bill auctions manage excess reserves and help return reserve money to target path over time.
- Step 5: Conducting monetary policy operations.
  - The central bank announces the target amount of CBL bills for the auction based on estimates of excess liquidity (Step 4).
  - Let the market (banks) determine the price (interest rate). For short-term (two-weeks) CBL bills, pricing could be guided by an interest rate corridor system, with standing credit facility rate as ceiling and standing deposit facility rate as floor.
  - To promote competition, banks could be allowed to submit multiple bids (maximum of 3 bids per bank).
- Step 6: Reassessing the assumptions underlying reserve money target.
  - Regular (e.g., quarterly, or semi-annually) review and adjustment of the assumptions underlying the reserve money target as new information becomes available.
  - Periodic reassessment could draw on indicator variables (exchange rate, currency in circulation and domestic component of narrow money) and economic assessment of the state of the economy; once assumptions are updated, restart the cycle at Step 1.

### Liberia’s growth potential — context and recent performance
- Objective: Analyze Liberia’s economic growth potential and suggest policies to help realize it.
- Background facts and statistics:
  - Two devastating civil wars during 1989-97 and 1999-2003 left real GDP per capita at US$680 in 2021.
  - US$680 in 2021 is the 35th lowest out of 43 ranked Sub-Saharan Africa (SSA) countries and well below the continent’s average of US$1,600.
  - The poverty rate stood at 51 percent in 2021, above the SSA average of 44 percent.
  - The Government of Liberia is targeting at least 5.8 percent per year by 2023 in its National Development Plan, the Pro-Poor Agenda for Prosperity and Development (PAPD).
- Growth record (2003–2021):
  - Average real GDP growth: 4.2 percent between 2003 and 2021, corresponding to 1.1 percent in per capita terms.
  - Comparisons: SSA average growth: 4.4; LIC average growth: 5.3.
  - Two distinct phases:
    - Strong phase: 6.7 percent annual growth during 2003-13.
    - Weak phase: economy contracted by -0.6 percent per year during 2014-21.
- Drivers of the first-decade recovery:
  - Peace and reconstruction spending; UNMIL presence with budget stimulus that peaked at 60 percent of Liberia’s GDP.
  - ArcelorMittal concession led to iron ore mining becoming Liberia’s main export.
  - Debt relief under the HIPC Initiative in 2010 reduced external debt stock to 15 percent of GDP from 90 percent of GDP.
- Setbacks from 2014 onward:
  - Ebola pandemic (2014-15) caused a recession.
  - Winding down of UNMIL through early 2018 removed fiscal stimulus.
  - International iron ore prices fell from averages of US$150 per ton during 2010-13 to US$55 per ton in 2015; recovery to US$100 per ton took until 2020.
  - Change in administration in 2018 led to temporary loss of macroeconomic control: central bank financing of the budget, inflation rising to 30 percent, and the Liberian dollar losing 40 percent of its value.
  - A new IMF-supported program was starting to gain traction in early 2020 when the COVID-19 pandemic hit; economic activity rebounded in 2021 but barely made up ground lost in 2019 and 2020.

### Sources of growth — methodological notes
- Growth accounting approach used: Cobb-Douglas production function decomposing GDP growth into labor and capital (physical and human), with residual captured as total factor productivity (TFP).
- Data and parameter choices:
  - Labor share of income estimated at 55 percent by projecting labor shares on income levels, employment rates, and consumption shares of GDP for a sample of other countries.
  - Capital data sourced from Penn World Table 10.0, with capital stock data reconstructed from capital-output ratios.
  - Years of schooling proxy human capital.
  - Employment measured using model-based data from the International Labour Organization (ILO).
  - Data availability covers 2003–19 (omitting 2020 recession and 2021 rebound).

*IMF staff paper excerpts (Liberia): findings, policy recommendations, and operational guidelines as presented in the supplied content.*

### 7.      For the period 2003-19 as a whole, employment and TFP were the main drivers of growth.

### 7.      For the period 2003-19 as a whole, employment and TFP were the main drivers of growth.

### Growth accounting: 2003–2019 — contributions and factor growth
- Annualized GDP growth and component contributions (2003-2019):
  - GDP: 4.5%
  - Capital (contribution): 0.9%
  - Employment (contribution): 1.7%
  - Human Capital (contribution): 0.4%
  - TFP (contribution): 1.5%
- Subperiod contributions:
  - 2003-2014:
    - GDP: 6.5%
    - Capital: 0.5%
    - Employment: 1.8%
    - Human Capital: 0.4%
    - TFP: 3.8%
  - 2014-2019:
    - GDP: -0.1%
    - Capital: 1.6%
    - Employment: 1.5%
    - Human Capital: 0.4%
    - TFP: -3.6%
- Memo items — growth rates of relevant factors:
  - Per Capita GDP / Population / Capital / Employment / Human Capital (growth rates)
    - 2003-2014:
      - Per Capita GDP: 3.4%
      - Population: 3.2%
      - Capital: 1.0%
      - Employment: 3.2%
      - Human Capital: 0.8%
    - 2014-2019:
      - Per Capita GDP: -2.6%
      - Population: 2.5%
      - Capital: 3.6%
      - Employment: 2.8%
      - Human Capital: 0.7%
    - 2003-2019:
      - Per Capita GDP: 1.5%
      - Population: 3.0%
      - Capital: 1.8%
      - Employment: 3.1%
      - Human Capital: 0.7%
- Interpretation:
  - Employment growth at around 3 percent closely mirrored population growth and contributed 1.7 ppts to GDP growth of 4.5 percent.
  - TFP added 1.5 ppts to aggregate growth for 2003-2019.
  - Human capital grew at 0.7 percent, contributing 0.4 ppts.
  - Capital accumulation added 0.9 ppts due to relatively low investment.

### The sharp TFP swing between subperiods and likely drivers
- Key observation:
  - TFP contribution declined from +3.8 ppts (2003-2014) to -3.6 ppts (2014-2019).
- Possible factors and evidence:
  - Cyclical factors and negative shocks in the second subperiod increased slack and depressed TFP.
  - Rapid labor force growth may have biased employment toward the informal sector; 2016 Household Survey: formal employment accounts for only a quarter of total employment.
  - Potential decline in capital productivity: increased share of construction at the expense of machinery and equipment outlays.
  - Missed opportunities in education after initial post-war rebound.
  - Structural reforms appear insufficient to prevent the drop in TFP growth contribution.

### Human capital — education: status, constraints, and efficiency opportunities
- Current status and metrics:
  - Net enrollment: 51 percent of school-age children attend school.
  - Expected years of schooling: 4.2 years (lowest in SSA; SSA average 8.3 years).
  - Learning-adjusted years of schooling: 2.2 years.
  - Public expenditure on education: about half the SSA or LIC averages (share of public expenditure and spending per student in PPP-adjusted terms lower, deficit less stark at secondary and tertiary).
  - Education spending composition (2015-20): wages and salaries account for almost 90 percent.
  - Teacher qualifications (Ministry of Education, 2016): 50 percent of early childhood staff, 62 percent of primary teachers, and 34 percent of junior and senior high school teachers have minimum qualifications.
- Constraints:
  - High overage and drop-out rates in primary school.
  - Large gap between average years of schooling and learning-adjusted schooling.
- Cost and fiscal implications:
  - Matching SSA spending ratio would cost the equivalent of 1.4 percent of GDP.
  - Matching average SSA spending per student (PPP-adjusted) would cost almost 2.5 percent of GDP.
- Efficiency-enhancing recommendations:
  - Reallocate resources to education from other sectors (example: Legislature budget allocation is only some 30 percent lower than the entire education sector).
  - Within education, shift resources from wages and salaries to teaching and learning materials and school infrastructure.
  - Emphasize teacher training, especially for rural teaching.
  - Scale up school feeding programs to improve retention; build on existing rudimentary programs.
  - Clean up learner data in EMIS to eliminate ghost learners and improve regional allocation of resources.

### Physical capital: infrastructure gaps, public investment, and efficiency
- Infrastructure deficiencies and outcomes:
  - Lowest percentage of paved roads among selected ECOWAS countries.
  - Electricity production and consumption extremely low; tariffs extremely high (even after a cut of about one third in December 2021).
  - LEC supply highly unreliable; many firms and households do not connect.
- Public investment financing and execution:
  - Total public investment around 10 percent of GDP in 2021; only 0.2 percent of GDP financed from central government budget, remainder by development partners.
  - Budget allocations to investment are modest and often compressed in execution when revenues fall short or current expenditures overrun.
- Investment efficiency:
  - ICOR indicates productivity of new investment fell sharply in the last ten years and is now the third lowest in SSA.
  - IMF’s 2016 PIMA: overall efficiency gap with respect to physical indicators of 38 percent compared to SSA and LIC averages.
- Institutional and procedural shortcomings highlighted by PIMA:
  - Low institutional strength in multi-year budgeting and safeguarding availability of funding.
  - Low institutional effectiveness for central-local project coordination.
  - Insufficient alignment of project selection with national priorities.
  - Lack of project monitoring and limited coverage that omits about 60 percent of donor-funded projects.
  - Low transparency of execution (limited monitoring, evaluation, ex-post audits).
  - Insufficient and late national co-financing of donor-financed projects causes delays or loss of projects.
  - Mismanaged public entities (example: LEC) that struggle financially and provide poor services despite high tariffs.
- Case example — SECRAMP (Southern Corridor Road Asset Management Project):
  - Original financing expectation: US$118 million (government, World Bank, other development partners, private sector).
  - Funding mechanism: private financing to be paid back with National Road Fund revenues from a US$0.30 per gallon fuel levy (estimated annual revenue yield of around US$30 million).
  - Timeline:
    - Approved: December 2018
    - Construction expected to begin: 2019
    - Original completion target: 2024
    - Project restructured after private investors pulled out; split into two sections (39 km government-financed; 61 km World Bank-financed)
    - Construction began in 2021
    - As of source: 12 km of the government-financed section completed; World Bank section expected to commence in October 2022
    - New full completion scheduled for 2026 (2 years later than originally planned)

### Public investment reforms under the IMF-supported program
- Government commitments and program measures:
  - Priority to projects already underway in the PSIP.
  - Prepare a framework paper to improve the public investment management cycle and better integrate donor-financed projects and develop a pipeline of approved sector projects.
  - Better protect funds allocated to investment in budget execution by strictly adhering to the Public Financial Management Act and the Budget Transfer Act.
  - MFDP to review organizational structure to ensure appropriate allocation of roles and functions, adequate communication, and sufficient resources for effective public investment management.
  - Undertake reforms of LEC as part of the IMF-supported program.
  - Additional resources from on-lending part of the August 2021 SDR allocation by CBL are predominantly earmarked for public investment.

### Business climate and access to financing: constraints and reform progress
- Empirical and literature context:
  - Structural variables and reforms (openness, regulatory frameworks, financial development) are linked to economic growth and TFP.
  - Access to financing is critical for SME growth and job creation; financial development explains large parts of TFP variation across SSA countries in cited studies.
- Recognized business constraints (PAPD and Enterprise Survey findings):
  - Weak legal and regulatory framework.
  - Fragile and unclear property rights.
  - Poor infrastructure.
  - High energy costs, especially electricity.
  - Excessive administrative and regulatory burdens due to red tape, corruption, and lack of transparency.
  - Difficulties accessing finance at affordable terms, particularly longer maturities.
  - World Bank Enterprise Survey (2017): five most binding constraints for small firms — access to finance, availability of electricity, taxation, access to land, customs and trade regulations (in declining order).
- Reform efforts and outcomes:
  - Government established Business Climate Working Group (BCWG).
  - Issued Executive Order No. 96 to streamline administrative requirements; simplified work and residence permits; some fees and duties cut.
  - Port procedures being simplified and digitalized in collaboration between port and revenue authorities.
  - National Symposium on Business Climate held in June 2021.
  - Reform matrices drawn up, but Business Climate Secretariat at MFDP has limited traction and business leaders express frustration.

*Source: IMF staff analysis (excerpts from Liberia country chapter).*

### 19.      In the context of the IMF-supported program, an effort is now being made to

### 1lbrea2022002 - 19.      In the context of the IMF-supported program, an effort is now being made to

### Business climate reforms (IMF-supported program)
- Focus on three specific priority areas:
  - (i) facilitating trade across borders and inside Liberia, with a reduction of excessive security checkpoints a particular objective;
  - (ii) registering businesses through digitalization, harmonization, and a one-stop shop at the Liberia Business Registry;
  - (iii) the enforcement of contracts by strengthening the Commercial Court.
- Current status:
  - Plans are still rather general.
  - Authorities have initiated consultations with stakeholders.
  - Program target: develop an implementation plan with concrete actions, milestones, and responsibilities by December 2022.

### Financial sector development and inclusion
- Key diagnostics:
  - Bank credit at just 17 percent of GDP.
  - Sub-Saharan Africa (SSA) average for bank credit: almost 40 percent of GDP.
  - The gender gap in access to finance is one of the largest on the continent.
  - The jump in the number of mobile accounts during the COVID-19 pandemic brought Liberia close to the SSA average.
- Reforms underway:
  - Establishment of a “national electronic payments switch” to improve interoperability for digital payments.
  - Development of a digital credit and collateral registry at the CBL.
- Additional recommended actions:
  - Greater efforts to resolve non-performing loans by fully applying existing tool, such as the exclusion of delinquent borrowers from banking services by the CBL.
  - Strengthening of the court system to induce banks to lend more and at better terms.
  - Financial literacy program.
  - Connecting Village Saving Associations with the formal banking system to spur financial inclusion.

### Other reform areas to address (without distracting from priority areas)
- Identified issues:
  - (i) unclear property rights with only 20 percent of land deeded;
  - (ii) absence of bankruptcy legislation;
  - (iii) difficult access to laws and regulations;
  - (iv) regulations adopted without consultation and impact assessment;
  - (v) no oversight mechanisms to ensure that administrative procedures are followed;
  - (vi) reservation of certain sectors for Liberian nationals and general minimum investment requirements for foreigners;
  - (vii) excessive physical inspection of imports at ports for lack of a risk management approach;
  - (viii) notorious case backlogs at the Supreme Court, which could be resolved by establishing a dedicated appeals court.

### Conclusions: growth outlook and drivers
- Main assessment:
  - The analysis strongly indicates that Liberia will find its way back to a better growth performance than in the last decade.
  - The period was exceptionally challenging as Liberia was hit by a series of negative shocks, which is unlikely to be repeated.
  - Decline of TFP contributed to weak growth; policy slippages, declining efficiency of investment, and failure to accelerate improvement of educational attainment levels also played a key role.
- Policy importance:
  - Policy reforms will determine how much growth will rise in the period ahead.
  - Considerable room exists to spur growth along several axes: human capital, infrastructure, business climate, and access to financing.
  - More resources should be mobilized, but significant gains can come from addressing inefficiencies and implementing low-cost or no-cost reforms.
- Endowments and advantages:
  - Ample fertile lands for agriculture, much still unexploited.
  - Copious rainfall; climate suitable to grow cash crops like rubber or coffee.
  - Fish-rich ocean; mineral resources in iron ore, gold, and diamonds.
  - Favorable geographical location with potential to become a regional hub.
  - A beautiful coastline and 40 percent of the Upper Guinea rain forest suitable for high-end tourism.
  - A large and well-educated expat community in the United States; English as the official language.
  - Liberia has attracted international investors such as ArcelorMittal, China Union Investment, MNG Gold Inc., and Aureus Mining Inc.

### Potential growth scenario and quantitative drivers
- Central illustrative scenario:
  - Liberia easily has the potential to growth at 5.5 percent per year.
  - Assumptions used to generate the 5.5 percent projection:
    - TFP growth reverts to the average of the post-war period.
    - Employment grows at the same pace as the population.
    - Capital grows no faster and no slower than it did historically.
    - Educational attainment levels gradually catch up with those prevailing in Ethiopia today.
  - Note: Strong reforms could yield more, but outcomes are not guaranteed.

- Table 2. Liberia: Potential Growth and Its Drivers (as presented)
  - Drivers of Growth — Growth Contribution
    - 2.6% population growth (UN) — 1.4% contribution to growth
    - 3.1% capital accumulation (historical) — 1.4% contribution to growth
    - 2.1% human capital growth (catching up with Ethiopia level) — 1.2% contribution to growth
    - 1.5% TFP growth (2003-19 average) — 1.5% contribution to growth
    - GDP growth — 5.5% growth
  - Source: IMF staff calculations.

### Key policy recommendations (summarized)
- Prioritize and implement the business climate reform package with concrete actions, milestones, and responsibilities by December 2022.
- Advance financial sector reforms to raise bank credit above the current 17 percent of GDP toward SSA norms and reduce the gender gap in access to finance.
- Fully apply existing tools to resolve non-performing loans, including exclusion of delinquent borrowers from banking services by the CBL.
- Strengthen the court system (Commercial Court and appeals mechanisms) to improve contract enforcement and reduce case backlogs.
- Implement financial literacy programs and connect Village Saving Associations with the formal banking system.
- Address land titling (only 20 percent of land deeded), introduce bankruptcy legislation, improve access to laws and regulations, require consultation and impact assessment for regulations, and adopt risk-based approaches to import inspections.

*IMF staff report content (extracted).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1lbrea2022002.pdf_