## _cr07356

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---

### Executive summary — key developments and outlook
- Real growth projected to be about 8 percent in 2007.
- Year-on-year inflation was 11.3 percent in May 2007, down from 12.0 percent in January.
- The Liberian dollar depreciated by 7.2 percent against the U.S. dollar in the year to end-May 2007.
- Public revenues (excluding grants) through April were 79 percent higher than in the same period a year ago.
- Staff projects a budget surplus of about 3 percent of GDP (commitment basis) in 2006/07.
- Performance under the SMP through March 2007: all but one quantitative benchmark met; all end-March structural benchmarks completed (some with delay).
- Cash-based balanced budget for 2007/08 targets revenues of US$182.5 million, a 30 percent increase from the staff’s revised projection for 2006/07; target supported by a one-off payment of US$15 million by Mittal Steel.
- Monetary policy will continue to use the exchange rate to gauge domestic monetary conditions and manage Liberian dollar liquidity to maintain broad exchange rate stability.
- Financial sector remains weak despite improvements in bank capitalization; further efforts needed to strengthen balance sheets and the regulatory and supervisory framework.
- Political developments and capacity constraints pose considerable risks to program implementation.

### Program context and SMP performance through March 2007
- The report reviews Liberia’s recent economic developments and progress under the SMP through March 2007; full program details presented in Country Report No. 07/49.
- Attached letter of intent (Appendix I) proposes minor adjustments to quantitative and structural benchmarks for second-half 2007.
- SMP performance through March 2007:
  - All but one quantitative benchmark achieved at end-December 2006 and end-March 2007.
  - Ceiling on CBL expenditures at end-December exceeded by US$0.2 million.
  - Legislation submitted for merger of Bureau of the Budget (BoB) and Bureau of Maritime Affairs (BMA) into the Ministry of Finance (September 2006 benchmark); expected to be considered during current legislative session.
  - External audit of the CBL’s 2006 accounts (April 2007 benchmark) conducted and expected to be completed soon.

### Recent economic and financial developments
- Monetary and price developments:
  - Nominal exchange rate: Liberian dollar depreciated moderately through early 2007.
  - CPI inflation: nonfood prices remain in check; year-on-year CPI 11.3 percent in May 2007.
  - M2 growth rose, mainly because of growth in U.S. dollar liabilities.
- Fiscal developments:
  - Public revenues increased beyond program targets, but expenditures did not keep pace; expenditure approvals continued to lag revenues.
  - Large surplus in government’s accounts at the CBL due to bottlenecks slowing expenditure approvals.
- Key datapoints and indicators (selected):
  - Real GDP (annual percentage change): 2.6 (2004), 5.3 (2005), 7.8 (2006), 7.8 (2007), 9.8 (2008).
  - Consumer prices (annual average): 3.6 (2004), 6.9 (2005), 7.2 (2006), 8.5 (2007), 8.0 (2008).
  - Nominal GDP (millions of U.S. dollars): 460.0 (2004), 530.2 (2005), 605.2 (2006), 666.8 (2007), 735.7 (2008).
  - Public sector external debt outstanding (total, millions of U.S. dollars): 812.0 (2004), 690.3 (2005), 748.1 (2006), 680.2 (2007), 615.0 (2008).
  - CBL's net foreign exchange position (millions of U.S. dollars): 3.3 (2004), 6.5 (2005), 21.8 (2006), 31.6 (2007), 42.4 (2008).
  - Broad money (M2) annual change: 49.3 percent (2004), 35.7 percent (2005), 34.4 percent (2006), 22.7 percent (2007), 18.3 percent (2008).
  - Liberia’s exchange rate at end-May 2007: L$62.5=US$1.

### Fiscal policy, domestic debt resolution, and 2007/08 budget
- Expenditure management and budget execution:
  - Fiscal surplus for 2006/07 projected at about 3 percent of GDP (commitment basis).
  - Authorities should adhere to the interim commitment control system and public procurement guidelines while accelerating expenditure.
  - To speed 2007/08 expenditure: line ministries/agencies to progress on public procurement training with World Bank technical assistance.
  - Passage of law to integrate BoB into the Ministry of Finance would improve budget execution.
- Domestic debt resolution strategy:
  - Review classified US$914 million in claims as “valid,” “contestable,” or “rejected.”
  - Discounting of valid claims: range from 0 percent for claims below US$1,000 to 87.6 percent for claims above US$1 million.
  - Commercial bank claims discounted by the average rate for other claims: 46.6 percent.
  - Financial Institutions (FIs): of US$263.8 million of valid claims to FIs, 97 percent is due to the CBL. Claims to FIs to be paid over 30 years beginning in 2007/08, with debt service increasing in outer years after a four-year grace period on principal. Total fiscal cost per year for 2007/08–2010/11 will be US$2.4 million.
  - Other claims (excluding FIs): of US$40.1 million of other claims, individual claimants yet to be identified for US$14 million. Remaining US$26 million discounted to US$8.4 million. 2006/07 budget appropriates US$5.6 million to cover discounted claims; remaining US$2.8 million expected to be covered under a US$6 million appropriation for domestic arrears in the 2007/08 budget.
  - Trust Fund: government to establish a Trust Fund to finance the debt resolution strategy. Government will allocate US$6 million in the 2007/08 budget (compared with expected domestic debt strategy payments of US$5.2 million in the fiscal year) and 5 percent of total revenues in 2008/09–10/11 (compared with an expected average fiscal year obligation on valid claims of around 1 percent of revenue). Pre-NTGL salary arrears (estimated at US$30.3 million at end-March 2007) and foreign mission arrears excluded and handled through direct budget appropriations.
  - Staff emphasized need for clear and transparent mechanisms for the Trust Fund and swift resolution of outstanding issues, ensuring consistency with banking sector restructuring and settling cross debts with state-owned enterprises.
- 2007/08 budget composition and wages:
  - Cash-based balanced budget submitted mid-May targets revenues (excluding grants) of US$182.5 million, a 30 percent increase from staff’s revised 2006/07 projection; assumes one-off Mittal Steel payment of US$15 million.
  - Budget allocates US$29.1 million to health and education—15.9 percent of total expenditures, from 15.5 percent in the 2006/07 budget.
  - Increase in minimum civil service wage from US$30 per month to US$50 per month; wage bill projected to increase from 7.0 percent of GDP in 2006/07 to 9.1 percent of GDP in 2007/08, and would account for 35 percent of revenues (versus 38 percent in WAEMU countries in 2006).
  - Budget allocates US$12.7 million for implementation of the domestic debt strategy and US$3.9 million for external debt payments.
- Revenue measures and administration reforms:
  - Finish restructuring domestic tax administration with headquarters for policy and field offices for large/medium/small taxpayers.
  - Implement new 9-digit taxpayer identification number.
  - Further reduce tax exemptions by strictly applying the Liberia Revenue Code (LRC).
  - Collect from sources yielding little revenue in 2006/07, including GSM licensing fees and forestry related revenues.
  - Amend law that allows government to grant ad hoc special tax incentives beyond those in the LRC.

### Monetary and financial sector policies and safeguards
- Monetary policy and exchange operations:
  - CBL to continue using the exchange rate to gauge domestic monetary conditions and manage Liberian dollar liquidity to maintain broad exchange rate stability.
  - CBL continued biweekly foreign exchange auctions, recently increased in size.
  - Accumulation of U.S. dollars in government’s accounts at the CBL has exerted downward pressure on the exchange rate, contributing to upward pressure on inflation.
  - Importance of Ministry of Finance continuing regular sale of foreign exchange to the CBL to safeguard auction credibility.
- Strengthening monetary policy instruments:
  - Finalize regulations and procedures to introduce credit and deposit auctions to augment foreign exchange auction as policy instrument, consistent with ongoing Fund technical assistance.
- Banking sector vulnerabilities and supervision:
  - Progress in improving bank capitalization, but system remains fragile with a high share of nonperforming loans and income concentrated in fee-based activities.
  - Discounting of banks’ claims on the government could adversely impact some banks; government committed to prevent risk of bank failures.
  - Given limited regulatory capacity, staff emphasized caution in granting licenses to new banks or deposit-taking microfinance institutions.
  - Submission of four abandoned and nonoperating banks to the courts for final resolution welcomed; another two cases planned to be submitted by year-end.
- CBL financial position and safeguards:
  - CBL achieved a lower-than-targeted deficit in 2006 (US$0.9 million versus US$1.9 million); board approved 2007 budget targeting a small surplus against program benchmark of a balanced budget.
  - Regularizing CBL’s claims on the government expected to further boost CBL income position in 2007.
  - Voluntary safeguards assessment concluded significant vulnerabilities in CBL’s safeguards framework; CBL implementing recommendations including new audit selection procedures and adoption of an internationally recognized financial reporting framework by 2008.

### Governance, anticorruption, and legal/administrative reforms
- Anticorruption strategy and implementation:
  - Strategy drafted in consultation with international partners; would establish an independent anticorruption commission with investigative and prosecutorial powers.
  - Legislation to establish the commission has been submitted to the president.
  - Staff recommendations:
    - Move quickly to draft a financial plan for the commission’s operation.
    - Seek the necessary donor financing.
    - Swift action to ensure the commission’s operational costs could be integrated in the national budget cycle.
  - Structural benchmark revised to require submission of legislation to establish an independent anticorruption agency.
- Legal, institutional, and statistical reforms with targets:
  - Draft legislation to address ad hoc tax concession issues and present to cabinet — Target: End-June 2007.
  - Reorganize administration of domestic taxes by taxpayer segmentation — Target: End-June 2007; Status: Good progress has been made.
  - Establish clear audit selection and rotation procedures for the CBL — Target: End-March 2007; Status: Implemented by mid-June 2007.
  - Appoint an auditor to audit the CBL’s financial accounts for 2007 — Target: End-September 2007.
  - Develop restructuring plan for remaining undercapitalized banks consistent with CBL policy — Target: End-June 2007.
  - Submit required legislation for establishment of an independent anticorruption agency — Target: End-September 2007.
  - Submit administrative procedure law and repeal inconsistent laws/regulations — Target: End-September 2007.
  - Develop comprehensive medium-term national statistical plan — Target: End-September 2007.
  - Replace Monrovia CPI with Harmonized CPI — Target: End-February 2007; Status: Implemented by end-February 2007.

### Debt sustainability, arrears clearance, and donor role
- External debt unsustainability and need for relief:
  - Liberia's external debt is described as unsustainable; comprehensive debt relief via HIPC Initiative and MDRI required.
  - Apart from token payments to international financial institutions, Liberia is not servicing its external debt.
- Public sector external debt (debt outstanding, including arrears): 3,735 (2004), 3,660 (2005), 4,527 (2006), 4,536 (2007), 4,525 (2008).
- Public sector external debt (percent of exports of goods and services): 2,606 (2004), 2,402 (2005), 2,079 (2006), 2,094 (2007), 1,783 (2008).
- Public sector external debt (percent of GDP): 812 (2004), 690 (2005), 748 (2006), 680 (2007), 615 (2008).
- Debt service charges: 83.9 (2004), 118.4 (2005), 139.0 (2006), 147.4 (2007), 153.1 (2008).
- Debt service charges (percent of GDP): 18.3 (2004), 22.3 (2005), 23.0 (2006), 22.1 (2007), 20.8 (2008).
- Arrears and financing assumptions:
  - Continued progress under the SMP, along with sufficient indications of support from donors, would be important steps toward clearance of arrears to the IMF and participation in HIPC/MDR initiatives.
  - Assumed steady rise in donor inflows (about half the rate of nominal GDP growth) based on reconstruction needs and assumed strong donor support.
  - Donor inflows in the first few years after 2007 expected to be affected by projected reduction in UNMIL operations.
- World Bank arrears as of May 6, 2007: US$458.0 million (US$47.4 million to IDA and US$410.6 million to IBRD).
- Financing appeals and measures:
  - Some countries contributed SCA-1 accounts and deferred charges to Liberia’s arrears clearance package; a significant funding gap remains.
  - IMF management proposed a financing package to mobilize necessary financing and looks forward to commitments from a wide group of bilateral contributors.

### Data, statistical capacity, and CBL reporting
- Data reporting and timeliness:
  - CBL regularly reports monetary, financial and exchange rate statistics for IFS, but timeliness needs improvement.
  - CBL publishes money and banking, prices, output, fiscal operations, debt, interest, exchange rates, and foreign trade on a bi-monthly basis with a lag of about six months in Liberia Financial Statistics.
  - Quarterly Financial and Economic Bulletin covers previous four quarters with a lag of about six months.
- Real sector and national accounts:
  - Annual production estimates prepared by MPEA National Accounts Unit; Fund staff estimated total GDP by sectoral origin for 1997–2006 with MPEA assistance.
  - Needed: national business register; resumption of annual Establishment Survey and National Accounts Questionnaire; Household Income and Expenditure Survey.
- Prices and CPI:
  - In January 2007, authorities adopted the Harmonized Consumer Price Index (HCPI) based on an expanded basket and updated weights.
  - Inflation revisions: a mission concluding June 29, 2007 assisted in correcting HCPI methodology, resulting in revision of inflation data from January 2007.
  - Reported inflation movements: year-on-year inflation rose to 12.4 percent in June from 10.1 percent in May; excluding food, increase slowed to 3.9 percent in June from 4.9 percent in May; inflation under new CPI dropped to 11 percent in May 2007 from 12 percent in January under the new CPI.
- Government finance statistics and monetary statistics:
  - MoF provides monthly disaggregated data on government revenue and on current and capital expenditure on a cash basis; scope to improve quality and to report on both cash and commitment basis.
  - CBL has made progress compiling monetary aggregates according to international standards; further steps needed in CBL accounting (proper accounting of foreign reserves; segregating required reserves by currency denomination; adequate classification of other assets and liabilities).
- Balance of payments and external debt statistics:
  - Official BOP statistics not reported comprehensively; Fund staff prepared provisional BOP statistics in cooperation with agencies.
  - Significant discrepancies in trade data across agencies; task force making progress updating external debt database.

### Program monitoring, structural benchmarks, and risks
- SMP monitoring:
  - Performance to be monitored on basis of quantitative and structural benchmarks for end-June, end-September and end-December 2007.
  - Floor for revenue collections for September and December 2007 raised to align with 2007/08 budget.
  - Benchmarks on CBL foreign exchange reserves for June, September, and December changed to reflect revised monetary program.
  - Structural benchmark relating to anticorruption strategy revised to require submission of legislation to establish an independent anticorruption agency.
- Risks to program:
  - Capacity constraints and political environment have delayed a number of structural benchmarks.
  - Internal politics (including election of a new House speaker) have slowed legislation in 2007.
  - Achievement of key structural benchmarks depends on legislative action, including:
    - Passage of the 2007/08 budget.
    - Laws to eliminate ad hoc investment incentives.
    - Integration of BoB and Bureau of Maritime Affairs into Ministry of Finance.
    - Establishment of an independent anticorruption commission.
  - Program success also hinges on continued financial and technical support from donors.
- Illustrative legislative risk:
  - On May 24, 2007, the president vetoed the Financial Autonomy Bill; passage of this bill would circumvent the interim commitment control system and undermine Liberia’s balanced cash–based budget. The legislature could still override this veto with a two-thirds majority.

### Staff appraisal, recommendations, and key policy actions
- Overall assessment:
  - Performance under the SMP through March 2007 broadly satisfactory: most quantitative benchmarks achieved and most structural benchmarks completed.
- Fiscal and expenditure recommendations:
  - Line ministries should continue to receive support and training on budget implementation while developing a comprehensive and properly sequenced reform plan to further strengthen public financial management.
  - Continued strong efforts needed to achieve revenue target for 2007/08, strengthen budget implementation, and maintain prudent public expenditure management to support poverty reduction priorities.
- Social spending and civil service:
  - Planned increases in social spending in 2007/08 budget welcome.
  - A comprehensive civil service reform strategy is needed to guide future wage policy decisions.
- Domestic debt strategy:
  - Move quickly to finalize modalities for restructuring banks’ claims and establish clear and transparent mechanisms for the Trust Fund that will administer domestic debt.
- Monetary and financial sector:
  - Further efforts required to improve monetary policy framework and strengthen financial sector balance sheets and supervisory framework.
  - Chief administrator should be involved in all aspects of CBL management and operations.
- Key condition for continued success:
  - Prompt action on key legislation and strong technical and financial support from Liberia's international partners required.
  - Timely approval of the 2007/08 budget is critical.

### IMF relations, arrears, and projected obligations
- Liberia has been in continuous arrears to the Fund since 1984; declaration of noncooperation issued in 1990; voting rights suspended in March 2003.
- Liberia’s arrears to the Fund at end-April 2007: SDR 531 million (744 percent of quota).
- Authorities have made monthly token payments of US$60,000 to the Fund since November 2005 (up from US$50,000 since January 2004).
- On October 2, 2006, the Executive Board lifted the declaration of noncooperation and initiated de-escalation of remedial measures.
- IMF membership and account figures (as of April 30, 2007):
  - Membership: Joined 03/28/1962; Article XIV.
  - Quota: 71.3 (SDR Million) — 100.0 percent of quota.
  - Fund holdings of currency: 271.4 (SDR Million) — 380.7 percent of quota.
  - Stand-By Arrangements outstanding: 165.4 (SDR Million) — 232.0 percent of quota.
  - Contingency and Compensatory: 34.7 (SDR Million) — 48.7 percent of quota.
  - Trust Fund: 22.9 (SDR Million) — 32.1 percent of quota.
- Projected obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Overdue Principal as of 04/30/2007: 223.02.
  - Charges/interest: 307.79.
  - Projected forthcoming charges/interest by year: 2007: 9.85; 2008: 13.14; 2009: 13.12; 2010: 13.13; 2011: 13.13.
  - Total (row): 530.81; Forthcoming 2007: 0.06; 2008: 13.14; 2009: 13.12; 2010: 13.13; 2011: 13.13.

*Source: _cr07356 - 1. Selected Economic and Financial Indicators, 2004–08; informational annex and IMF staff report excerpts contained in the supplied document.*

### 1. Selected Economic and Financial Indicators, 2004–08 .......................................................16

### 1. Selected Economic and Financial Indicators, 2004–08

### Executive summary — key developments and outlook
- Real growth projected to be about 8 percent in 2007.
- Year-on-year inflation was 11.3 percent in May 2007, down from 12.0 percent in January.
- The Liberian dollar depreciated by 7.2 percent against the U.S. dollar in the year to end-May 2007.
- Public revenues (excluding grants) through April were 79 percent higher than in the same period a year ago.
- Staff projects a budget surplus of about 3 percent of GDP (commitment basis) in 2006/07.
- Performance under the SMP through March 2007: all but one quantitative benchmark met; all end-March structural benchmarks completed (some with delay).
- Cash-based balanced budget for 2007/08 targets revenues of US$182.5 million, a 30 percent increase from the staff’s revised projection for 2006/07; target supported by a one-off payment of US$15 million by Mittal Steel.
- Monetary policy will continue to use the exchange rate to gauge domestic monetary conditions and manage Liberian dollar liquidity to maintain broad exchange rate stability.
- Financial sector remains weak despite improvements in bank capitalization; further efforts needed to strengthen balance sheets and the regulatory and supervisory framework.
- Political developments and capacity constraints pose considerable risks to program implementation.

### Introduction — program context and performance through March 2007
- Report reviews Liberia’s recent economic developments and progress under the SMP through March 2007; full program details presented in Country Report No. 07/49.
- Attached letter of intent (Appendix I) proposes minor adjustments to quantitative and structural benchmarks for second-half 2007.
- SMP performance through March 2007:
  - All but one quantitative benchmark achieved at end-December 2006 and end-March 2007.
  - Ceiling on CBL expenditures at end-December exceeded by US$0.2 million.
  - Legislation submitted for merger of Bureau of the Budget (BoB) and Bureau of Maritime Affairs (BMA) into the Ministry of Finance (September 2006 benchmark); expected to be considered during current legislative session.
  - External audit of the CBL’s 2006 accounts (April 2007 benchmark) conducted and expected to be completed soon.

### Recent economic developments
- Monetary and price developments:
  - Nominal exchange rate: Liberian dollar depreciated moderately through early 2007.
  - CPI inflation: nonfood prices remain in check; year-on-year CPI 11.3 percent in May 2007.
  - M2 growth rose, mainly because of growth in U.S. dollar liabilities.
- Fiscal developments:
  - Public revenues increased beyond program targets, but expenditures did not keep pace; expenditure approvals continued to lag revenues.
  - Large surplus in government’s accounts at the CBL due to bottlenecks slowing expenditure approvals.
- Central government revenues and expenditures (outturn vs. quarterly SMP targets) show revenue outturn exceeding revenue targets while cash-based expenditure outturn remained below targets.

### Policy discussions and outlook for 2007 — summary of staff and authorities’ plans
A. Fiscal Policy
- Expenditure management and budget execution:
  - Fiscal surplus for 2006/07 projected at about 3 percent of GDP (commitment basis).
  - Authorities should adhere to the interim commitment control system and public procurement guidelines while accelerating expenditure.
  - To speed 2007/08 expenditure: line ministries/agencies to progress on public procurement training with World Bank technical assistance.
  - Passage of law to integrate BoB into the Ministry of Finance would improve budget execution.
- Domestic debt resolution strategy:
  - Authorities implemented a domestic debt resolution strategy following review of US$914 million in claims classified as “valid,” “contestable,” or “rejected.”
  - Discounting of valid claims: range from 0 percent for claims below US$1,000 to 87.6 percent for claims above US$1 million.
  - Commercial bank claims discounted by the average rate for other claims: 46.6 percent, with calibration to prevent triggering bank failures.
  - Financial Institutions (FIs): of US$263.8 million of valid claims to FIs, 97 percent is due to the CBL. Claims to FIs to be paid over 30 years beginning in 2007/08, with debt service increasing in outer years after a four-year grace period on principal. Total fiscal cost per year for 2007/08–2010/11 will be US$2.4 million.
  - Other claims (excluding FIs): of US$40.1 million of other claims, individual claimants yet to be identified for US$14 million. Remaining US$26 million discounted to US$8.4 million—salary arrears and arrears on goods and services in past five years. 2006/07 budget appropriates US$5.6 million to cover discounted claims; remaining US$2.8 million expected to be covered under a US$6 million appropriation for domestic arrears in the 2007/08 budget.
  - Trust Fund: government to establish a Trust Fund to finance the debt resolution strategy. Government will allocate US$6 million in the 2007/08 budget (compared with expected domestic debt strategy payments of US$5.2 million in the fiscal year) and 5 percent of total revenues in 2008/09–10/11 (compared with an expected average fiscal year obligation on valid claims of around 1 percent of revenue). Pre-NTGL salary arrears (estimated at US$30.3 million at end-March 2007) and foreign mission arrears excluded and handled through direct budget appropriations.
  - Staff emphasized need for clear and transparent mechanisms for the Trust Fund and swift resolution of outstanding issues, ensuring consistency with banking sector restructuring and settling cross debts with state-owned enterprises.
- 2007/08 budget composition and wages:
  - Cash-based balanced budget submitted mid-May targets revenues (excluding grants) of US$182.5 million, a 30 percent increase from staff’s revised 2006/07 projection; assumes one-off Mittal Steel payment of US$15 million.
  - Budget allocates US$29.1 million to health and education—15.9 percent of total expenditures, from 15.5 percent in the 2006/07 budget.
  - Budget provides for increase in minimum civil service wage from US$30 per month to US$50 per month, allows for more wage dispersion, and envisages a Senior Executive Service interim measure.
  - Wage bill projected to increase from 7.0 percent of GDP in 2006/07 to 9.1 percent of GDP in 2007/08, and would account for 35 percent of revenues (versus 38 percent in WAEMU countries in 2006).
  - Budget allocates US$12.7 million for implementation of the domestic debt strategy and US$3.9 million for external debt payments.
- Revenue measures and administration reforms to meet 2007/08 target:
  - Plans to (i) finish restructuring domestic tax administration with headquarters for policy and field offices for large/medium/small taxpayers; (ii) implement new 9-digit taxpayer identification number; (iii) further reduce tax exemptions by strictly applying the Liberia Revenue Code (LRC); and (iv) collect from sources yielding little revenue in 2006/07, including GSM licensing fees and forestry related revenues.
  - Staff and authorities agreed on importance of amending law that allows government to grant ad hoc special tax incentives beyond those in the LRC.

B. Monetary and Financial Sector Policies
- Monetary policy framework and exchange operations:
  - CBL to continue using the exchange rate to gauge domestic monetary conditions and manage Liberian dollar liquidity to maintain broad exchange rate stability.
  - CBL continued biweekly foreign exchange auctions, recently increased in size.
  - Accumulation of U.S. dollars in government’s accounts at the CBL has exerted downward pressure on the exchange rate, contributing to upward pressure on inflation.
  - Importance of Ministry of Finance continuing regular sale of foreign exchange to the CBL, consistent with monetary program assumptions, to safeguard auction credibility and maintain exchange rate stability.
- Strengthening monetary policy instruments:
  - Further efforts needed to finalize regulations and procedures to introduce credit and deposit auctions to augment foreign exchange auction as policy instrument, consistent with ongoing Fund technical assistance.
- Banking sector vulnerabilities and supervision:
  - Progress in improving bank capitalization, but the banking system remains fragile with a high share of nonperforming loans and income concentrated in fee-based activities.
  - Discounting of banks’ claims on the government (per domestic debt strategy) could adversely impact some banks; government committed to prevent risk of bank failures.
  - Given limited regulatory capacity, staff emphasized caution in granting licenses to new banks or deposit-taking microfinance institutions.
  - Submission of four abandoned and nonoperating banks to the courts for final resolution welcomed; another two cases planned to be submitted by year-end.
- CBL financial position and safeguards:
  - CBL achieved a lower-than-targeted deficit in 2006 (US$0.9 million versus US$1.9 million); board approved 2007 budget targeting a small surplus against program benchmark of a balanced budget.
  - Regularizing CBL’s claims on the government expected to further boost CBL income position in 2007.
  - Given future spending priorities (printing new currency, cost of new monetary policy instruments), maintaining strict budget discipline at CBL is important.
  - Voluntary safeguards assessment concluded significant vulnerabilities in CBL’s safeguards framework; CBL implementing recommendations including new audit selection procedures and adoption of an internationally recognized financial reporting framework by 2008.

### Governance issues and risks to implementation
- Political developments and capacity constraints: difficulties in getting the opposition-led legislature to consider and approve supportive legislation could delay or complicate implementation of key reforms (including timely passage of the budget and other supportive laws).
- Staff highlighted need for continued strong efforts to achieve revenue target for 2007/08, strengthen budget implementation, and maintain prudent public expenditure management to support poverty reduction priorities.

*Source: _cr07356 - 1. Selected Economic and Financial Indicators, 2004–08 (IMF).*

### 14.      The mission welcomed the government’s recent adoption of an anticorruption

### 14.      The mission welcomed the government’s recent adoption of an anticorruption strategy

### Anticorruption strategy and implementation
- The strategy was drafted in consultation with international partners.
- The strategy would establish an independent anticorruption commission with its own investigative and prosecutorial powers.
- Legislation to establish the commission has been submitted to the president.
- Staff recommendations:
  - Move quickly to draft a financial plan for the commission’s operation.
  - Seek the necessary donor financing.
  - Swift action to ensure the commission’s operational costs could be integrated in the national budget cycle.
- Structural benchmark revision:
  - The structural benchmark now requires the authorities to submit legislation that would establish an independent anticorruption agency.
  - Footnote: This benchmark was revised in consultation with the Fund’s Legal Department to properly sequence the process leading up to establishment of the anticorruption commission, i.e. requiring establishment of the commission only once legislation has been approved.

### External Debt and Arrears
- Progress has been made in reconciling Liberia’s external debt.
- Preliminary work on the HIPC Initiative debt sustainability analysis, undertaken in collaboration with the World Bank, confirms Liberia’s eligibility to benefit from HIPC Initiative and MDRI-related debt relief, once financing assurances have been obtained.
- The staff briefed the authorities on the operational steps involved in arrears clearance.

### Data issues and statistical capacity
- Progress has been made in rebuilding Liberia’s statistical capacity, but more needs to be done to establish the database required for policy formulation and monitoring.
- IMF technical assistance has focused on improving fiscal, monetary, and balance of payments statistics.
- Other donors have helped build a store of socioeconomic data.
- Staff recommendation:
  - Authorities need to complete the planned medium-term national statistical plan in consultation with donors in a timely manner.
- Program benchmark addition:
  - Completion of a national statistical plan was agreed to be added as a benchmark for end-September 2007.

### Program monitoring and risks
- SMP monitoring:
  - Performance under the SMP will be monitored on the basis of quantitative and structural benchmarks for end-June, end-September and end-December 2007 (Tables 1 and 3, Appendix I).
  - The floor for revenue collections for September and December 2007 has been raised, bringing it in line with the 2007/08 budget.
  - Benchmarks on the foreign exchange reserves accumulated by the CBL for June, September, and December have been changed to reflect the revised monetary program for 2007.
  - The structural benchmark relating to the anticorruption strategy’s implementation was revised to require submission of legislation to establish an independent anticorruption agency.
- Risks to program:
  - Capacity constraints and the political environment have led to delays in achieving a number of structural benchmarks.
  - Internal politics, including the election of a new House speaker, have already slowed legislation in 2007.
  - Achievement of key structural benchmarks depends on legislative action, including:
    - Passage of the 2007/08 budget.
    - Laws to eliminate ad hoc investment incentives.
    - Integration of the BoB and Bureau of Maritime Affairs into the Ministry of Finance.
    - Establishment of an independent anticorruption commission.
  - The program’s success also hinges on continued financial and technical support from donors.
- Illustrative legislative risk:
  - On May 24, 2007, the president vetoed the Financial Autonomy Bill under which the legislature would set, and have full control of, its own budget without revision or oversight by any government institution. Passage of this bill would circumvent the interim commitment control system and undermine Liberia’s balanced cash–based budget – a cornerstone of the SMP. The legislature could still override this veto with a two-thirds majority.

### Staff appraisal: performance and policy recommendations
- Overall assessment:
  - Performance under the SMP through March 2007 has been broadly satisfactory.
  - The government has achieved most of the quantitative benchmarks and completed most of the structural benchmarks under the SMP.
- Fiscal and expenditure observations:
  - Slow pace of expenditure and resulting accumulation of U.S. dollars in the government’s accounts at the CBL have put some downward pressure on the exchange rate to the U.S. dollar.
  - Recommendation: Line ministries should continue to receive support and training on budget implementation in the near-term while developing a comprehensive and properly sequenced reform plan to further strengthen public financial management.
- Social spending and civil service:
  - Planned increases in social spending, provided for in the 2007/08 budget, are welcome.
  - The proposed budget allocates greater resources to the wage bill.
  - Staff view: A comprehensive civil service reform strategy is needed to strengthen government institutions and guide future wage policy decisions.
- Domestic debt strategy:
  - Recommendation: Move quickly to finalize modalities for restructuring banks’ claims and establish clear and transparent mechanisms for the Trust Fund that will administer domestic debt.
- Monetary and financial sector:
  - Meeting inflation objectives will require further efforts to improve the monetary policy framework.
  - Continued efforts required to strengthen financial sector balance sheets and the supervisory framework.
  - Given his central role, the chief administrator should be involved in all aspects of management and operations.
- Key condition for continued success:
  - Prompt action on key legislation and strong technical and financial support from Liberia's international partners are required.
  - Timely approval of the 2007/08 budget is critical in clarifying the resource envelope for the line ministries.
  - Legislative approval of a proposal to merge the BoB into the Ministry of Finance would enhance budget implementation.
  - Legislative support is also needed to continue implementing the anticorruption strategy and to reform tax exemption policies.

*Source: IMF staff report excerpt.*

### 23.      Liberia's external debt is unsustainable, and comprehensive debt relief is

### 23.      Liberia's external debt is unsustainable, and comprehensive debt relief is required.

### Debt sustainability and debt relief
- Liberia's external debt is described as unsustainable, and comprehensive debt relief is required.
- Debt relief under the HIPC Initiative and the MDRI is characterized as essential to normalize relations with creditors and assume a path to sustainable development.
- Apart from token payments to international financial institutions, Liberia is not servicing its external debt.
- Public sector external debt (medium and long term) — debt outstanding, including arrears: 3,735 (2004), 3,660 (2005), 4,527 (2006), 4,536 (2007), 4,525 (2008).
- Public sector external debt (percent of exports of goods and services): 2,606 (2004), 2,402 (2005), 2,079 (2006), 2,094 (2007), 1,783 (2008).
- Public sector external debt (percent of GDP): 812 (2004), 690 (2005), 748 (2006), 680 (2007), 615 (2008).
- Debt service charges: 83.9 (2004), 118.4 (2005), 139.0 (2006), 147.4 (2007), 153.1 (2008).
- Debt service charges (percent of GDP): 18.3 (2004), 22.3 (2005), 23.0 (2006), 22.1 (2007), 20.8 (2008).

### Importance of program performance and donor assurances
- Continued progress under the SMP, along with sufficient indications of support from donors, would be important steps toward clearance of arrears to the IMF.
- Such progress would also help pave the way for Liberia’s timely participation in the HIPC and MDR initiatives.
- The IMF staff concluded that policies under the 2007 program meet the standard of an upper credit tranche Fund arrangement, apart from program financing assurances.
- The government believes performance under the SMP could be counted toward a track record to reach the HIPC decision point, apart from financing assurances from donors to fund debt relief.

### Selected economic indicators and projections (2004–08)
- Real GDP (annual percentage change): 2.6 (2004), 5.3 (2005), 7.8 (2006), 7.8 (2007), 9.8 (2008).
- Consumer prices (annual average): 3.6 (2004), 6.9 (2005), 7.2 (2006), 8.5 (2007), 8.0 (2008).
- Consumer prices (end of period): 7.5 (2004), 7.0 (2005), 8.9 (2006), 7.9 (2007), 8.3 (2008).
- Nominal GDP (millions of U.S. dollars): 460.0 (2004), 530.2 (2005), 605.2 (2006), 666.8 (2007), 735.7 (2008).
- Real GDP per capita (constant 1992 U.S. dollars): 117.7 (2004), 122.3 (2005), 128.8 (2006), 135.6 (2007), 145.3 (2008).
- Exports of goods, f.o.b. (annual percentage change): -4.7 (2004), 6.3 (2005), 43.0 (2006), -0.6 (2007), 17.1 (2008).
- Imports of goods, f.o.b. (annual percentage change): 84.4 (2004), 24.4 (2005), 36.5 (2006), 4.2 (2007), 12.1 (2008).
- Current account balance, including grants (deficit, -): -5.6 (2004), -9.4 (2005), -18.0 (2006), -21.6 (2007), -24.4 (2008).
- Current account balance, excluding grants (deficit, -): -46.7 (2004), -63.5 (2005), -68.1 (2006), -66.8 (2007), -66.1 (2008).
- Trade balance (deficit, -): -28.7 (2004), -34.6 (2005), -40.2 (2006), -39.1 (2007), -38.7 (2008).
- Exports, f.o.b. (percent of GDP): 22.6 (2004), 20.8 (2005), 26.1 (2006), 23.5 (2007), 25.0 (2008).
- Imports, f.o.b. (percent of GDP): -51.3 (2004), -55.4 (2005), -66.2 (2006), -62.6 (2007), -63.6 (2008).
- Current transfers (net): 243 (2004), 311 (2005), 364 (2006), 363 (2007), 369 (2008).
- Donor transfers (net): 189 (2004), 287 (2005), 303 (2006), 302 (2007), 307 (2008).
- Public sector external debt outstanding (total, millions of U.S. dollars): 812.0 (2004), 690.3 (2005), 748.1 (2006), 680.2 (2007), 615.0 (2008).
- Arrears (accrual +): 84 (2004), 118 (2005), 139 (2006), 147 (2007), 153 (2008).
- Use of Fund credit (net change in arrears): 10 (2004), 17 (2005), 17 (2006), 17 (2007), 17 (2008).
- Increase in non-Fund arrears: 74 (2004), 101 (2005), 122 (2006), 130 (2007), 136 (2008).

### Fiscal outcomes and budgetary policy (selected figures)
- Total revenue and grants (millions of U.S. dollars, fiscal year basis): 4.3 (2004), 36.1 (2005), 65.6 (2006), 67.0 (2007), 27.7 (2008) — as reported in Table 1 (percent of GDP).
- Total expenditure and net lending (percent of GDP, fiscal year basis): -26.7 (2004), 51.3 (2005), -21.9 (2006), 136.5 (2007), 26.1 (2008).
- Central government operations (January–December, percent of GDP): Total revenue and grants: 13.6 (2004), 16.2 (2005), 15.1 (2006), 22.5 (2007), 26.0 (2008).
- Total expenditure and net lending (January–December, percent of GDP): 11.6 (2004), 15.4 (2005), 10.5 (2006), 22.1 (2007), 25.4 (2008).
- Overall fiscal balance (cash basis): 2.0 (2004), 0.8 (2005), 4.6 (2006), 0.3 (2007), 0.7 (2008).
- For 2007/08, the budget targets revenues (excluding grants) of US$182.5 million; budget assumes a one-off payment of US$15 million and the first annual payment of US$3 million for community development from the Mittal Steel agreement.
- The budget increases allocations for direct social services by 39 percent (US$42.5 million) from the 2006/07 budget and increases the civil service wage bill by 43 percent compared with the previous year to raise the minimum civil service wage from US$30 per month to US$50 per month.
- The 2007/08 budget provides US$12.7 million for implementation of the domestic debt resolution strategy and allocates US$3.9 million for arrears payments.

### Monetary and financial sector indicators
- Broad money (M2) annual change: 49.3 percent (2004), 35.7 percent (2005), 34.4 percent (2006), 22.7 percent (2007), 18.3 percent (2008).
- Reserve money (annual percentage change): 31.4 (2004), 27.2 (2005), 23.9 (2006), 18.0 (2007), 17.9 (2008).
- Broad money (stocks, billions of Liberian dollars): 4.7 (2004), 6.4 (2005), 8.5 (2006), 10.5 (2007), 12.4 (2008).
- Liberian dollar component of broad money (billions of Liberian dollars): 2.2 (2004), 2.8 (2005), 3.5 (2006), 4.2 (2007), 5.0 (2008).
- U.S. dollar component of broad money (billions of Liberian dollars): 2.5 (2004), 3.6 (2005), 5.1 (2006), 6.3 (2007), 7.4 (2008).
- CBL's net foreign exchange position (millions of U.S. dollars): 3.3 (2004), 6.5 (2005), 21.8 (2006), 31.6 (2007), 42.4 (2008).
- CBL's net foreign exchange position (months of imports of goods and services): 0.1 (2004), 0.2 (2005), 0.5 (2006), 0.7 (2007), 0.8 (2008).

### SMP performance, structural benchmarks, and reforms
- The government reported that all but one of the end-December 2006 and end-March 2007 quantitative benchmarks were met.
- Public revenues substantially exceeded program targets and progress was made in improving the central bank’s finances.
- Structural achievements include: introduction of the Harmonized CPI; commencement of implementation of the government’s domestic debt strategy; adoption of audit selection criteria for the central bank audits; external audit of the CBL’s 2006 accounts was conducted and expected to be completed soon.
- The government submitted the 2007/08 budget to the legislature on May 17, 2007.
- Agreed revised structural benchmark for 2007: submit required legislation for establishment of an independent anticorruption agency for legislative approval; added benchmark: prepare a medium-term national statistical plan by end-September 2007.
- Selected implemented structural benchmarks (SMP February–September 2006 and 2007 SMP):
  - Strengthen the Large Taxpayer Unit (LTU): Implemented by end-March 2006.
  - Increase number of large taxpayers from 60 to 110: Implemented by end-July 2006.
  - Develop timetable to ensure approval of the 2006/07 budget: Implemented by end-March 2006.
  - Submit budget for legislative approval before fiscal year start: Implemented by end-June 2006.
  - Establish the stock of domestic debt of the GOL and complete verification process: Implemented by end-December 2006.
  - Finalize the domestic debt resolution strategy, consistent with a restructuring plan for the CBL: Implemented by end-January 2007.
  - Revise monetary policy governance and publish Monetary Policy Framework: Implemented from end-March 2006.
  - Conduct external audit of the CBL by auditors with international reputation: Ongoing — expected to be completed soon.
  - Commence implementation of the domestic debt resolution strategy, and develop a plan to settle cross-debts between the government and state-owned enterprises: Implemented by mid-April 2007.
  - Submit a balanced cash-based budget for 2007/08 for legislative approval: Budget submitted to legislature on May 17, 2007.

### Financing assumptions and donor role
- The assumed steady rise in donor inflows (about half the rate of nominal GDP growth) is based on Liberia's extensive reconstruction needs and assumed strong donor support.
- Donor inflows in the first few years after 2007 are expected to be affected by the projected reduction in UNMIL operations.
- Capital and financial account projections include official financing (disbursements and amortization assumed unchanged following decision point at US$100,000 per month to the IMF, WB and others), private financing projections and projected overall financing needs (e.g., overall balance -79 (2004), -115 (2005), -124 (2006), -138 (2007), -159 (2008)).

*Source: IMF staff report and Liberian authorities, as contained in the document.*

### Section 204(e) of the Liberia Revenue Code of 2000, as well as

### _cr07356 - Section 204(e) of the Liberia Revenue Code of 2000, as well as

### Tax policy and revenue administration
- Section 204(e) of the Liberia Revenue Code of 2000, and the 2004 Act amending the code, allowed the government to enter into ad hoc tax concession agreements with individual investors.
- Draft legislation has been developed to address these issues and is being prepared for presentation to cabinet.
  - Target: End-June 2007
- Reorganize administration of domestic taxes by taxpayer segmentation.
  - Target: End-June 2007
  - Status: Good progress has been made

### Financial sector — Central Bank of Liberia (CBL) safeguards and audits
- Establish clear audit selection and rotation procedures and criteria for the CBL to select an internationally reputable audit firm to conduct the CBL’s future external audits, pursuant to ISA, beginning in financial year 2007.
  - Target: End-March 2007
  - Status: Implemented by mid-June 2007
- Appoint an auditor, consistent with the criteria above, to audit the CBL’s financial accounts for 2007.
  - Target: End-September 2007
- Develop a restructuring plan for the remaining undercapitalized banks consistent with the CBL’s Bank Reconstruction and Resolution Policy.
  - Target: End-June 2007

### Other legal, institutional, and statistical reforms
- Submit required legislation for establishment of an independent anticorruption agency for legislative approval, consistent with the government’s anticorruption strategy.
  - Target: End-September 2007
- Submit for legislative enactment an administrative procedure law that establishes a transparent process for the issuance of regulations pursuant to the Liberia Revenue Code of 2000, and submit legislation to repeal other laws and revoke regulations that are inconsistent with the law.
  - Target: End-September 2007
- Develop a comprehensive medium-term national statistical plan.
  - Target: End-September 2007
- Replace the Monrovia CPI with the Harmonized CPI.
  - Target: End-February 2007
  - Status: Implemented by end-February 2007

### Relations with the IMF — status and key figures
- Liberia has been in continuous arrears to the Fund since 1984; the Fund issued a declaration of noncooperation in 1990, and Liberia’s voting rights were suspended in March 2003.
- Liberia’s arrears to the Fund at end-April 2007 amounted to SDR 531 million (744 percent of quota).
- The authorities have been making monthly token payments of US$60,000 to the Fund since November 2005, up from US$50,000 since January 2004.
- On October 2, 2006, the Executive Board lifted the declaration of noncooperation and initiated the process of de-escalating remedial measures against Liberia.

### IMF membership, accounts, and outstanding obligations (as of April 30, 2007)
- Membership: Joined 03/28/1962; Article XIV
- Quota: 71.3 (SDR Million) — 100.0 percent of quota
- Fund holdings of currency: 271.4 (SDR Million) — 380.7 percent of quota
- Stand-By Arrangements outstanding: 165.4 (SDR Million) — 232.0 percent of quota
- Contingency and Compensatory: 34.7 (SDR Million) — 48.7 percent of quota
- Trust Fund: 22.9 (SDR Million) — 32.1 percent of quota
- Latest Stand-By arrangements:
  - Stand-By: Approval Date 12/07/1984, Expiration Date 12/06/1985, Approved (SDR Million) 42.8, Drawn (SDR Million) 8.5
  - Stand-By: Approval Date 09/14/1983, Expiration Date 09/13/1984, Approved (SDR Million) 55.0, Drawn (SDR Million) 55.0

### Projected obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Overdue Principal as of 04/30/2007: 223.02
- Charges/interest: 307.79
- Projected forthcoming charges/interest by year:
  - 2007: 9.85
  - 2008: 13.14
  - 2009: 13.12
  - 2010: 13.13
  - 2011: 13.13
- Total (row): 530.81; Forthcoming 2007: 0.06; 2008: 13.14; 2009: 13.12; 2010: 13.13; 2011: 13.13

### Safeguards assessment of the CBL
- A voluntary safeguards assessment under the 2006 staff-monitored program found significant vulnerabilities in the CBL’s external and internal audit mechanisms, financial reporting, and system of internal controls.
- Recommendations included:
  - Strengthen external audit and audit oversight.
  - Improve CBL’s financial reporting by adopting International Financial Reporting Standards (IFRS) for implementation by 2008.
  - Establish controls over the reporting of monetary data to the Fund.
- Implementation of most recommendations is underway.
- The safeguards assessment will need updating for a possible PRGF arrangement; the update will follow up on the 2006 external audit (yet to be completed) and determine whether audit selection policy ensures audits in accordance with international standards.

### Exchange rate arrangement and monetary context
- Currency: Liberian dollar (L$); U.S. dollar is also legal tender.
- Exchange rate arrangement: Managed float with no predetermined path; exchange rate is market determined; all foreign exchange dealers may buy and sell currencies.
- Liberia’s exchange rate at end-May 2007 was L$62.5=US$1.

### Technical assistance from the IMF — mission inventory (selection)
- A range of technical assistance missions across departments (MFD, MCM, FAD, STA, LEG) covering:
  - Monetary operations, foreign exchange auctions, banking supervision, payments system (MFD/MCM; missions in May 2004, Aug. 2004, Feb. 2005, Aug. 2005, June 2006, Aug. 2006, Oct. 2006, Feb. 2007, Mar. 2007, Apr. 2007, Apr./Jun. 2007).
  - Bank restructuring (MFD/MCM; missions in May 2005, May 2006, Aug. 2006, Oct. 2006, Feb. 2007, Mar. 2007, Apr./Jun. 2007).
  - Public expenditure management, tax administration, revenue administration, tax policy, and public financial management (FAD; missions from Dec. 2003 through May. 2007, including advisors).
  - Statistical missions: national accounts, price, monetary, fiscal, and balance of payments statistics (STA; missions from Dec. 2003 through Nov. 2006).
  - Mission: revenue code (LEG) Oct. 2006.
- A resident representative has been posted in Monrovia since April 2, 2006.

### Relations with the World Bank — arrears and assistance (as of May 6, 2007)
- Liberia’s arrears to the World Bank by May 6, 2007: US$458.0 million (US$47.4 million to IDA and US$410.6 million to IBRD).
- Historical disbursements to June 1987: US$141.3 million from 22 IBRD loans and US$91.5 million from 17 IDA credits; only US$43.6 million repaid on these disbursements.
- Since June 20, 2006, Liberia received two pre-arrears clearance IDA grants totaling US$46.5 million for emergency infrastructure needs.
- World Bank grants and support cited include:
  - US$4.0 million LICUS Implementation Trust Fund grant (approved March 2004).
  - A further LICUS grant package of US$6.9 million (approved November 2007).
  - US$25 million grant from IBRD surplus (approved October 2004).
  - Liberia Emergency Infrastructure Pre-Arrears Clearance Grant US$30.0 million (approved June 20, 2006), supplemented by an additional IDA grant of US$16.5 million in October 2006.

### IMF–World Bank collaboration and lead responsibilities
- Structural reform areas and lead institutions (selection):
  - Fiscal area: Civil service reform (World Bank); Expenditure monitoring and control (IMF); Public Expenditure and Financial Accountability (World Bank); Tax administration, policy and legislation (IMF).
  - Monetary and financial sector: Banking sector reform (IMF/World Bank); Technical Assistance (Central Bank) (IMF/World Bank).
  - Governance: GEMAP (World Bank/IMF); Extractive Industries Transparency Initiative (World Bank); Kimberly Process (World Bank).
  - Private sector development: Business climate, agriculture, forestry and mining sector reform (World Bank).
  - Other: Price controls, External trade (IMF); Transport, Urban development, Decentralization (World Bank).
- Areas where the World Bank leads without direct IMF involvement include preparation of the Poverty Reduction Strategy and strengthening statistical capacity (NSO support).
- Areas where the Fund leads without direct World Bank involvement include monetary policy, interest rates, the exchange rate, the balance of payments, and related statistical and measurement issues.

### Statistical issues — capacity and reforms
- Substantial weaknesses in economic statistics hamper effective surveillance due to civil war–related destruction of databases and loss of capacity.
- Several STA missions (five in 2006) assisted in rebuilding capacity to compile national accounts, price, monetary, fiscal and balance of payments statistics.
- The government passed legislation in July 2004 to create the Liberia Institute of Statistics and Geo-Information Services (LISGIS) as a semi-autonomous agency to coordinate and reestablish national economic and social statistics.
- Liberia participates in the Fund’s General Data Dissemination System (GDDS) Project for Anglophone African Countries (funded by the U.K. Department for International Development) and has posted metadata and plans on the Fund’s Dissemination Standards Bulletin Board (DSBB) since October 24, 2005.

*International Monetary Fund — Liberia: Third Review of Performance Under the Staff-Monitored Program — Informational Annex (Prepared by the African Department; Approved June 28, 2007).*

### 4.      The Central Bank of Liberia (CBL) regularly reports monetary , financial and

### _cr07356 - 4.      The Central Bank of Liberia (CBL) regularly reports monetary , financial and

### Data reporting and timeliness
- The CBL regularly reports monetary, financial and exchange rate statistics for publication in International Financial Statistics (IFS), but the timeliness of the reports needs to be improved.
- The CBL publishes data on money and banking, prices, output, fiscal operations, debt, interest, exchange rates, and foreign trade on a bi-monthly basis with a lag of about six months in Liberia Financial Statistics.
- The CBL publishes the quarterly Financial and Economic Bulletin, covering the previous four quarters, with a lag of about six months.

### Real sector
- Annual estimates of production by sector are prepared by the National Accounts Unit of the Ministry of Planning and Economic Affairs (MPEA).
- Fund staff estimated total GDP by sectoral origin for the period 1997–2006 with the assistance of the MPEA.
- National accounts data would benefit from:
  - (i) the establishment of a national business register; and
  - (ii) the resumption of an annual Establishment Survey and National Accounts Questionnaire for manufacturing, mining, utilities and agriculture.
- Estimates for GDP by expenditure are not available.
- A Household Income and Expenditure Survey is needed as a basis for more reliable data.

### Prices
- In January 2007, the authorities formally adopted the Harmonized Consumer Price Index (HCPI), in line with STA recommendations.
- The HCPI is based on an expanded basket of goods and services consistent with the ECOWAS harmonized market basket, and updated weights (using consumption patterns in neighboring countries in the absence of an updated household survey).
- The authorities have compiled data for this index since October 2005.
- Prior to January 2007, price data were based on the Monrovia Consumer Price Index (MCPI) which contained a basket of only 79 items, weighted according to a household income and expenditure survey from 1964.
- Inflation developments reported later in the document:
  - Year-on-year inflation rose to 12.4 percent in June from 10.1 percent in May, mostly on account of higher food prices; excluding food, the rate of increase in consumer prices slowed to 3.9 percent in June from 4.9 percent in May.
  - Inflation under the new CPI: inflation dropped to 11 percent in May 2007 from 12 percent in January under the new CPI.
- Note on HCPI revisions: Inflation data under Harmonized CPI, adopted at end-January 2007, have been revised following additional STA TA. A mission that concluded on June 29, 2007 assisted the authorities in correcting problems with calculation methodology, which resulted in a revision of inflation data reported under the HCPI from January 2007.

### Government finance statistics
- The authorities regularly provide staff with information on fiscal accounts on a cash basis.
- The Ministry of Finance (MoF) provides monthly disaggregated data on government revenue and on current and capital expenditure.
- There is considerable scope for improving the quality of government finance statistics, including reporting fiscal data on both cash and commitment basis.
- Data on domestic arrears and on financing items are unreliable, despite substantial technical assistance under the DFID project for Anglophone Africa.
- The authorities have not reported data for publication in the Government Financial Statistics Yearbook (GFSY) since 1988 and have not reported data for publication in the IFS for several years.
- Efforts have begun to move to the GFSM 2001, including participation of an official in a Fund-sponsored GFS training course.

### Monetary statistics and CBL operations
- The CBL has made progress in compiling monetary aggregates according to international standards.
- Further steps are needed to strengthen the CBL’s accounting system, including:
  - proper accounting of foreign reserves;
  - segregating required reserves by currency denomination; and
  - adequate classification of other assets and liabilities.
- Reporting by commercial banks has improved, but bank responses to requests for explanations and follow-up to inconsistencies remain weak.
- An STA mission in November 2006 finalized the standardized report form (SRF) for the CBL, recommended further improvements in source data of the other depository corporations, and initiated development of an integrated monetary database to meet the data needs of the CBL, STA, and AFR, including for monitoring the PRGF-supported program.

### Balance of payments and external debt
- Official balance of payments statistics are not reported comprehensively; Fund staff prepared provisional balance of payments statistics in cooperation with CBL, MoC, MPEA, and MoF.
- The CBL is responsible for compiling the balance of payments in coordination with other agencies.
- Progress has been made compiling certain current and financial account components—mainly on trade and related services, government expenditures, remittances, and on nonresident deposits in the financial account.
- Lack of primary source data and errors in distinguishing components in services, income and transfers underscore the need for technical assistance.
- Significant discrepancies exist in trade data reported by various agencies; an effort should be made to resolve and reconcile these discrepancies.
- The CBL completed a census of foreign direct investment enterprises in preparation for an investment survey following STA July 2004 recommendations.
- An STA mission in November 2006 set out recommendations to strengthen balance of payments compilation at the CBL, including staff training.
- In March 2007, STA approved a long-term advisor to assist the CBL in improving balance of payments data.
- Staffing and poor coordination with data providers identified as key impediments to improving balance of payments statistics.
- A task force comprising staff seconded from the CBL, MoF, MPEA, General Auditing Office (GAO) and the Bureau of the Budget (BoB) is making progress in obtaining loan agreements and financial statements from external creditors to update the external debt database maintained by the MoF.
- STA trained three officials in 2005—one in balance of payments and two in debt statistics; another CBL official selected for the 2007 INS BOP course in Washington D.C.
- The authorities engaged an international financial advisor to assist with rebuilding the database on external commercial debt.
- Significant gaps exist in records of external public debt, particularly related to bilateral and commercial creditors.

### Table of Common Indicators Required for Surveillance (as of December 31, 2006) — selected entries preserved exactly
- Exchange Rates: Date of latest observation May 2007; Date received Jun. 2006; Frequency of Data D; Frequency of Reporting M; Frequency of publication B
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Reserve/Base Money: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Broad Money: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Central Bank Balance Sheet: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Consolidated Balance Sheet of the Banking System: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Interest Rates: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Consumer Price Index: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation Apr. 2007; Date received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of publication B
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation Mar. 2006; Date received May. 2006; Frequency of Data Q; Frequency of Reporting B; Frequency of publication B
- Exports and Imports of Goods and Services: Date of latest observation Oct. 2005; Date received Dec. 2005; Frequency of Data M; Frequency of Reporting Q; Frequency of publication B
- Gross External Debt: Date of latest observation Mar. 2005; Date received May. 2006; Frequency of Data Q; Frequency of Reporting B; Frequency of publication B

### Statement by the IMF Staff Representative (July 13, 2007) — key developments and assessment
- New information since the staff report does not alter the thrust of the staff appraisal; policies under the 2007 SMP continue to meet the standard on an upper credit tranche Fund arrangement, except for program financing.
- Preliminary data: total government revenue in fiscal year 2006/07 (July-June) was US$148.3 million, an increase of 75 percent compared with fiscal year 2005/06 and 23 percent more than projected in the program.
- Indications that government spending picked up in the last months of the fiscal year.
- Supported by higher U.S. dollar government spending and increased sales of foreign exchange in the CBL’s weekly auctions, the Liberian dollar appreciated to L$60.5/US$1 on July 9 from L$62.5/US$1 at end-May.
- The depreciation of the Liberian dollar slowed to 4.8 percent in the twelve months to end-June 2007 from 7.2 percent in May.
- Political developments: the Auditor General submitted a critical assessment of the 2007/08 budget; the budget had not been approved for the fiscal year that started on July 1; the cash management committee at the Ministry of Finance is currently not able to approve any expenditures; the Minister of Finance expects the budget to be approved by the end of July.

### Press Release No. 07/160 — Executive Board discussion and policy recommendations (July 13, 2007)
- The Executive Board was informed of progress in implementing policies under Liberia’s Staff Monitored Program (SMP) for 2007.
- Positive assessments and recommendations:
  - Revenue collection in 2006/07 substantially exceeded the budget target.
  - The government strictly implemented the interim commitment control system; it is important to resist pressures to relax this system to prevent reemergence of domestic payments arrears.
  - The government should work closely with the legislature to ensure passage of the 2007/08 budget as soon as possible.
  - Raising civil service salaries and wages is important, but a comprehensive civil service reform strategy is needed to ensure sustainability and efficiency.
  - Begin implementation of the government’s recently adopted anticorruption strategy, including establishing an independent anticorruption commission; draft legislation should be submitted to the legislature and development partners should be involved in finalizing an operational plan.
  - Liberia’s external debt is unsustainable; urgent progress toward debt relief and mobilizing financing for arrears clearance and debt relief is critical.
  - IMF management proposed a financing package to mobilize necessary financing and looks forward to commitments from a wide group of bilateral contributors.

### Statement by Peter Gakunu, Executive Director for Liberia and Ita Mannathoko, Advisor (July 13, 2007) — authorities’ record and needs
- Authorities credited for extraordinary commitment to an ambitious reform program under difficult circumstances.
- Constraints noted: meager fiscal resources, significant capacity constraints, civil service wages substantially below the global poverty line of $2 a day, an opposition-controlled parliament, and high societal expectations.
- Liberia’s debt continues to expand as it accumulates interest; arrears clearance is urgent and sufficient arrears clearance commitments are needed.
- Authorities will need unremitting financial and technical support from the donor community.
- Recent economic developments highlighted:
  - Real GDP growth in 2006 is estimated to have risen to 8 percent from 5.5 percent in 2005.
  - Broad nominal exchange rate stability maintained with some flexibility; a 7 percent depreciation against the dollar recorded for the year ending May 2007.
  - New CPI basket adopted; data show a declining inflation trend for the country-wide basket.

### Performance under the SMP, fiscal and financial sector measures
- SMP performance described as broadly satisfactory; public revenues continued to exceed program targets and targets are being adjusted upwards.
- Spending acceleration in the last quarter of the fiscal year expected to allow meeting the current fiscal year target.
- Fiscal policy and public financial management measures:
  - Ongoing capacity building in public procurement.
  - Aggressive domestic debt resolution program; a trust fund established with $6 million initial allocation under the current budget.
  - Over the next three years, 5 percent of the annual budget will be allocated to this trust fund to cover debt resolution payments for the fiscal year.
  - Progress on anti-corruption strategy: donors consulted on financing the anticorruption commission; a financial plan is being drafted and money budgeted for the commission to be supplemented by donor funds.
  - Draft amendment to tax exemption legislation is under IMF legal review.
- Financial sector reform:
  - Voluntary safeguards assessment of CBL systems completed and being used to guide capacity strengthening.
  - Banking sector improvements:
    - All banks now meet the minimum capital requirement.
    - CBL intensified on-site examinations and enhanced enforcement, improving corporate governance.
    - Recent 2007 data show gross assets of the banking sector rose by 24 percent over December 2006 and by 46 percent compared to March 2006.
    - The ratio of non performing loans to total loans and advances declined by 19.9 percentage points since March 2006.
    - Aggregate deposits increased by 22 percent over December 2006 and by 50 percent compared to March 2006.
  - Further steps planned to strengthen CBL supervisory functions and consider options to improve Liberia’s legal system for enforcement of financial contracts and debt collection.

*Source: IMF staff report and related statements (as provided in the supplied content).*

### 6.      The SMP benchmark regarding the audit selection criteria for the Central Bank of Liberia has

### _cr07356 - 6.      The SMP benchmark regarding the audit selection criteria for the Central Bank of Liberia has

### Central Bank audit, GEMAP, and supervisory capacity
- The SMP benchmark regarding the audit selection criteria for the Central Bank of Liberia has now been resolved and the Central Bank of Liberia audit is near finalization by the external auditors.
- The Liberian Authorities are committed to ensuring that the Central Bank of Liberia’s Chief Administrator plays an effective role in the context of the GEMAP.
- The Authorities thank the IMF for its assistance in providing a long term expert, a measure which has helped the Central Bank of Liberia to improve its supervisory capacity.

### Coordination on domestic debt and PFM reform
- The Central Bank of Liberia is working closely with the Ministry of Finance to conclude discussions for the liquidation of government debt to the banking system under the new domestic debt strategy.
- Public Financial Management Reform: civil service capacity and wage level remain central concerns for reform and budgeting.

### Civil service capacity, wages, and donor support
- The Authorities continue to face a dilemma of how to build a civil service of the required quality and quantity given significant budgetary constraints.
- The current civil service wage is so low that it provides little incentive to qualified and competent candidates to join the service.
- Despite recent salary increases, the minimum civil service wage of $50 a month remains below the global poverty line of $2 a day.
- Thus, enhanced donor support is necessary within the context of a comprehensive civil service reform strategy that will address wage and capacity issues such as the training needed for budget planning and implementation in line ministries.

### Socioeconomic context and spending priorities
- Liberia is a post-conflict country with widespread poverty; most of the population lives below the global absolute poverty line of $1 a day.
- Unemployment remains high, at over 80 percent of the labor force, with many unemployed being ex-combatants and restive youth.
- The government’s revenue base falls far short of post-conflict reconstruction needs; donors provide critical project support outside of the budget.
- Within the available cash budget, expenditure on key social and rural services such as education, health, agriculture, public works, water and sanitation has been increased by 39 percent in the current fiscal year.

### Arrears clearance, HIPC/MDRI eligibility, and financing appeals
- Contributions: Some countries have agreed to contribute their SCA-1 accounts and deferred charges to Liberia’s arrears clearance package; Sierra Leone and the Democratic Republic of Congo are specifically thanked for their contributions.
- A significant funding gap still remains despite these contributions.
- Preliminary HIPC debt sustainability analysis shows that Liberia would be eligible to use HIPC and MDRI related debt relief to help bring its overall debt down to manageable and sustainable levels, but this will only happen once adequate financing assurances have been obtained to enable Liberia to clear its arrears.
- The IMF and the international community have a critical role in supporting the Authorities’ sustained effort to bring the country’s finances to relative normalcy under a sustainable trajectory.
- Under the current government, Liberia has consistently conformed to IMF requirements with respect to policy recommendations, reforms and payments.
- Urgent appeals:
  - An urgent need for the IMF Executive Directors and the G8 to expedite the process of securing the balance of financial assurances needed for arrears clearance.
  - Appeal to all Executive Directors to encourage their Authorities to expeditiously participate in the arrears clearance package needed to re-establish Liberia on a sustainable footing.
  - Hope that the G8 and management will approach the larger SCA-1 account holders to appeal for their participation.

### Commercial debt restructuring
- The Authorities have been working on the resolution of Liberia’s commercial debt.
- With grants from the Swiss government, financial and legal advisers have been retained to assist in restructuring Liberia’s commercial debt within the parameters set out in the HIPC framework.
- Several meetings have already been held with various creditors, including hedge funds.

### Conclusion and requested Board message
- A strong message is sought from the Executive Board that:
  - Liberia is effectively implementing this Fund program, with policies meeting the Upper Credit Tranche (UCT) conditionality level.
  - Liberia is establishing a credible track record.
  - The Fund is ready, as soon as adequate arrears clearance assurances have been made, to make quick progress towards the HIPC and MDRI debt relief required to bring Liberia’s debt to normalcy at sustainable and manageable levels.
- Expected outcome: This will then allow for the economic progress needed to sustain peaceful reform in Liberia.
- Emphasis: The importance of continued financing support from the development community for Liberia cannot be over-emphasized; this is a critical juncture for the country.
- Closing thanks to the Executive Board, Management and Staff for efforts to help clear Liberia’s arrears and place the country on a sustainable footing.

*Source: _cr07356 - 6.      The SMP benchmark regarding the audit selection criteria for the Central Bank of Liberia has*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07356.pdf_