## _cr10373

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### I. Introduction and Recent Developments
- Post-conflict stabilization described as "essentially complete." Requirements for the HIPC Completion Point were met in June 2010.
- Nominal public sector external debt amounts to 9 percent of GDP, assuming HIPC terms are offered by remaining non-Paris Club creditors.
- Growth drivers and external flows:
  - Recovery led by agriculture (notably the rubber sector) and restart of commercial logging.
  - Growth picked up after a 2009 slowdown related to global recession spillovers.
  - Favorable terms of trade movements; inflationary pressure easing due to lower fuel and food prices.
  - Higher net inflows of foreign exchange in 2010 stabilized the exchange rate and permitted a modest increase in reserves.
  - FDI commitments and estimated FDI inflows increased substantially; related import increase reflected in a higher current account deficit.
- Fiscal and institutional developments FY2010:
  - Government revenue rose and a balanced budget was maintained despite a small shortfall in nontax revenue.
  - Capital expenditure fell short by about 2 percentage points of GDP.
  - Far-reaching institutional and legal changes in public financial management, debt management, budget process, tax policy, and tax administration.
  - New Commercial Code and commercial court act approved; changes to the Revenue Code finalized by the Executive.
  - Concessions ratified: iron ore, palm oil, port management in Monrovia; offshore oil exploration rights sold to a major oil company.
- Program status:
  - All performance criteria and indicative targets through June 2010 were observed.
  - Four of five structural benchmarks substantively completed; publication of national accounts rephased to early 2011.

### II. Surveillance Issues — Medium-Term Outlook and Risks
- Baseline assumptions:
  - Continued sound macroeconomic policies, broadly unchanged donor support, political stability.
  - Heavy dependence on commencement of iron ore and timber production.
- Baseline medium-term projections (selected series):
  - Real GDP growth (%): 2010: 6.3; 2011: 8.8; 2012: 11.7; 2013: 8.4; 2014: 7.1; 2015: 7.0
  - Real GDP growth excl. mining (%): 2010: 6.3; 2011: 6.6; 2012: 6.5; 2013: 6.0; 2014: 5.8; 2015: 4.3
  - Overall fiscal balance, incl. grants (% of GDP): 2010: 0.6; 2011: -0.5; 2012: -3.4; 2013: -4.5; 2014: -5.5; 2015: -5.3
  - Overall fiscal balance, excl. grants (% of GDP): 2010: -0.8; 2011: -6.4; 2012: -7.2; 2013: -8.7; 2014: -10.3; 2015: -10.3
  - Current account, incl. grants (% of GDP): 2010: -40.4; 2011: -59.2; 2012: -64.9; 2013: -74.9; 2014: -20.9; 2015: -13.8
  - Gross official reserves (millions of US dollars): 2010: 317; 2011: 330; 2012: 340; 2013: 350; 2014: 360; 2015: 369
  - Months of imports of goods and services (1): 2010: 1; 2011: 2.6; 2012: 2.0; 2013: 2.0; 2014: 1.9; 2015: 2.6
  - Months of imports of goods and services (2): 2010: 2; 2011: 3.1; 2012: 2.6; 2013: 2.6; 2014: 2.5; 2015: 2.9
    - Footnotes: 1/ Excluding UNMIL service imports. 2/ Excluding UNMIL service and FDI-related imports.
- Dynamics and drivers:
  - Growth expected to recover to 6 percent in 2010 (text) and accelerate as iron ore exports begin in 2011.
  - 2011–13: FDI-financed mine construction imports raise external current account deficit substantially; effect expected to end by 2014 when imports reduce and iron ore exports rise.
  - Inflationary pressure expected to be contained due to high import content of FDI flows, weak linkages between enclaves and rest of economy, and slack in domestic employment market.
- Risks:
  - Commodity price volatility creating upside and downside risks, investor retrenchment, and revenue volatility.
  - Risk of "growth without development" if enclave revenues are not directed to broad-based objectives.
  - Potential instability or reform slowdown ahead of end-2011 presidential elections and prospective post-election UN drawdown.
  - Offshore oil discovery poses upside income and downside governance risks.

### III. Competitiveness, External Stability, and Real Exchange Rate Assessment
- Trade and current account features:
  - Visible trade deficit at or over 40 percent of GDP during 2007–2010.
  - Services deficit averaged 50 percent of GDP, largely related to aid inflows.
  - Official transfers (excluding UNMIL) and FDI averaged 50 percent and 25 percent of GDP, respectively.
  - Current account deficit high and volatile: weakened to almost 60 percent of GDP in 2008; improved in 2009; projected to remain above 50 percent of GDP in 2011–12 before improving with export restarts.
- Competitiveness and business climate:
  - Cost competitiveness a significant medium-term issue; high dollarization reduces exchange rate policy role.
  - Doing Business indicators: Liberia advanced, surpassing fragile states average and approaching ECOWAS region average.
  - Transparency International: substantial improvement since 2008; 2010 ranking in top five of SSA.
  - Labor costs competitive for unskilled labor; higher non-labor input costs remain a constraint.
- CGER preliminary real exchange rate results (macroeconomic balance approach):
  - Indicated overvaluation between 12 and 15 percent depending on parameters.
  - Selected regression outputs and gaps (percent):
    - CA Norm (percent of GDP): 0.1 -2.4 -3.3
    - Underlying CA projection (percent of GDP): -18.0 -18.0 -18.0
    - Current Account Gap (percent of GDP): 18.1 15.6 14.7
    - Real Exchange Rate gap (percent): -15.4 -13.2 -12.5
  - Calculation based on a medium-term elasticity of 0.44 (CGER elasticity weighted by 2015 export/import ratios).
- Policy implications:
  - Improve competitiveness via productivity gains and removal of bureaucratic, legal, and physical obstacles rather than exchange rate adjustment.
  - Continue regional trade integration (ECOWAS), WTO accession, and transport infrastructure improvements.
  - Continue governance reforms: rule of law, property rights, transparency, tax administration.

### IV. External Stability Approach — Findings and Required Adjustment
- NFA stabilizing assumption: stabilizing net foreign position of -9.0 percent of GDP.1/
- Underlying Current Account: -18.0 (percent of GDP)
- Sustainable Current Account: -9.0 (percent of GDP)
- Gap: -8.3 (percent of GDP)
- Real exchange rate adjustment needed to close the gap: about 8 percent (table shows -8.5 percent depreciation).
- Medium-term elasticity used: 0.31.2/
- Formula for stabilizing current account presented explicitly in the source.

1/ Assumes a stabilizing net foreign position of -9.0 percent of GDP.  
2/ Calculation based on medium-term elasticity of 0.31 (CGER elasticities weighted by 2009 export/import ratios).

### V. Reserve Adequacy and External Resilience
- SDR allocation effect: 2009 SDR allocation substantially strengthened reserve adequacy.
- Reserves to imports (months):
  - 2009: 2.6 months
  - 2011–13: 2.0 months (projected decline driven by strong expansion of imports financed by FDI in the iron ore sector)
  - Import coverage excluding FDI-related imports: 2½ months coverage 2011–13
  - 2014–15: projected rise to 2.9 months
- Debt indicators: remain well below policy-related thresholds except under the historical scenario.

### VI. FDI Projects — Modeling Approach, Scenarios, and Fiscal/BOP Impacts
- Concessions modeled:
  - Six ratified foreign investment concessions: four iron ore and two palm oil.
- Scenarios:
  - Program baseline (three concessions)
  - High case (five concessions)
  - Best case (six concessions)
  - Low case (only palm oil concessions; no iron ore production)
- Borrowing and fiscal assumptions:
  - Borrowing capped at up to 3 percent of GDP per year while keeping external debt stock below 30 percent of GDP (in NPV terms).
  - Budget grants held constant at 5 percent of baseline GDP in all scenarios.
  - Non-interest current expenditure assumed to increase in real terms by about 5 percent each year.
  - All resources available after current spending devoted to capital investment.
  - Ten-year focus: 2011–20; framework does not explicitly assume absorption constraints but notes operational/implementation capacity issues could affect annual paths.
- Feedback and impacts:
  - Increase in infrastructure capital stock assumed to raise productivity in non-enclave sectors.
  - Revenue profile: substantial but back-loaded within 2011–20; palm oil revenue negligible up to 2020 (oil palms take 5 years to reach maturity).
  - Growth: direct effects from concessions operations and indirect effects from publicly-financed infrastructure.
  - Balance of payments: initial highly negative during investment phase; turns positive as production expands despite large profit transfers; positive contribution equals value added accruing to government and domestic labor net of additional imports.

### VII. Infrastructure Needs and Financing
- Total infrastructure need FY2011-20: US$3.7 billion (382 percent of 2010 GDP) — AICD conclusion.
  - Roads: 1.1 (Billions of US dollars)
  - Water and Sewerage: 0.8
    - Water: 0.5
    - Sanitation: 0.4
  - Power: 1.3
    - Generation: 0.9
    - Transmission and distribution: 0.5
  - Other: 0.5
- Financing sources assumed:
  - Concession revenues; donor support in grant form; concessional borrowing consistent with authorities’ debt management strategy.
- Affordability:
  - In all but the low case (no iron ore after 2010), infrastructure program largely affordable.
  - Baseline cumulative financing gap: US$0.4 billion; nearly 90 percent of infrastructure investment could be financed over ten years.
  - Filling residual gap via concessional borrowing appears viable; market-rate loans would push debt above vulnerability thresholds.
- Policy implications:
  - Intensify reforms (e.g., tax administration improvements).
  - Develop a public investment plan to mobilize and redirect aid to priority areas.
  - Recognize public sector wage pressures that could undercut investment efforts.
  - Consider back-loading infrastructure program if capacity improvements do not materialize.
  - Improve expenditure quality via better planning and implementation.

### VIII. Financial Sector Development — Status and Priorities
- Constraints and progress:
  - Low financial intermediation and narrow range of financial products; banking expansion underway with new entrants; intermediation gap with SSA closing.
  - Excess liquidity in banking system; lending to private sector limited.
  - SMEs face credit access problems due to weak legal/judicial framework, limited bank capacity, high bank operating costs.
  - Interest rate spreads high and maturities short-term.
- Services and infrastructure:
  - Weak physical infrastructure and rudimentary payment/settlement systems.
  - Nonbank sector (microfinance, leasing, insurance, pensions) underdeveloped.
  - New entrants introducing e-banking, ATMs, and mobile money.
- Development priorities:
  - Complete legal and institutional reforms.
  - Encourage broader range of financial services and increased access.
  - Urgent tasks: upgrade payments system; implement legislation creating a commercial court.
  - Explore replication of mobile banking, microfinance, structured SME lending.
- Examples and indicators:
  - Mobile money:
    - Mobile money services in Liberian dollars launched in April 2010 with the largest commercial bank; transactions minimal so far.
    - MTN expanding mobile banking via Lonestar.
    - Operational challenges: oversight, IT security, identity verification, rural geographic coverage.
  - Microfinance average loan size per borrower (US$, as of end-2009):
    - Ethiopia: 118
    - Ghana: 255
    - Liberia: 57
    - Sierra Leone: 187
    - Tanzania: 77
  - Structured SME financing example (Ghana): partial credit guarantees, performance-based grants, technical assistance; reported creation of 2,000 formal sector jobs over 12 months to April 2009.

### IX. Fiscal Policy, FY2010–11 Budget, and Program Implementation
- FY2010 execution:
  - Risk management plan and expenditure cuts in response to revenue shortfalls.
  - Capital projects delayed/cancelled or replaced by current expenditure; 2 percent of GDP shortfall in capital spending.
- FY2011 budget (July 2010–June 2011):
  - Anchored by debt management strategy limiting borrowing to 3 percent of GDP NPV.
  - Budget preparation followed new PFM law; delays in legislative discussion and executive finalization through end-October 2010 undermined cash management; interim expenditure limited to one twelfth of previous year’s level.
- Tax policy and revenues:
  - Top personal and corporate income tax rates reduced from 35 to 25 percent (effective January 1, 2011).
  - Net revenue effect partly offset by higher taxes/excises on alcohol, airlines, cell phone usage, and hotels.
  - Nontax revenue budgeted to increase by almost 2 percentage points of GDP (mainly one-off payments for new iron ore concessions and an oil exploration license already received).
- Financing and spending projections (Percent of GDP; FY2010 Outturn / FY2011 Budget):
  - Revenue and grants: 31.0 / 35.3
    - Tax revenue: 22.4 / 20.2
    - Non-tax revenue: 7.3 / 9.2
    - Grants: 1.4 / 5.9
  - Expenditure: 30.4 / 35.8
    - Current expenditure: 27.0 / 27.5
      - Wages: 12.3 / 13.8
    - Capital expenditure: 3.4 / 8.3
  - Overall balance: 0.6 / -0.5
- Capital spending and wages:
  - Budgeted increase in capital spending over 2009/10 outturn: almost 5 percentage points of GDP (underlying increase close to 3 percent of GDP).
  - Wage bill set to rise 1½ percentage points of GDP due to regularization of 7,000 additional teachers and nurses and selective security force increases.
- Contingency:
  - Authorities anticipate a supplementary budget early in 2011 if additional revenues or concessional funding materialize.

### X. Monetary and Financial Sector Policies (CBL)
- Exchange rate and reserves:
  - Monetary policy aims to contain excessive exchange rate volatility; depreciation pressure has substantially reduced since early-2010.
  - CBL tailored foreign exchange auction sales to market conditions and achieved a modest increase in net foreign exchange position.
  - Margin against reserve targets in monetary program amounted to US$16 million at end-June 2010.
- Liquidity and instruments:
  - Banking sector highly liquid: vault cash and excess required reserves equivalent to 45 percent of total commercial deposits as of end-June 2010.
  - Net domestic assets of the CBL slightly below projections.
  - Foreign exchange auction helps mop up excess liquidity but is limited by reserve accumulation objectives.
  - Imminent launch of local currency treasury bill market to add a liquidity management instrument.
  - Need to improve CBL liquidity monitoring and forecasting; improve collaboration with MoF.
- Banking sector health:
  - Profitability remains low; all banks respect prudential ratios.
  - Minimum capital requirement increased to US$10 million by end-December 2010.
  - CBL lowered minimum general provisions for loan loss to 1 percent from 2 percent in August 2010.
- Payments and currency:
  - Treasury bill market expected to boost demand for Liberian dollars.
  - Consideration of replacing damaged bank notes and issuing higher-denomination notes weighed against inflation expectations.
- Governance and safeguards:
  - Progress in strengthening internal financial controls at the CBL; internal audit capacity building; semi-annual data audits feasible.
  - Handover of monetary data reporting package audit to CBL internal audit from second half of 2010.

### XI. Structural Reforms, PRS, and Statistics
- Structural benchmarks and PFM:
  - Publication of national accounts delayed to February 2011.
  - Continued implementation of Public Financial Management Act; transition to improved public accounting and reporting targeted by June 2011.
  - Urgent need to strengthen capacity for project evaluation and selection, internal audit, expenditure and cash management.
- PRS performance:
  - Second year implementation report to April 2010: implementation rate of deliverables increased from 20 percent to 80 percent.
  - PRS extended to end-2011 to accommodate third year deliverables.
- Statistical weaknesses:
  - National accounts and balance of payments statistics weak; TA being provided.
  - Publication of validated national accounts delayed to February 2011.

### XII. Debt, External Policies, and Trade
- HIPC completion and debt relief:
  - HIPC Completion Point reached June 2010; low risk of debt distress.
  - Paris Club creditors agreed on full cancellation of remaining debt; authorities working on bilateral agreements to be finalized no later than March 2011.
  - Debt buyback funded by World Bank managed Debt Reduction Facility completed with final commercial creditors in November 2010.
- Debt management:
  - Debt Management Committee operational; intends to issue guidelines for new borrowing and government guarantees.
- Trade and WTO:
  - Liberia observer at WTO; Memorandum on the Foreign Trade Regime finalized and to be sent to WTO by end-2010.
  - Expectation to conclude membership process in 2012.
  - Liberian trade strategy for EU EPA finalized.
  - Commitment to adopt ECOWAS common external tariff per migration plan.

### XIII. Program Monitoring, Staff Appraisal, and Recommendations
- Program conditionality:
  - No changes to program conditionality proposed; Technical Memorandum amended for concession payment timing.
- Staff findings:
  - Sound macroeconomic policies, strengthened institutions, and debt relief stabilized the economy and supported confidence.
  - Completion of HIPC debt cancellation supported confidence and raised growth potential; surge in new foreign investment commitments.
  - Medium-term prospects bright for commodity exports (iron ore, palm oil, offshore oil), with fiscal revenues improving especially after 2015.
  - Outside enclave sectors, significant growth and development challenges remain.
- Staff recommendations and risks:
  - Authorities’ preparedness for desired scale-up of public investment spending incomplete; need concerted government effort and donor engagement to identify strategic infrastructure projects.
  - Review and streamline nuisance taxes, user fees, and regulatory charges; ensure fiscal terms of concession agreements conform with Revenue Code.
  - Monitor wage and employment pressures to avoid crowding out public investment.
  - Limited scope for active monetary policy due to high dollarization and lack of instruments; treasury bill auctions to be introduced in FY2011.
  - Practical measures to enhance Liberian dollar use and gradual build-up of foreign exchange reserves should continue.
  - Treat indications of moderate real exchange rate overvaluation cautiously due to data limitations and structural changes.
  - Concession FDI will boost income growth and fiscal revenues and strengthen the balance of payments but unlikely to generate sufficient jobs to absorb growing under-employed labor force.
  - Top structural priorities: infrastructure rehabilitation; financial sector development; capacity building; property rights; maintaining security.
  - Concession revenues, concessional borrowing, and public-private partnerships could bridge much of infrastructure financing gap over ten years conditional on implementation capacity, donor coordination, and private sector involvement.
  - Shift financial sector development focus toward nonbank sector; urgently develop payment system; promote mobile banking, microfinance, structured SME finance.

### XIV. Recommendation and Fund Consultation
- Staff recommend completion of the fifth review under the ECF arrangement and support the sixth disbursement.
- Supplementary Letter of Intent (Monrovia, November 19, 2010) requests completion of fifth review and approval of SDR 4.44 million sixth disbursement.
- Proposed next Article IV consultation to follow the 2010 Decision on consultation cycles.

### XV. Recent Economic Indicators and Fiscal/Macroeconomic Tables (selected figures)
- Real GDP growth (annual percent changes, sample): 4.6, 6.3, 6.3, 8.5, 8.8, 11.7 (series shown).
- Consumer prices (average series shown): 17.5, 7.4, 7.6, 7.4, 3.9, 4.2, 4.8.
- Nominal GDP (millions of US dollars, series): 850.7, 879.0, 952.9, 976.6, 1,032.2, 1,054.1, 1,231.2.
- Gross official reserves (millions of US dollars, series): 107.8, 312.2, 334.2, 317.1, 351.5, 329.8, 339.9.
- Import coverage of reserves (months, series): 0.6, 2.3, 2.0, 1.9, 1.8, 1.6, 1.7.
- Central government operations (percent of GDP, selected):
  - Total revenue and grants: 27.2, 31.8, 31.0, 34.5, 35.3, 33.1, 34.0 (FY2009–13 sequence shown).
  - Total expenditure and net lending: 28.8, 31.5, 30.4, 34.1, 35.8, 36.6, 38.5.
  - Overall balance including grants: -1.6, 0.4, 0.6, 0.4, -0.5, -3.4, -4.5.
- Balance of payments (millions of US dollars, Table 2 sample):
  - Trade balance: -455, -409, -450, -742, -764 (years shown).
  - Exports, f.o.b.: 254, 153, 207, 315, 413 (years shown).
  - Imports, f.o.b.: -709, -563, -657, -1,057, -1,176 (years shown).
  - Donor transfers (net): 1,087, 920, 1,019, 967, 878 (years shown).
  - Current account balance (including grants): -488, -324, -395, -624, -799 (years shown).
- Fund financing and disbursements:
  - Total under ECF/EFF arrangements: SDR 550.03 million (ECF: SDR 207.26 million; EFF: SDR 342.77 million).
  - Recent ECF disbursements and approvals: SDR 7.00 million (Dec 29, 2008); SDR 7.00 million (May 14, 2009); SDR 4.44 million (Dec 21, 2009); SDR 4.44 million (July 2, 2010); SDR 4.44 million (Oct 31, 2010); SDR 4.44 million (Feb 15, 2011 projected).

### XVI. Data Adequacy and IMF Relations
- Data shortcomings significantly hamper surveillance.
- National accounts:
  - Comprehensive national accounts data not available; high uncertainty about level/growth of real GDP and sectoral components.
  - National business register and national accounts questionnaires established December 2008; second-round establishment survey completed after low response rates.
  - Upward revision of GDP expected in early 2011 after methodological issues addressed.
- Price statistics:
  - CPI for Monrovia compiled since 2005; Harmonized CPI providing national coverage adopted in 2007.
- Government finance statistics:
  - Ministry of Finance provides monthly disaggregated cash/commitment data; areas needing improvement include domestic debt reporting, arrears, data sharing, and conversion exchange rates.
- Monetary statistics:
  - Data provision adequate for surveillance; MFS report suspended since June 2009; STA mission March 2010 assisted with MFSM-standard forms.
- Balance of payments:
  - Reporting not comprehensive; fund staff prepare provisional statistics; need improvements in trade/services, FDI, government expenditures, remittances, and nonresident deposits.
- Participation and assessments:
  - Participant in GDDS since October 2005; no Data ROSC mission yet.
  - Executive Board completed fifth review under ECF on December 8, 2010 enabling disbursement of SDR 4.44 million (about US$6.82 million).

*Source: IMF staff report excerpts, "1. Incorporating Resource Models into the Macroeconomic Framework," Staff Report for the 2010 Article IV Consultation and Fifth Review Under the ECF arrangement (document _cr10373).*

### 1. Incorporating Resource Models into the Macroeconomic Framework ..........................14

### 1. Incorporating Resource Models into the Macroeconomic Framework

### I. Introduction and Recent Developments
- Post-conflict economic stabilization is "essentially complete." Requirements for the HIPC Completion Point were met in June 2010. Post completion point, nominal public sector external debt amounts to 9 percent of GDP, assuming HIPC terms are offered by remaining non-Paris Club creditors.
- Growth dynamics and sectoral drivers:
  - Recovery led by agriculture, notably the rubber sector, and the restart of commercial logging.
  - Growth is picking up after a slowdown in 2009 related to global recession spillovers.
- Prices, inflation, and external variables:
  - Terms of trade movements have been favorable.
  - Inflationary pressure is easing due to lower fuel and food prices; rising commodity prices contributed to a rebound in rubber exports.
  - Higher net inflows of foreign exchange in 2010 stabilized the exchange rate and permitted a modest increase in reserves.
- External investment and imports:
  - FDI commitments have increased substantially, as have estimated FDI inflows; the related increase of imports is reflected in a higher current account deficit.
- Fiscal performance FY2010:
  - Government revenue continued to rise and a balanced budget was maintained despite a small shortfall in nontax revenue.
  - Both revenue and expenditure broadly achieved programmed levels, but capital expenditure fell short by about 2 percentage points of GDP.
- Institutional and structural reforms:
  - Far-reaching institutional and legal changes instituted in public financial management, debt management, budget process, tax policy, and tax administration.
  - Financial sector legal and regulatory improvements aimed at strengthening stability, increasing intermediation, and expanding access to financial services.
  - Legislative actions: FY2011 budget approved in September with main parameters in line with staff estimates; new Commercial Code and act to establish a commercial court approved; changes to the Revenue Code finalized by the Executive.
  - Concessions ratified: iron ore, palm oil, port management in Monrovia; offshore oil exploration rights sold to a major oil company (raising expectations of a discovery).
- Program implementation status:
  - All performance criteria and indicative targets through June 2010 were observed.
  - Four of five structural benchmarks were substantively completed, one with a minor delay; remaining benchmark (publication of national accounts) put back to early 2011.

### II. Surveillance Issues
- Strategic challenge:
  - With stabilization and debt relief achieved, challenge is to translate reform momentum into sustained broad-based development.
  - Authorities’ development strategy "Liberia Rising 2030" aims for middle-income status through inclusive growth, capacity building, and infrastructure investment; envisages large-scale foreign investment in enclave sectors (iron ore and palm oil), with fiscal revenues devoted to infrastructure.
  - Strategy intends to create "growth corridors" linking isolated areas; authorities expect cost declines as additional roads, power, and ports come on stream and to motivate private investment outside enclaves.
  - Continued governance reforms—rule of law, property rights, transparency, tax administration—expected to reinforce business climate improvements.
- Staff view:
  - Outline of development strategy assessed as well conceived and appropriate.
  - Consultations focused on competitiveness issues, structural impediments to growth, impact of iron ore and palm oil concessions on macro-economy and the budget (including contribution to infrastructure rehabilitation), and expanding financial sector role for growth.

#### A. Medium-Term Outlook and Risks
- Baseline assumptions:
  - Assumes continued sound macroeconomic policies, broadly unchanged donor support, and ongoing political stability.
  - Heavily dependent on commencement of iron ore and timber production.
- Growth and external projections (baseline medium-term projection table excerpt):
  - Real GDP growth (%): 2010: 6.3; 2011: 8.8; 2012: 11.7; 2013: 8.4; 2014: 7.1; 2015: 7.0
  - Real GDP growth excl. mining (%): 2010: 6.3; 2011: 6.6; 2012: 6.5; 2013: 6.0; 2014: 5.8; 2015: 4.3
  - Overall fiscal balance, incl. grants (% of GDP): 2010: 0.6; 2011: -0.5; 2012: -3.4; 2013: -4.5; 2014: -5.5; 2015: -5.3
  - Overall fiscal balance, excl. grants (% of GDP): 2010: -0.8; 2011: -6.4; 2012: -7.2; 2013: -8.7; 2014: -10.3; 2015: -10.3
  - Current account, incl. grants (% of GDP): 2010: -40.4; 2011: -59.2; 2012: -64.9; 2013: -74.9; 2014: -20.9; 2015: -13.8
  - Gross official reserves (millions of US dollars): 2010: 317; 2011: 330; 2012: 340; 2013: 350; 2014: 360; 2015: 369
  - Months of imports of goods and services (1): 2010: 1; 2011: 2.6; 2012: 2.0; 2013: 2.0; 2014: 1.9; 2015: 2.6
  - Months of imports of goods and services (2): 2010: 2; 2011: 3.1; 2012: 2.6; 2013: 2.6; 2014: 2.5; 2015: 2.9
    - Footnotes: 1/ Excluding UNMIL service imports. 2/ Excluding UNMIL service and FDI-related imports.
- Dynamics and drivers:
  - Growth expected to recover to 6 percent in 2010 (text states 6 percent), with timber expansion and accelerate further as iron ore exports begin in 2011.
  - Over 2011–13, expansion of foreign investment-financed imports for mine construction expected to raise external current account deficit substantially; effect expected to end by 2014 when imports reduce and iron ore exports rise.
  - Inflationary pressure expected to be contained due to high import content of FDI flows, lack of linkages between enclave sectors and rest of economy, and slack in domestic employment market limiting overheating.
- Risks:
  - Significant upside and downside risks linked to commodity price fluctuations which could lead to investor retrenchment and revenue volatility.
  - Risk of "growth without development" where enclave revenues are not effectively directed to broad-based objectives (cited Clower et al., Growth Without Development – An Economic Survey of Liberia, 1966).
  - Potential instability or slowdown of reforms ahead of end-2011 presidential elections and prospective post-election UN drawdown.
  - Potential discovery of offshore oil poses both upside (income) and downside (governance) risks.

#### B. Competitiveness and External Stability Assessment
- Trade and current account patterns:
  - Visible trade deficit remained at, or over, 40 percent of GDP during 2007–2010.
  - Services deficit averaged 50 percent of GDP, largely related to aid inflows.
  - Trade deficit financed by official transfers and FDI: total official transfers, excluding UNMIL, and FDI averaged 50 percent and 25 percent of GDP, respectively.
  - Current account deficit high and volatile: weakened to almost 60 percent of GDP in 2008 due to fuel and food price shock and increased FDI; improved in 2009 due to reduced FDI-financed imports exceeding drop in rubber exports.
  - Projected 2011–12 strengthening of FDI would renew current account weakening, with deficit projected to remain above 50 percent of GDP; later improvement expected as timber, iron ore and palm oil exports restart.
  - Export processing and import substitution are very limited, indicating need to improve business environment.
- Competitiveness and business climate:
  - Cost competitiveness identified as a significant medium-term issue; high dollarization means exchange rate policy is unlikely to be a key factor.
  - Business climate and governance indicators improved but significant challenges remain: weak administrative capacity, many administrative fees and procedures, and uncertain property rights hinder investment outside natural resources.
  - Positive improvements:
    - Doing Business Indicators: Liberia has advanced, surpassing the fragile states average and approaching the ECOWAS region average.
    - Transparency International Corruption Perceptions Survey shows substantial improvement since 2008, with a 2010 ranking in the top five of SSA.
  - Labor costs: competitive for unskilled labor regionally and globally, but offset by higher non-labor costs for goods and services inputs.
- Real exchange rate assessment (CGER preliminary):
  - Macroeconomic balance approach points to an overvaluation between 12 and 15 percent depending on parameters.
  - Selected regression outputs and results:
    - Fiscal balance/GDP (rel. to trading partners): 0.20 0.283 1.04
    - Old age dependency: -0.14
    - Population growth (rel. to trading partners): -1.21
    - Initial NFA/GDP: 0.02 0.048
    - Oil balance/GDP: 0.23 0.319 0.18
    - Per capita growth (rel. to trading partners): -0.21 -0.437
    - Relative income: 0.02 0.07
    - CA Norm (percent of GDP): 0.1 -2.4 -3.3
    - Underlying CA projection (percent of GDP): -18.0 -18.0 -18.0
    - Current Account Gap (percent of GDP): 18.1 15.6 14.7
    - Real Exchange Rate gap (percent): -15.4 -13.2 -12.5
  - Note: "Appreciation (depreciation) needed in the real exchange rate to close the gap between the norm and the underlying. The calculation is based on a medium-term elasticity of 0.44, which assumes the CGER elasticity weighted by the ratios of exports and imports of goods and services in 2015."
- Policy implications discussed during consultations:
  - Improving competitiveness should focus on productivity gains via removal of bureaucratic, legal and physical obstacles rather than exchange rate adjustment due to high dollarization.
  - Importance of ongoing regional trade integration within ECOWAS, WTO accession, and better transport infrastructure to improve competitiveness.
  - Continued implementation of governance reforms—including rule of law, property rights, transparency, and tax administration—could substantially reinforce improvements in the business climate.

*Source: IMF staff report excerpt, "1. Incorporating Resource Models into the Macroeconomic Framework."*

### 19.      The external stability approach calculates that Liberia’s medium-term net foreign

### 19.      The external stability approach calculates that Liberia’s medium-term net foreign

### External stability approach — findings and required adjustment
- Net foreign asset (NFA) stabilizing assumption: stabilizing net foreign position of -9.0 percent of GDP.1/
- Underlying current account and NFA-stabilizing current account:
  - Underlying Current Account: -18.0 (percent of GDP)
  - Sustainable Current Account: -9.0 (percent of GDP)
  - Gap: -8.3 (percent of GDP)
- Real exchange rate adjustment needed to close the gap: about 8 percent (calculated as -8.5 percent in the table’s depreciation column).
- Medium-term elasticity used in calculation: 0.31.2/
- Formula provided for stabilizing current account:
  - CA_S = ((g + Π(1 + g))/(1 + g))(1 + Π)) b_S  (as presented in the source).

1/ Assumes a stabilizing net foreign position of -9.0 percent of GDP.  
2/ The calculation is based on a medium-term elasticity of 0.31, which assumes the CGER elasticities weighted by the ratio of exports and imports of goods and services in 2009.

### Reserve adequacy and external resilience
- SDR allocation effect: 2009 SDR allocation substantially strengthened reserve adequacy.
- Reserves to imports ratio (projected):
  - 2009: 2.6 months
  - 2011–13: 2.0 months (projected decline driven by strong expansion of imports financed by FDI in the iron ore sector)
  - Import coverage excluding FDI-related imports: 2½ months coverage 2011–13
  - 2014–15: projected to rise to 2.9 months
- Debt indicators: all remain well below policy-related thresholds except under the historical scenario.

### Structural impediments to competitiveness and growth
- Key impediments identified:
  - Inadequate infrastructure:
    - Energy costs: three times the African average.
    - Low road paving ratios; some regions inaccessible during rainy season.
    - Multi-donor diagnostic of infrastructure needs completed.
  - Insecurity of land tenure:
    - Inadequately defined/enforced legal framework (civil laws and customary arrangements).
    - Endemic land disputes and controversial use of the Eminent Domain Law.
    - Land Commission created in 2009 to advise on disputes and improve titling/registry; Commission lacks binding authority.
  - Financial sector development constraints:
    - Low financial intermediation and narrow range of financial products.
    - Plans: structured SME lending, microfinance, mobile banking; medium-term capital market development.
  - Limited implementation capacity:
    - PRS implementation reports identify limited domestic implementation capacity as the principal constraint.
    - Authorities prepared a National Capacity Development Strategy.
  - Fragility of peace:
    - Unmet expectations from the “peace dividend” and tensions among tribal groups and between indigenous Liberians and Americo-Liberians could reignite conflict.
    - UN police and military forces assist in maintaining security; external support focused on rule of law, security sector reform, and national reconciliation.

### Economic impact of foreign direct investment (FDI) projects — modeling approach
- Concessions modeled:
  - Six ratified foreign investment concessions: four in iron ore and two in palm oil.
- Model outputs included: physical production, fiscal revenue, exports, foreign and domestic labor income, profit transfer, capital flows.
- Scenarios considered:
  - Program baseline (three concessions)
  - High case (five concessions)
  - Best case (six concessions)
  - Low case (only palm oil concessions; no iron ore production)
- Borrowing and fiscal assumptions:
  - Borrowing capped at up to 3 percent of GDP per year while keeping external debt stock below 30 percent of GDP (both in net present value terms).
  - Budget grants held constant at 5 percent of baseline GDP in all scenarios.
  - Non-interest current expenditure assumed to increase in real terms by about 5 percent each year.
  - All resources available after current spending devoted to capital investment.
  - Ten-year focus: 2011–20; framework does not explicitly assume absorption constraints but notes operational/implementation capacity issues could affect annual paths.
- Feedback effect: increase in infrastructure capital stock assumed to raise productivity in non-enclave sectors.

### FDI impact on revenues, growth, and balance of payments
- Revenue profile:
  - Potential revenues substantial and back-loaded within 2011–20 due to lengthy pre-production investment periods and depreciation schedules.
  - Palm oil revenue contribution negligible up to 2020 (oil palms take 5 years to reach maturity).
- Growth impact:
  - Direct effect from concessions’ operations and indirect effect from increased publicly-financed infrastructure projects financed by concession revenues.
  - Increase in capital stock assumed to raise output in the non-enclave sector.
- Balance of payments impact:
  - Initial direct impact projected to be highly negative during investment phase.
  - As production expands, contribution turns positive despite large profit transfers; positive contribution equals value added accruing to government and domestic labor net of additional imports.

### Infrastructure needs and financing
- Total infrastructure need for FY2011-20: US$3.7 billion (382 percent of 2010 GDP) — AICD conclusion.
  - Roads: 1.1 (Billions of US dollars)
  - Water and Sewerage: 0.8
    - Water: 0.5
    - Sanitation: 0.4
  - Power: 1.3
    - Generation: 0.9
    - Transmission and distribution: 0.5
  - Other: 0.5
- Financing sources assumed:
  - Concession revenues
  - Donor support in grant form
  - Concessional borrowing consistent with authorities’ debt management strategy
- Medium-term fiscal projections and affordability:
  - In all but the low case (no iron ore after 2010), the infrastructure program is largely affordable.
  - Baseline scenario cumulative financing gap: US$0.4 billion; nearly 90 percent of infrastructure investment could be financed over the ten-year period.
  - Filling the residual financing gap via concessional borrowing appears viable; loans at market rates and maturities would push debt above vulnerability thresholds.
- Policy implications to address financing gap and program risks:
  - Intensify reform in other areas (e.g., tax administration improvements omitted from staff framework).
  - Develop a public investment plan to mobilize and redirect aid to priority areas.
  - Recognize public sector wage pressures that could undercut investment efforts.
  - Consider back-loading infrastructure program if capacity improvements do not materialize rapidly.
  - Improve quality of expenditure through better planning and implementation.

### Financial sector development — status and priorities
- Constraints and recent progress:
  - Low financial intermediation and private sector lending limit support for needed growth.
  - Banking system expansion due to entry of other African banks; intermediation gap with SSA is closing.
  - Banking system has significant excess liquidity; lending to private sector limited relative to peers.
  - SMEs face difficulties accessing credit due to weak legal/judicial framework, limited bank capacity to appraise SMEs, and high bank operating costs.
  - Interest rate spreads high and maturities short-term.
- Range of services and infrastructure:
  - Weak physical infrastructure impedes banking expansion and limits services.
  - Rudimentary payment and settlement systems reduce banking benefits.
  - Nonbank sector (microfinance, leasing, insurance, pensions) remains underdeveloped.
  - New entrants are introducing e-banking, automated teller machines, and mobile money.
- Development priorities recommended:
  - Complete ongoing reforms to legal and institutional framework.
  - Encourage a broader range of financial services and increased access to finance.
  - Urgent tasks: upgrade the payments system; implement recent legislation creating a commercial court.
  - Explore replication of successful innovations: mobile banking, microfinance, structured SME lending.
- Examples and data:
  - Mobile money:
    - Mobile money transfer services in Liberian dollars launched in April 2010 in collaboration with the largest commercial bank; transactions minimal so far.
    - MTN expanding mobile banking to about 20 countries including Liberia via Lonestar.
    - Operational challenges: oversight, IT security, identity verification, geographic coverage to rural areas.
  - Structured SME financing example (Ghana): partial credit guarantees, performance-based grants, technical assistance; reported improved SME access and creation of 2,000 formal sector jobs over 12 months to April 2009.
  - Microfinance average loan size per borrower (US$, as of end-2009):
    - Ethiopia: 118
    - Ghana: 255
    - Liberia: 57
    - Sierra Leone: 187
    - Tanzania: 77

### Fiscal policy and program discussions (FY2010–11)
- FY2010 budget execution:
  - Risk management plan and expenditure cuts implemented in response to revenue shortfalls.
  - Capital projects delayed, cancelled, or replaced by current expenditure, leading to a 2 percent of GDP shortfall of capital spending relative to the fiscal program.
  - Need for greater expertise in expenditure planning and higher priority to capital spending.
- FY2011 budget (July 2010–June 2011) — alignment and features:
  - Anchored by debt management strategy limiting borrowing to 3 percent of GDP in net present value terms.
  - Budget preparation followed the new PFM law; included medium-term context, budget framework paper, and state enterprise reporting annex.
  - Delays in legislative discussion and executive finalization through end-October 2010 undermined cash management; interim expenditure limited to one twelfth of previous year’s level.
- Tax policy and revenue changes:
  - Top personal and corporate income tax rates reduced from 35 to 25 percent.
  - Net revenue effect partly offset by higher taxes/excises on alcohol, airlines, cell phone usage, and hotels.
  - Nontax revenue budgeted to increase by almost 2 percentage points of GDP (mainly due to one-off payments for new iron ore concessions and an oil exploration license already received).
  - Domestic financing through drawdown of government deposits; budget included no provision for borrowing.
  - Delays in disbursing FY2010 general budget support lead to increase of grants in FY2011.
- Expenditure and balance projections (Percent of GDP):
  - FY2010 Outturn / FY2011 Budget
    - Revenue and grants: 31.0 / 35.3
      - Tax revenue: 22.4 / 20.2
      - Non-tax revenue: 7.3 / 9.2
      - Grants: 1.4 / 5.9
    - Expenditure: 30.4 / 35.8
      - Current expenditure: 27.0 / 27.5
        - Wages: 12.3 / 13.8
      - Capital expenditure: 3.4 / 8.3
    - Overall balance: 0.6 / -0.5
- Capital spending and wages:
  - Budgeted increase in capital spending over 2009/10 outturn: almost 5 percentage points of GDP (underlying increase close to 3 percent of GDP).
  - Investment concentrated in public works, education, and health.
  - Wage bill set to rise 1½ percentage points of GDP due to regularization of education and health payroll (7,000 additional teachers and nurses) and selective increases to security forces.
- Contingency planning:
  - Authorities anticipate tabling a supplementary budget early in 2011, in consultation with Fund staff, if additional revenues materialize or concessional funding is identified.

*Source: IMF staff report content as provided in the supplied document excerpt.*

### 35.      Staff broadly supported the main FY2011 budget parameters, while noting

### _cr10373 - 35.      Staff broadly supported the main FY2011 budget parameters, while noting

### Fiscal policy and budget implementation
- Staff broadly supported the main FY2011 budget parameters, while noting implementation risks.
- Revenue projections:
  - Both tax and nontax revenue projections appeared realistic, given the first quarter outturn.
  - Future tax administration improvements could support revenue growth.
- Expenditure and investment:
  - Staff considered the increase in the wage bill to be sustainable and necessary for improved service delivery in health, education, and security.
  - Main risks to implementing the capital budget are capacity constraints that could slow project implementation and delays if budget support is not disbursed timely.
  - Over the medium term, capital spending is expected to increase substantially, funded largely by iron ore taxation and concessional borrowing.
  - Staff considers an annual real increase of non-interest current expenditure of about 5 percent could accommodate significant increases in other priority spending.
  - Combined with a moderate increase of interest spending, total current expenditure is programmed to stabilize as a percent of GDP.
- Tax policy:
  - Changes in tax policy are at the planning stage.
  - The authorities intend to adopt the ECOWAS Common External Tariff, and are considering improvements to the fiscal regimes governing the forestry and petroleum sectors and the eventual adoption of a VAT.
  - A review of nuisance taxes, fees and charges is expected to reduce business compliance costs.

### Monetary and financial sector policies
- Exchange rate and reserves:
  - Monetary policy aims to contain excessive exchange rate volatility.
  - Pressure for exchange rate depreciation against the US dollar has substantially reduced since early-2010.
  - The CBL has tailored foreign exchange auction sales to market conditions and achieved a modest increase in the net foreign exchange position (MEFP ¶9).
  - Maintaining adequate foreign exchange reserve coverage is an important element of confidence building; the CBL drew on its reserve account to finance headquarters rehabilitation during 2010–11. The resulting expenditure in foreign exchange can be accommodated through the margin against reserve targets in the monetary program (amounting to US$16 million at end-June 2010) but should not undermine the objective of a gradual build-up of foreign exchange reserves.
- Liquidity and instruments:
  - Liquidity monitoring remains important.
  - The banking sector remained highly liquid with vault cash and excess required reserves equivalent to 45 percent of total commercial deposits as of end-June 2010.
  - Net domestic assets of the CBL are slightly below projections, reflecting higher-than-anticipated commercial bank deposits at the CBL.
  - The foreign exchange auction helps mop up excess liquidity in the absence of domestic capital and interbank markets, but its use is limited by reserve accumulation objectives.
  - The anticipated launch of the local currency treasury bill market will add a new liquidity management instrument.
  - Immediate challenge: improve CBL liquidity monitoring and forecasting capacity; staff reiterated need for improved collaboration and information sharing between the CBL and the MoF.
- Banking sector health:
  - Banking sector profitability remains low.
  - All banks respect the required prudential ratios.
  - The increase of the minimum capital requirement to US$10 million by end-December 2010 will further contribute to financial stability.
  - Low profitability attributed to high operating and overhead costs relative to income and possibly enhanced competition from new entrants.
  - The CBL lowered the minimum general provisions for loan loss to 1 percent from 2 percent in August 2010 to provide incentives for extending new loans.
- Payments and currency:
  - The imminent introduction of the local currency treasury bill market may help boost demand for Liberian dollars.
  - Replacing damaged or mutilated bank notes and issuing higher-denomination notes could be considered, though authorities are concerned about possible adverse effects on inflation expectations.
- Governance:
  - Meaningful progress has been made in strengthening internal financial controls at the CBL.
  - The CBL has been building up internal audit capacity and reached a position to carry out semi-annual data audits.
  - Staff supported a handover of the audit for the monetary data reporting package to the internal audit section of the CBL from the second half of 2010 (MEFP ¶10).

### Structural reforms and poverty reduction strategy (PRS)
- Progress on program benchmarks has generally proceeded satisfactorily, though publication of national accounts is delayed to early 2011 (MEFP ¶7–8 and ¶12).
- Key reforms and administrative improvements:
  - Trade facilitation: introduction of a short negative list requiring an import permit declaration (IPD) from the Ministry of Commerce for specified goods (fuel and selected chemicals, explosives, hazardous waste, cultural artifacts, obscene materials, military vehicles, and aircraft).
  - CBL publicized regulations for treasury bill auctions to eligible participants, setting the stage for intra-year budget financing of the FY2011 budget.
  - The Ministry of Finance now pays all government civil servants in Monrovia by direct bank transfer, and civil servants in 7 of the other 14 counties.
  - A computerized asset registry compiled for 85 of the 89 ministries and agencies substantively completing the exercise.
  - Data problems, including estimation of the informal sector and dual currency reporting, delayed publication of validated national accounts from September 2010 to February 2011.
- Public financial management and capacity needs:
  - Implementation of the Public Financial Management Act is continuing; additional efforts required to ensure transition to improved public accounting and reporting is completed by June 2011.
  - Continued vigilance needed in public procurement, fiscal terms of concessions, and external audit.
  - Urgent need to strengthen capacity to evaluate and select projects for the medium-term expenditure framework, develop internal audit, and strengthen expenditure and cash management.
- PRS performance:
  - The second year implementation report of the PRS to April 2010 reports improved implementation (MEFP ¶13): implementation rate of deliverables increased from 20 percent in the first year to 80 percent in the second year.
  - PRS extended to end-2011 because some third year deliverables will not be achieved by mid-2011.

### Statistical issues
- Weaknesses in the national accounts and balance of payments statistics hamper surveillance.
- Financing and technical assistance from the Fund and other agencies is being provided to upgrade statistical capacity in these areas.
- Publication of validated national accounts delayed to February 2011 due to data problems.

### Debt, external policies, and trade
- Debt relief and risk:
  - Following HIPC completion point reached in June 2010, Liberia has a low risk of debt distress.
  - Recent agreement with Paris Club creditors on full cancelation of remaining debt will further reduce debt vulnerabilities; authorities working on bilateral agreements with Paris Club creditors, intending to finalize them no later than March 2011.
  - Authorities committed to seek comparable treatment from remaining bilateral and commercial creditors.
  - Negotiations continue with remaining non-Paris Club bilateral creditors.
  - A debt buyback funded by the World Bank managed Debt Reduction Facility was completed with the final two remaining commercial creditors in November 2010.
- Debt management:
  - The Debt Management Committee is fully operational and intends to issue guidelines for new borrowing and government guarantee requests and to initiate and assess proposals for investment projects eligible for external concessional financing (MEFP ¶4).
- Trade arrangements and WTO:
  - Liberia recently became an observer at the WTO; the authorities indicated their Memorandum on the Foreign Trade Regime has been finalized and will be sent to the WTO secretariat by end-2010.
  - They expect to conclude the membership process in 2012.
  - Authorities finalized the Liberian trade strategy required for the Economic Partnership Agreement (EPA) with the European Union.
  - Liberia remains committed, with other ECOWAS members, to adoption of the common external tariff according to the agreed migration plan.

### Program monitoring and staff appraisal — key findings and recommendations
- Program monitoring:
  - No changes to program conditionality are proposed.
  - The Technical Memorandum is amended to reflect changes in the program path of concession payments for March and June 2011 (Attachment II).
- Staff appraisal — findings:
  - Sound macroeconomic policies, strengthened institutions, and debt relief have stabilized the economy and supported confidence building.
  - Economic growth is recovering after a slowdown from global financial crisis spillovers; improvements in the terms of trade supported exports and moderated import price inflation.
  - Completion of HIPC Initiative debt cancellation supported confidence, evidenced by a surge of new foreign investment commitments, and raised underlying growth potential.
  - Medium-term growth prospects bright for commodity exports; iron ore, palm oil, and offshore oil investments will significantly improve fiscal revenues over the medium term, especially after 2015.
  - Outside enclave sectors, major growth and development challenges remain.
- Staff appraisal — risks and recommendations:
  - Authorities’ preparedness for desired scale-up of public investment spending is far from complete; a concerted government effort and effective engagement with bilateral and multilateral partners are needed to identify and implement strategic infrastructure projects.
  - To counter perception of a large tax burden on the private sector, authorities will review and streamline nuisance taxes, user fees, and regulatory charges; attention should ensure fiscal terms of new concession agreements conform with the revenue code.
  - Wage and employment pressure risks crowding out public investment if not tackled in future budgets.
  - Scope for an active monetary policy remains limited due to high dollarization and lack of monetary instruments; introducing variation in foreign exchange sales has reduced exchange rate volatility.
  - Introduction of treasury bill auctions expected in FY2011 will create a new liquidity management tool.
  - Practical measures are needed to enhance use of the Liberian dollar as a means of payment; a gradual build-up of foreign exchange reserves should continue.
  - Exchange rate has minor role in external stability and competitiveness due to high dollarization; indications of moderate overvaluation of the real exchange rate over the medium term should be treated cautiously due to data limitations and structural changes.
  - Concession FDI investments will boost income growth and fiscal revenues and strengthen the balance of payments, notwithstanding large factor payments abroad, but are unlikely to generate the scale of job creation needed to absorb the growing, young, under-employed labor force.
  - Structural impediments outside the concessions sector are significant: infrastructure rehabilitation; financial sector development; capacity building; defining and enforcing property rights; and maintaining security.
  - Accelerating infrastructure development is a top priority; concession revenues, concessional borrowing, and public-private partnerships could bridge much of the infrastructure financing gap over the next ten years, conditional on improved implementation capacity, enhanced donor coordination, and private sector involvement.
  - Financial sector development should shift focus from banks to the nonbank sector; renewed impetus for developing the payment system is urgently needed.
  - Creative solutions (mobile banking, microfinance, structured SME finance) show promise to improve financial access.
- Program performance and governance:
  - Program performance generally good: all performance criteria through end-June 2010 were observed.
  - Delays in completion of structural benchmarks were relatively minor.
  - Preparation of the FY2011 budget was exemplary, but a four month delay in legislative approval and executive finalization undermined effectiveness of budget preparation investments.
  - All sovereign arrears to private creditors have been cleared; the financing assurances review is no longer applicable.
- Principal risks:
  - Aside from adverse external developments, principal risks include loss of reform momentum leading to unbalanced growth and unmet development objectives.
  - Staff confident risks could be mitigated by maintaining strict focus on removing multiform barriers to growth outside the enclave sectors.

*Source: IMF staff report excerpt.*

### 61.      Staff recommend completion of the fifth review under the ECF arrangement,

### _cr10373 - 61.      Staff recommend completion of the fifth review under the ECF arrangement,

### Recommendation and Fund Consultation
- Staff recommend completion of the fifth review under the ECF arrangement, and support the sixth disbursement under the arrangement.
- It is proposed that the next Article IV consultation with Liberia take place in accordance with the 2010 Decision on consultation cycles.
- The Supplementary Letter of Intent (Monrovia, November 19, 2010) requests completion of the fifth review and approval of the sixth disbursement in the amount of SDR 4.44 million.

### Recent Economic Developments (selected indicators and findings)
- Real GDP growth rate series shown for 2006–2010; sample indicators include:
  - Real GDP growth rate entries in Table 5: 4.6, 6.3, 6.3, 8.5, 8.8, 11.7 (annual percentage changes across years shown).
- Consumer prices (average): 17.5, 7.4, 7.6, 7.4, 3.9, 4.2, 4.8 (annual averages across periods shown).
- Nominal GDP (millions of US dollars): 850.7, 879.0, 952.9, 976.6, 1,032.2, 1,054.1, 1,231.2 (period sequence shown).
- Nominal GDP per capita (US dollars): 243.2, 239.6, 249.1, 255.3, 260.3, 265.8, 300.8 (period sequence shown).
- Import coverage of reserves (months): 0.6, 2.3, 2.0, 1.9, 1.8, 1.6, 1.7 (series shown).
- Gross official reserves (millions of US dollars): 107.8, 312.2, 334.2, 317.1, 351.5, 329.8, 339.9 (series shown).

### Fiscal Policy and Central Government Operations
- Fiscal year basis: fiscal year ends in June; budgets shown on a cash basis (debt service after all debt relief).
- Central government budget (levels, millions of US dollars, selected):
  - Total revenue and grants: 39.5, 13.5, 23.8, 22.6, 17.7, 24.5, 5.6 (series shown).
  - Total expenditure and net lending: 60.2, 26.3, 15.6, 13.4, 17.6, 28.9, 14.9 (series shown).
  - Capital expenditure (annual percentage change entries shown): 43.4, 41.5, 48.8, -6.2, 53.6, 167.4, 33.8 (series shown).
- Fiscal operations (millions of US dollars, Table 4a, FY2009–13 projections):
  - Total revenue and grants: 234.9, 290.9, 288.0, 342.4, 358.6, 378.8, 439.5 (FY sequence shown).
  - Total expenditure and net lending: 248.9, 287.6, 282.2, 338.4, 363.7, 417.8, 497.5 (FY sequence shown).
  - Overall balance including grants (millions of US dollars): -14.0, 3.2, 5.9, 4.0, -5.0, -39.0, -58.0 (FY sequence shown).
- Fiscal ratios (percent of GDP, Table 4b, FY2009–13 projections):
  - Total revenue and grants: 27.2, 31.8, 31.0, 34.5, 35.3, 33.1, 34.0 (percent of GDP sequence shown).
  - Total expenditure and net lending: 28.8, 31.5, 30.4, 34.1, 35.8, 36.6, 38.5 (percent of GDP sequence shown).
  - Overall balance including grants: -1.6, 0.4, 0.6, 0.4, -0.5, -3.4, -4.5 (percent of GDP sequence shown).

### Balance of Payments and External Sector
- Table 2 (Millions of US dollars, 2008–12 projections):
  - Trade balance: -455, -409, -450, -742, -764 (years shown).
  - Exports, f.o.b.: 254, 153, 207, 315, 413 (years shown).
    - Of which: rubber: 225, 93, 136, 138, 120 (years shown).
  - Imports, f.o.b.: -709, -563, -657, -1,057, -1,176 (years shown).
  - Donor transfers (net): 1,087, 920, 1,019, 967, 878 (years shown).
  - Current account balance (including grants): -488, -324, -395, -624, -799 (years shown).
  - Current account balance, excluding grants: -1,575, -1,244, -1,414, -1,592, -1,677 (years shown).
- Memorandum items:
  - Public sector external debt (debt outstanding, including arrears): 3,203, 1,678, 871, 0, 1,138 (levels by year shown).
  - Public sector external debt (percent of GDP): 376.6, 190.9, 8.9, 8.9, 11.2 (percent sequence shown).

### Debt Sustainability and Stress Scenarios
- Debt sustainability analysis (Figures 3a and 3b) presents alternative scenarios for public and publicly guaranteed external debt and public debt indicators over 2010/11–2030/31.
- Notes and key assumptions:
  - 1/ The most extreme stress test is the test that yields the highest ratio in 2019/20 (figure context).
  - 2/ Given lack of reliability of historical data, DSA uses only FY 2004/05 to FY2007/08 data while excluding FY2008/09.
  - Historical scenario breaches the PV debt-to-GDP threshold due mainly to high current account deficits after return of political stability; staff does not consider this a reliable indicator of potential debt distress.
  - In Figure 3b, revenues are defined inclusive of grants.
- Selected indicators (series labels shown in figures and tables):
  - PV of debt-to-GDP ratio, PV of debt-to-exports ratio, PV of debt-to-revenue ratio, Debt service-to-exports ratio, Debt service-to-revenue ratio, Rate of debt accumulation, Grant-equivalent financing (% of GDP).

### Monetary Sector and Banking Indicators
- Monetary survey highlights (millions of US dollars, Table 3a):
  - Net foreign assets (Monetary Survey): -674.0, -664.3, 183.9, 194.8, 215.2 (series shown).
  - Broad money (M2): 276.9, 346.0, 340.8, 359.4, 407.1 (levels shown).
  - Reserve money (annual percentage change): 13.1, 12.4, -24.3, -3.2, 16.1, 15.0, 19.0 (series shown).
  - Money multiplier (M2/M0): 4.4, 5.2, 4.6, 5.4, 4.4, 5.2, 5.1 (series shown).
  - CBL's gross official foreign reserves (millions of US dollars): 107.8, 312.2, 334.2, 317.1, 351.5, 329.8, 339.9 (series shown).
- Monetary survey in Liberian dollars (Table 3b) provides parallel series in local currency terms (levels and percent changes shown).

### Fund Financing, Disbursements, and Projected Payments
- Total under ECF/EFF arrangements: SDR 550.03 million (ECF: SDR 207.26 million; EFF: SDR 342.77 million) as shown in the disbursement schedule.
- Schedule of actual and projected ECF disbursements and reviews (Table 8 and schedule):
  - ECF: SDR 7.00 million (December 29, 2008) — Executive Board approval of first review.
  - ECF: SDR 7.00 million (May 14, 2009) — Executive Board approval of second review.
  - ECF: SDR 4.44 million (December 21, 2009) — Executive Board approval of third review.
  - ECF: SDR 4.44 million (July 2, 2010) — Executive Board approval of fourth review.
  - ECF: SDR 4.44 million (October 31, 2010) — Observance of performance criteria for June 30, 2010; completion of the fifth review.
  - ECF: SDR 4.44 million (February 15, 2011) — Observance of performance criteria for December 31, 2010; completion of the sixth review.
- Table 7 (Fund credit position and projected payments, in millions of SDRs):
  - Prospective drawings ECF: 8.88 (2010), 4.44 (2011) shown.
  - Projected debt service to the Fund (series 2010–2021 includes values such as 0.08, 2.18, 3.77, 5.97, 6.41, 7.88, 4.27, 2.68, 0.44).
  - Fund credit outstanding (in percent of GDP and levels) shown across projection years; interest assumptions: effective January 7, 2010 interest on ECF credit outstanding would be zero in 2010 and 2011; assumed ECF interest rate at 0.25% from 2012 onward.

### Program Commitments and Authorities’ Letter
- Supplementary Letter of Intent (Monrovia, November 19, 2010) and accompanying Supplementary Memorandum of Economic and Financial Policies outline:
  - Implementation of Liberia’s economic program supported by the ECF through September 2010.
  - Recent economic policy actions and commitments.
  - Request that the fifth review be completed and the sixth disbursement of SDR 4.44 million be approved.
  - Authorities state belief that policies are adequate to achieve program objectives and commit to further measures as appropriate and to continue consultations with Fund staff.
  - Authorities consent to publication on the IMF external website of the letter, the Supplementary MEFP, and the related Staff Report for the Article IV Consultation and Fifth Review under the ECF.

*Source: _cr10373 - 61.      Staff recommend completion of the fifth review under the ECF arrangement, (IMF staff report and attachments, pages and tables as provided).*

### 1.      Economic developments are encouraging and should support a continued

### _cr10373 - 1.      Economic developments are encouraging and should support a continued

### Economic outlook and growth
- Real GDP growth should rise above 6 percent from 4½ percent in 2009.
- After a slowdown in 2009, economic activity is strengthening in 2010 with subdued price inflation.
- Exports have rebounded on account of rising rubber production and prices.
- Foreign direct investment commitments are up sharply; ratified agreements so far this year include:
  - two more iron ore mines (bringing the number of ratified iron ore concessions to four);
  - a second large-scale palm oil plantation;
  - the rehabilitation of the Port of Monrovia.
- A major multinational oil company is joining other companies in conducting offshore oil exploration.
- Assuming current conditions remain, inflation is projected to be around 5 percent to end-2010.

### Employment and social spending
- Acceleration of growth is expected to be accompanied by a pick-up in employment.
- Spending in support of PRS deliverables accounts for 65 percent of total budgeted spending.
- Significant expenditure increases related to:
  - regularization of several thousand qualified volunteer teachers and nurses onto the payroll;
  - pay increases for police and armed services personnel;
  - election administration;
  - capital projects.

### Fiscal performance, revenue, and the 2010/11 budget
- All quantitative performance criteria under the program through end-June 2010 were observed.
- Three out of four structural benchmarks set for completion under the program for end-June 2010 were met; the remaining benchmark (computerized government asset registry) expected to be completed by end-December 2010.
- The 2010/11 Budget was approved by the Legislature in September.
- An expansion of revenue is anticipated on account of:
  - one-off signature payments for concession agreements;
  - increased sales taxes and excises on luxury goods and communications.
- As announced in 2009, top rates of corporate and personal income tax will be lowered from 35 to 25 percent on January 1, 2011.
- Budget financing is presently limited to:
  - a drawdown of uncommitted deposits in the amount of one percent of GDP; and
  - intra-year treasury bill financing, which is expected to begin shortly.
- A supplementary budget will be tabled should new financing sources become available.

### Public financial management and treasury reforms
- Improvements in public financial management:
  - Direct payment of central government civil servant salaries has expanded greatly and now includes all of Monrovia and some rural counties.
  - Efforts to include remaining government agencies and investigate alternate arrangements for remote areas.
  - Progress on computerized asset registry with a few remaining ministries/agencies expected to be completed by end-December 2010.
  - Regularization of payrolls expanded to cover 15 ministries, yielding considerable financial savings from eliminating fraudulent payments.
  - An external audit of pension payments expected to be completed by end-2010.
  - Concerted effort to develop internal audit capacity.
  - Building capacity in state-owned enterprises to comply with public reporting requirements under the Public Financial Management Act; confident quarterly reporting to the Ministry of Finance will begin in early 2011 (benchmark).
- Computerization of treasury and revenue functions:
  - An integrated financial management information system will be the basis for government accounting incorporating the new chart of accounts from July 1, 2011.
  - Continued roll-out of the ASYCUDA system in customs—expanding it to the Monrovia oil terminal and international airport by end-December 2010 (benchmark)—and begin implementing the IT system in the Bureau of Internal Revenue.
  - Treasury bill program to be launched later in 2010 following issuance of regulations in June; treasury bill auction regulation adopted by the CBL Board and publicized (met).

### Debt situation and borrowing strategy
- Liberia has returned to a sustainable level of public debt.
- Paris Club creditors announced cancellation of all remaining claims; completion of buyback of commercial debt with the last two remaining creditors completed.
- Aim to conclude remaining Paris Club bilateral agreements by March 2011.
- Efforts to reach agreement on HIPC terms with non-Paris Club creditors are intensifying.
- Seeking highly concessional financing to fund pressing investment needs while maintaining low debt vulnerability.
- Procedures for submitting borrowing requests to the Debt Management Committee will be prepared by end-October.

### Monetary and financial sector conditions and reforms
- Monetary and financial conditions are stable.
- Pressure for exchange rate depreciation against the US dollar has lessened substantially since the beginning of the year partly because of action taken by the CBL to smooth developments in the foreign exchange market.
- Net domestic assets of the CBL are slightly below expectation at mid-year, reflecting higher-than-anticipated government and commercial bank deposits at the CBL.
- Private sector credit growth slowed since the onset of the financial crisis but is now expected to stabilize at a reasonably buoyant pace of expansion.
- Financial sector transformation and reforms:
  - Intend to consolidate existing initiatives and strengthen medium-term financial sector reform agenda as a center pillar of the overall growth strategy.
  - Regulatory framework to establish a privately-managed credit reference bureau has been formulated.
  - New Commercial Court Act will strengthen creditors’ rights and improve borrowers’ access to bank credit.
  - New Commercial Code provides for lease and mortgage financing.
  - Central Bank of Liberia has revised the Anti-Money Laundering Law of 2002 for submission to the Legislature.
  - CBL has improved internal controls and established a satisfactory track record in implementing recommendations of the 2008 Safeguards Assessment.
  - Next Monetary Data Reporting Package audit will be carried out by the CBL internal audit department.

### Regional and multilateral trade negotiations
- On track to begin migrating to the ECOWAS Common External Tariff by mid-2011.
- Regarding WTO accession, Liberia has been accorded observer status and hopes to conclude accession negotiations in 2012.

### National accounts, statistics, and surveys
- Difficulties in completing the compilation of national accounts data have caused delays; intention to finalize publication of the national accounts at the beginning of 2011.
- Publication of new national accounts estimates anticipated in February 2011 (delayed from September 2009).
- Preparations, with World Bank support, for a household expenditure survey which will support national accounts compilation.
- Preliminary labor force survey results confirm high levels of vulnerable employment status (self employment in the informal sector).
- Validation of national accounts data delayed due to poor response from some large formal sector enterprises, data issues, and difficulties estimating the informal sector.

### Program implementation, structural benchmarks, and status (selected)
- All quantitative performance criteria through end-June 2010 were observed (Table 1a).
- Structural benchmark completion status (selected entries from Table 2):
  - National Accounts establishment survey completed. Target: End-December 2009. Status: Met with delay. Revised survey completed April 2010.
  - Debt management software installed. Target: End-December 2009. Status: Met with delay. Interface still to be completed.
  - Two successive quarterly implementation reports of the PFM law circulated. Target: End-April 2010. Status: Met with delay in June 2010.
  - Remove import permit declaration requirement for imports covered by ASYCUDA. Target: End-June 2010. Status: Not met. Implemented with delay in September 2010.
  - Treasury bill auction regulation adopted by the CBL Board and publicized. Target: End-June 2010. Status: Met. Approved and issued by the CBL board in June 2010.
  - Direct salary payments to banks for all Monrovia-based civil servants. Target: End-June 2010. Status: Met. All Monrovia-based civil servants in ministries as well as civil servants in 8 of 15 counties paid by direct bank payment.
  - Compilation of a comprehensive computerized asset registry by the General Services Agency of all ministries and agencies. Target: End-June 2010. Status: Not Met. Electronic inventory completed for 85 of 89 ministries and agencies as of June 1, 2010.
  - Publication of validated national accounts data for 2008 by LISGIS. Target: End-September 2010 (rephased to February 2011). Status: Not met. Source data are under validation.
  - Extend ASYCUDA system to the Monrovia oil terminal and international airport. Target: End-December 2010. Status: Ongoing.
  - Regular quarterly reporting of state owned enterprise financial operations to Ministry of Finance. Target: End-January 2011. Status: Ongoing.

### Program targets and selected numerical fiscal/monetary indicators (from Tables)
- Table 1a highlights (Millions of US dollars, unless otherwise indicated):
  - Floor on total revenue collection: 39.5; 52.7; 121.5; 102.0; 116.6; 181.5; 185.3; 204.9; 277.6; 260.0; 275.0 (cumulative within fiscal year).
  - Floor on fiscal balance: 0.0; 0.8; -4.1; -4.1; -0.9; -4.1; -4.1; 19.6; -4.1; -4.1; -3.8.
  - Floor on social and other priority spending (percent of total revenue and grants collected): ...; ...; 60.0; 60.0; 63.8; 60.0; 60.0; 60.1; 60.0; 60.0; 70.7.
  - Floor on CBL’s net foreign exchange position: 57.1; 60.3; 248.4; 248.4; 268.9; 251.5; 251.5; 268.5; 261.6; 254.6; 270.7.
  - Floor on CBL’s cash-based budget balance: -0.4; 0.8; 0.0; 0.0; 0.1; 0.0; 0.0; 0.0; 0.0; 0.0; 0.1.
  - Memorandum item: Programmed receipt of one-time signing bonuses and Social Development Fund contributions from new iron ore projects: ...; ...; 20.0; ...; 0.5; 20.0; ...; 23.8; 47.4; ...; 29.9.
- Table 1b highlights (Millions of US dollars, unless otherwise indicated):
  - Floor on total revenue collection of the central government: 48.2; 103.1; 210.6; 294.5 (cumulative within fiscal year).
  - Floor on social and other priority spending (percent of total revenue and grants collected, indicative target): ...; 65.0; ...; 65.0.
  - Ceiling on gross borrowing by the public sector in foreign currency: 46.0; 46.0; 46.0; 46.0.
  - Ceiling on new domestic borrowing of the central government: 2.5; 5.0; 7.5; 10.0.
  - Floor on CBL’s net foreign exchange position: 264.6; 274.5; ...; ...
  - Ceiling on CBL's gross credit to central government: 0.0; 0.0; 0.0; 0.0.
  - Ceiling on net domestic assets of the CBL (indicative target): -37.7; -28.1; ...; ...
  - Memorandum item: Programmed receipt of one-time signing bonuses and Social Development Fund contributions from new iron ore projects: 0.0; 0.0; 37.4; 42.5.
  - Memorandum item: Programmed receipt of external budget support and ratified concession payments: 11.0; 27.8; 54.4; 92.6.

### Development strategy and medium-term planning
- Delivery of 2008–11 PRS objectives has improved as indicated by the second year implementation report.
- Stakeholder consultations begun for a successor national development strategy, “Liberia Rising 2030”, aimed at rapid, inclusive growth.
- To better prioritize investment projects, the authorities will extend the project budget into a multi-year investment program covering selected spending ministries and link closely to the medium-term expenditure framework being prepared for the FY2012 budget with support from the World Bank and other donors.

*Source: _cr10373 - 1.      Economic developments are encouraging and should support a continued*

### 3. The program floor on total revenue collection will be adjusted downward to the

### _cr10373 - 3. The program floor on total revenue collection will be adjusted downward to the

### Program adjustor: Signing bonuses and Social Development Fund payments (new iron ore projects)
- Provision: The program floor on total revenue collection will be adjusted downward to the extent that signing bonuses and payments into Social Development Funds from new iron ore projects fall short of the program schedule, cumulative within the fiscal year.
- Program Schedule for Cumulative Signing Bonuses and Social Development Fund Payments from New Iron Ore Projects, 2010/11 (In millions of U.S. dollars)
  - December 2010: 0.0
  - March 2011: 37.4
  - June 2011: 42.5

### External financing adjustor
- Provision: The program ceilings for CBL gross credit to government and CBL net domestic assets will be adjusted upward and the program floor on the net foreign exchange position of the CBL will be adjusted downward, by the amount of the difference between actual and programmed external budget support and ratified concession signature payments. The adjuster will be calculated on a cumulative basis from July 1, 2010.
- Cumulative Program External Budget Support and Ratified Concession Signature Payments (In millions of U.S. dollars)
  - December 2010: 27.8
  - March 2011: 54.4
  - June 2011: 92.6

### Relations with the Fund — key financial positions and arrangements (as of end-September 2010 / as of October 31, 2010)
- Quota: 129.20 (SDR Million); %Quota: 100.00
- Fund holdings of currency: 129.18; %Quota: 99.99
- Reserve Tranche Position: 0.03; %Quota: 0.02
- Net cumulative allocation (SDR Department): 123.98; %Allocation: 100.00
- Holdings (SDR Department): 132.23; %Allocation: 106.66
- Outstanding Purchases and Loans: ECF Arrangements: 24.38 (SDR Million); %Quota: 18.87
- Latest Financial Arrangements:
  - ECF: Date of Arrangement Mar 14, 2008; Expiration Date Mar 13, 2011; Amount Approved (SDR Million) 239.02; Amount Drawn (SDR Million) 230.14
  - EFF: Mar 14, 2008 – Sep 25, 2008; Amount Approved 342.77; Amount Drawn 342.77
  - Stand-By: Dec 07, 1984 – Dec 06, 1985; Amount Approved 42.78; Amount Drawn 8.50
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Principal forthcoming: 2014: 2.10
  - Charges/Interest forthcoming: 2011: 0.00; 2012: 0.06; 2013: 0.06; 2014: 0.06
  - Total forthcoming: 2011: 0.00; 2012: 0.06; 2013: 0.06; 2014: 2.16

### HIPC and debt relief
- Implementation of HIPC Initiative: Enhanced Framework
  - Commitment of HIPC assistance — Decision point date: March 2008
  - Assistance committed by all creditors (US$ Million): 2,739.20
  - Of which: IMF assistance (US$ Million): 721.10
  - (SDR equivalent in millions): 440.90
  - Completion point date: June 2010
- Disbursement of IMF assistance (SDR Million)
  - Assistance disbursed to the member: 440.90
  - Interim assistance: 30.14
  - Completion point balance: 410.76
  - Additional disbursement of interest income: 10.99
  - Total disbursements: 451.89
- Delivery of Debt Relief at the Completion Point:
  - Debt relief (SDR Million): 548.53
  - Financed by: Liberia Administered Account: 116.20; Remaining HIPC resources: 432.33
  - Debt relief by facility (SDR Million) — Eligible Debt Delivery Date June 2010: GRA 342.77; PRGT 205.76; Total 548.53

### Safeguards assessment and CBL governance
- An updated safeguards assessment of the Central Bank of Liberia (CBL) was completed in August 2008.
- Findings and actions:
  - CBL had largely addressed measures to increase transparency recommended by the 2007 interim safeguards assessment.
  - Significant risks remained; some addressed subsequently, including assumption of co–signing authority for CBL financial matters by the Fund-supported Special Advisor (assignment completed October 2009).
  - Internal audit capacity was weak and the Audit Committee was not exercising effective oversight.
  - Priority measure adopted: engage external auditor to conduct special periodic audits of monetary data reported to the Fund.
  - Report for six months ending June 30, 2010 indicated key processes and controls over monetary data reporting to IMF were adequate and no design or operating deficiencies were reported.
  - The monetary data reporting package audit was handed over to the CBL internal audit department beginning with the second half of 2010.
  - Progress also made on development of investment guidelines for CBL foreign exchange reserves.
- Staff will continue to monitor developments in the CBL’s safeguards framework.

### Exchange rate arrangement
- Liberia maintains an exchange rate system that is free of restrictions on payments for current and capital transfers.
- Currency: Liberian dollar; U.S. dollar is also legal tender.
- Since the beginning of 2009, the Liberian dollar has fluctuated more against the U.S. dollar. Classification of the de facto exchange rate arrangement: ‘other managed’.
- Liberia’s exchange rate at end-September 2010: L$72.5=US$1.

### Article IV consultation and staff missions
- 2008 Article IV consultation discussions: October 20–31, 2008 in Monrovia. Staff report (Country Report No. 09/4, 1/13/09) discussed by the Executive Board on December 22, 2008.
- 2010 Article IV consultation: staff mission visited Monrovia during September 21–October 1, 2010.

### Technical assistance, 2008–10 (selected entries)
- Customs Administration: FAD January 2008
- Revenue Administration and Tax Administration: FAD April 2008
- Review of Revenue Administration Reforms and Technical Assistance Needs: FAD February 2009
- PFM—Drafting Regulations: FAD February–March 2009
- Fiscal Decentralization: FAD February–March 2009
- Balance of Payments: STA January 2008
- Banking Supervision: MCM September 2008
- Accounting: MCM January 2009
- Monetary Operations: MCM March 2009; June–July 2010; October 2009
- GFS: STA April–May 2009
- PFM Regulations Drafting: FAD May 2009
- Revenue Authority, Customs and Tax Administration: FAD May 2009
- Legal Drafting: LEG May 2009
- Foreign Exchange Operations: MCM June 2009
- Accounting Standards: MCM August–September 2009
- Tax Administration: FAD September 2009; Revenue Administration FAD July 2010
- Banking Supervision: MCM September–October 2009; August 2010
- Tax Policy: FAD November 2009
- Monetary Finance Statistics: STA March–April 2010
- National Accounts: STA April 2010; STA July–August 2010
- Central Bank Accounting Standards: MCM May 2010
- Fiscal Law—Drafting Tax Legislation: FAD July 2010
- PFM: FAD October 2010
- Resident Advisors (selected):
  - Banking Supervision MCM February 2007–August 2008
  - Payment Systems MCM April 2007–October 2007
  - Long-term Advisor for the CBL MCM August 2007–October 2009
  - Public Financial Management FAD July 2008–Present

### Joint World Bank–IMF Work Program, 2010–11 (as of end-September 2010) — selected items
- World Bank work program:
  - Liberia Poverty Assessment: January 2010; Expected delivery date September 2011; Status: Ongoing (Phase 1)
  - Fourth Reengagement and Reform Support Program (RRSPIV): November 2010; Expected delivery date September 2011; Status: Policy discussions
  - Poverty Reduction Strategy - Support: November 2010; Expected delivery date June 2011; Status: Concept stage
  - Policy Note on Concessions: October 2010; Expected delivery date June 2011; Status: Concept Stage
  - Economic Governance and Institutional Reform Project: November 2010; Expected delivery date August 30, 2011; Status: Ongoing
- IMF work program:
  - Fourth Review of ECF: April 2010; Expected delivery date Mid-2010; Status: Completed June 2010
  - Fifth Review of ECF: October 2010; Expected delivery date December 2010; Status: Scheduled December 2010
  - Assist authorities in setting up macroeconomic framework tool: January 2011
- Jointly performed:
  - Joint Workshop with senior legislatures on infrastructure financing and debt: April 2010; Expected delivery date Mid-2010; Status: Delayed to February 2011
  - Assist authorities in developing MTEF/PSIP framework for 2011/12 budget: October 2010 (Bank) / February 2011 (Fund); Expected delivery date April 2011; Status: Ongoing
  - Assist authorities in compiling 2008 National Accounts: July 2010 (Fund) / October 2010 (Bank) / February 2011 (Fund); Expected delivery date February 2011; Status: Ongoing
- Fund request to Bank:
  - Assistance in elaborating and delivering financial sector development program: 2011; Status: Not decided
- Bank request to Fund:
  - Regular updates of performance under the Fund-supported program and macroeconomic projections: Continuous
- Last update: September 2010

*INTERNATIONAL MONETARY FUND  LIBERIA  Staff Report for the 2010 Article IV Consultation and Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility  Informational Annex  Prepared by African Department  (In consultation with other departments)  November 22, 2010*

### 2. IMF Relations Note

### 2. IMF Relations Note

### Assessment of Data Adequacy for Surveillance
- General: Data have serious shortcomings that significantly hamper surveillance.
- National accounts:
  - Comprehensive national accounts data are not available.
  - Fund staff estimate GDP by sector using the production approach and primary source data provided by the Liberia Institute of Statistics and Geo-Information Services.
  - Estimates for GDP by expenditure are not available.
  - High degree of uncertainty regarding estimates of the level and growth rate of real GDP, sectoral components, and all ratios to nominal GDP.
  - National business register and National Accounts questionnaires were established in December 2008.
  - A second round of national accounts establishment survey has been completed after low response rates from the first one and data are being compiled.
  - The Fund is providing TA in this area with verifying and validating the source data, but there are challenges to estimating informal sector activities.
  - Liberia participates in the National Accounts Module of the Enhanced Data Dissemination Initiative (EDDI), which aims to strengthen annual national accounts, and to develop producer price indices.
  - An upward revision of GDP is expected in early 2011 after methodological issues have been addressed.
- Price statistics:
  - A consumer price index for Monrovia has been compiled since 2005.
  - The Harmonized Consumer Price Index providing national coverage was officially adopted in 2007.
- Government finance statistics:
  - The Ministry of Finance regularly provides the African Department with monthly disaggregated data on government revenue and on government current and capital expenditure on a cash and commitment basis.
  - Areas needing improvement: reporting financing items and expenditures on domestic debt and arrears; lack of legal framework to collect statistics; limited data sharing and coordination among data producing agencies; inconsistent institutional coverage of the statistics with other datasets (e.g. national accounts and monetary statistics); omission of nonmonetary transactions; limited data on stocks of financial assets and liabilities; and incorrect reference exchange rate to convert data from Liberian dollars to U.S. dollars.
- Monetary statistics:
  - Data provision is adequate for surveillance.
  - The Central Bank of Liberia has made progress in adopting the statistical methodology recommended by the IMF’s Monetary and Financial Statistics Manual (MFSM).
  - The report of monetary and financial statistics (MFS) has been suspended since June 2009.
  - A STA mission in March 2010 assisted authorities to introduce standardized report forms of MFS and collect data from commercial banks in accordance with the MFSM methodology.
- Balance of payments:
  - Reporting is not comprehensive; Fund staff prepare provisional balance of payments statistics for surveillance.
  - Remaining improvements needed in primary source data, compilation, and timeliness in data dissemination, especially for trade and services, foreign direct investment, government expenditures, remittances, and nonresident deposits data.

### Data Standards and Reporting
- Participant in the General Data Dissemination System (GDDS) since October 2005.
- Liberia has not yet received a mission to produce the Data Module of the Reports on the Observance of Standards and Codes (data ROSC).
- Reporting to STA (optional):
  - The authorities report annual balance of payments data to the IFS and the BOPSY, but do not report the government statistics to the GFSY.

### IMF Article IV Consultation and Executive Board Assessment (Public Information Notice No. 10/157, December 8, 2010)
- Background and recent developments:
  - Since end-2008, authorities instituted institutional and legal changes in public financial management, debt management, budget process, tax policy, and tax administration.
  - Legislature approved a comprehensive Public Financial management Act, a new Commercial Code, and significant changes to the Revenue Code.
  - Liberia Poverty Reduction Strategy (PRS) adopted in 2008: second year implementation report to April 2010 reports an increase of the implementation rate of deliverables to 80 percent, from 20 percent in the first year.
  - After a slowdown in 2009, economic activity is strengthening in 2010 with subdued inflation and a stable exchange rate.
  - Real GDP growth expected to rise from 4½ percent in 2009 to 6 percent in 2010.
  - Exports have rebounded due to rising rubber and timber production; FDI is on the upswing with new investment commitments following ratification of iron ore and palm oil concession agreements.
- Executive Directors’ assessment:
  - Commended authorities for satisfactory implementation of the Fund-supported program.
  - Noted prudent macroeconomic policies, strengthened institutions, and debt relief contributed to macroeconomic stability.
  - Cautioned that vulnerabilities remain from volatile commodity prices and large development needs.
  - Supported development strategy aimed at inclusive growth, capacity building, financial sector development, and infrastructure investment.
  - Emphasized prioritizing infrastructure projects and safeguarding debt sustainability; strengthen project implementation capacity (appraisal, procurement, execution), internal audit and control.
  - Encouraged focus on property rights, resolving land ownership disputes, and maintaining social stability.
  - Welcomed commitment to strengthen public financial management and limit debt creation; encouraged engagement with bilateral and multilateral partners and private sector involvement in infrastructure provision.
  - Stressed that future concession revenues should be deployed to infrastructure and human capital.
  - Monetary policy should aim to sustain adequate foreign exchange reserves; launch of the treasury bill market would improve liquidity management and boost demand for the Liberian dollar.
  - Enhancing export competitiveness cannot be based on exchange rate adjustment given high dollarization; structural reforms to improve the business climate are needed.
  - Encouraged solutions to improve access to financial services and noted debt buyback and Paris Club cancellation reduced debt vulnerabilities; urged efforts to secure remaining outstanding pledges toward the Fund’s contribution to debt relief for Liberia.

### IMF Press Release — Fifth Review Under Extended Credit Facility (December 8, 2010)
- The Executive Board completed the fifth review of Liberia’s performance under an Extended Credit Facility (ECF) arrangement.
- Completion enables immediate disbursement equivalent to SDR 4.44 million (about US$6.82 million).
- Total disbursements under the arrangement: SDR 234.58 million (about US$360.37 million).
- The three year ECF arrangement was approved in March 2008 for an amount of SDR 239.02 million (about US$367.19 million).
- Statement highlights by Mr. John Lipsky:
  - Authorities implemented prudent macroeconomic policies and structural reforms; balanced budget principle maintained during 2009–10 financial year.
  - Inflation returned to single digits, exchange rate broadly stable, economic growth picking up aided by FDI recovery.
  - Reaching completion point under the HIPC Initiative laid basis for comprehensive debt relief; Liberia now has a modest debt burden and space to take on new concessional debt to finance investment projects.
  - Macroeconomic framework for 2010–11 is well-conceived: budget envisages solid revenue growth, increased allocation to poverty reduction programs, and significant boost to public investment.
  - Balanced budget policy will be re-evaluated if concessional financing and appropriate projects are identified.
  - Monetary policy should support low inflation and permit a modest increase in reserves.
  - Over the medium term, reforms needed to alleviate structural constraints: improve project selection and preparation, procurement and cash management, strengthen public financial management, implement revenue administration reforms, accelerate financial sector development, and pursue governance reform including land tenure and property rights.

### Statement by Moeketsi Majoro, Executive Director for Liberia (December 8, 2010) — Key points
- Authorities broadly agree with the staff report; main challenges: cost competitiveness outside enclave sectors, infrastructural development, strengthening institutions, and medium-term budgetary planning post-HIPC.
- Recent performance:
  - Economy grew on average by 6.8 percent over the last five years.
  - Real GDP growth fell to an estimated 4.6 percent in 2009 from 7 percent in the preceding year due to the global financial crisis and declining commodity prices.
  - Inflation in 2009 averaged 7.4 percent, moderated from double digit highs in 2008.
  - Decreases in export earnings and remittances put pressure on the exchange rate in 2009; current account deficit expected to be fully financed by FDI and other external inflows.
  - Gross international reserves of the Central Bank of Liberia (CBL) increased in 2009.
- Program performance:
  - Authorities maintained macroeconomic stability and satisfactorily performed under the ECF-supported program.
  - All quantitative performance criteria under the program through end-June 2010 were met.
  - Authorities observed three out of four structural benchmarks set for completion in June 2010.
  - Completion of remaining benchmark (computerize government asset registry) anticipated by end of December 2010.
  - Benchmark on compilation of national accounts data not observed due to unexpected constraints; authorities plan to finalize publication of national accounts at the beginning of 2011.
- Outlook:
  - Prospects for continued recovery are good; Liberia’s low economic base presents many opportunities for reconstruction and high medium-term growth.
  - Continued recovery of agriculture and forestry noted.

### Selected Economic and Financial Indicators, 2006–10 (key figures)
- Real GDP (annual percent change): 2006: 7.8; 2007: 9.4; 2008: 7.1; 2009: 4.6; 2010 Prel. Proj.: 6.3
- GDP deflator (US dollars): 2006: 3.5; 2007: 12.0; 2008: 7.3; 2009: -1.2; 2010: 4.5
- Nominal GDP (millions of US dollars): 2006: 603.8; 2007: 739.9; 2008: 850.7; 2009: 879.0; 2010: 976.6
- Consumer prices (annual average): 2006: 7.2; 2007: 13.7; 2008: 17.5; 2009: 7.4; 2010: 7.4
- Exports, f.o.b. (annual percent change): 2006: 44.1; 2007: 28.6; 2008: 22.2; 2009: -39.7; 2010: 34.8
- Imports, f.o.b (annual percent change): 2006: 44.0; 2007: 13.0; 2008: 42.2; 2009: -20.6; 2010: 16.8
- Terms of trade (deterioration -): 2006: 54.5; 2007: -11.9; 2008: -8.1; 2009: -9.4; 2010: 66.1
- Average exchange rate (local currency per U.S. dollar): 2006: 58.0; 2007: 61.3; 2008: 63.2; 2009: 68.3; 2010: ...
- Gross official reserves (millions of US dollars): 2006: 46.5; 2007: 85.3; 2008: 107.8; 2009: 312.2; 2010: 317.1
- Import coverage of reserves (months)1/: 2006: 0.5; 2007: 0.8; 2008: 0.8; 2009: 3.2; 2010: 2.6
- Total revenue and grants (annual percent change): 2006: 6.5; 2007: 73.3; 2008: 39.5; 2009: 13.5; 2010: 22.6
- Of which: total revenue (annual percent change): 2006: 6.6; 2007: 73.6; 2008: 36.7; 2009: 5.2; 2010: 30.2
- Total expenditure and net lending (annual percent change): 2006: -19.5; 2007: 100.2; 2008: 60.2; 2009: 26.3; 2010: 13.4
- Of which: current expenditure (annual percent change): 2006: -12.0; 2007: 84.1; 2008: 62.9; 2009: 24.2; 2010: 16.4
- Capital expenditure (annual percent change): 2006: -65.5; 2007: 354.3; 2008: 43.4; 2009: 41.5; 2010: -6.2
- Reserve money (annual percent change): 2006: 23.9; 2007: 26.7; 2008: 13.1; 2009: 12.4; 2010: -3.2
- Broad money (M2) (annual percent change)3/: 2006: 35.1; 2007: 43.2; 2008: 45.7; 2009: 37.7; 2010: 1.9
- Credit to private sector (annual percent change): 2006: 41.7; 2007: 39.2; 2008: 44.1; 2009: 31.5; 2010: 11.1
- Current account balance (including official grants) (Percent of GDP): 2006: -13.9; 2007: -31.4; 2008: -57.3; 2009: -36.8; 2010: -40.4
- Current account balance (excluding official grants) (Percent of GDP): 2006: -199.6; 2007: -177.9; 2008: -185.3; 2009: -148.2; 2010: -152.0
- Trade balance (Percent of GDP): 2006: -46.3; 2007: -39.3; 2008: -53.4; 2009: -46.6; 2010: -46.1
- Exports, f.o.b. (Percent of GDP): 2006: 26.8; 2007: 28.1; 2008: 29.9; 2009: 17.4; 2010: 21.2
- Imports, f.o.b (Percent of GDP): 2006: -73.1; 2007: -67.4; 2008: -83.3; 2009: -64.0; 2010: -67.3
- Central government operations (Percent of GDP):
  - Total revenue and grants: 2006: 14.9; 2007: 22.1; 2008: 26.0; 2009: 27.2; 2010: 31.0
  - Of which: total revenue: 2006: 14.8; 2007: 21.9; 2008: 25.2; 2009: 24.4; 2010: 29.6
  - Total expenditure and net lending: 2006: 10.7; 2007: 18.3; 2008: 24.8; 2009: 28.8; 2010: 30.4
  - Of which: current expenditure: 2006: 10.1; 2007: 15.8; 2008: 21.8; 2009: 24.9; 2010: 27.0
  - Capital expenditure: 2006: 0.6; 2007: 2.5; 2008: 3.0; 2009: 3.9; 2010: 3.4
  - Overall fiscal balance (including grants): 2006: 4.2; 2007: 3.8; 2008: 1.2; 2009: -1.6; 2010: 0.6
- Public external debt (Percent of GDP): 2006: 783.7; 2007: 594.5; 2008: 376.6; 2009: 190.9; 2010: 8.9

1/ Excluding imputed UN military services imports.
2/ Fiscal year ending in June on a cash basis (debt service payments shown after all debt relief).
3/ Defined as Liberian currency outside banks plus demand, time, and savings deposits in Liberian and US dollars.

*Source: _cr10373 - 2. IMF Relations Note*

### 61.5 percent of the economy in 2009, will be the main impetus to growth. Additionally, the

### _cr10373 - 61.5 percent of the economy in 2009, will be the main impetus to growth. Additionally, the

### Growth outlook and macroeconomic projections
- The resumption of iron ore mining will enhance growth over the medium term, attracting large investment and boosting exports.
- Real GDP growth projections:
  - 6.3 percent in 2010
  - around 8.5 percent in 2011
- Inflation is projected to moderate in the medium term as import prices and the exchange rate stabilize.
- Gross international reserves of the CBL (in months of import cover) are projected to decline from 2.6 in 2010 to 2.0 in 2011, largely attributable to expected high growth and development-related imports.

### Fiscal policy
- Authorities’ fiscal strategy aims at limiting debt creation and rationalizing public financial management.
- 2010/11 budget structure:
  - Core government budget: reflects revenues expected to materialize and grow each year; to be used for core government priorities and recurrent activities; will function as planned and contain adequate investment through a capital expenditure minimum rule.
  - Project budget: based on one-off and/or uncertain receipts; will finance one-off projects; projects will only start when funding has been received; assists targeting and focusing spending on key, specific poverty reduction activities.
- Implementation plans:
  - Implement the Medium Term Expenditure Framework (MTEF) over the next two years.
  - Develop sector plans aligned to the new PRS (National Vision) to ensure budget priorities align with poverty reduction objectives; sector plans necessitated by the MTEF and the Public Sector Investment Program (PSIP).
- Monitoring and targeting of spending:
  - New public expenditure survey to include people from outside government in monitoring spending.
  - Activity-based deliverables for the new PRS to be used as measurable objectives for spending entities in the 2010/11 budget.
  - Joint monitoring and evaluation by the Ministry of Economic Planning and Economic Affairs and the Ministry of Finance.
  - PRS deliverables and reporting of policy outputs from each spending entity in annual and mid-year fiscal outturn.

### Monetary and financial sector policies
- Monetary policy objective of the CBL: attainment of broad exchange rate stability to anchor price stability.
- Main monetary policy instruments: reserve requirement ratio and the foreign exchange sale auction.
- CBL medium-term financial sector strategy aims to produce a significantly changed financial sector that is stronger, more stable, vibrant, and a vanguard for broad-based economic growth and development.
- Emphases of the second phase of CBL’s reform agenda:
  - Improving financial intermediation.
  - Building a modern payment system.
  - Intensifying work towards establishment of a capital market.
  - Reforming and strengthening the insurance sector.
  - Reforming the non-bank financial sector including operation of foreign exchange bureaus.
- Capacity-building and legal frameworks:
  - In collaboration with commercial banks, CBL has established a Banking Institute.
  - Developed the commercial code and legislation for a commercial court.
  - CBL is working with banks and the Liberian Institute of Certified Public Accountants to train banking staff as a prelude to implementation of International Financial Reporting Standards (IFRS), as required by CBL by end-2012.

### Debt management policy
- Transition from HIPC no-borrowing requirement to resumption of borrowing to finance national reconstruction and development activities, consistent with maintaining a sustainable debt position starting this fiscal year.
- Development of a domestic debt market through sale and issuance of treasury bills is underway.
- New responsibilities for the Debt Management Unit as required by the PFM law and regulation.
- Under the Debt Management Strategy (DMS):
  - All loans will be approved and monitored by the Debt Management Committee.
  - Loans are to adhere to the reporting requirements set out in the PFM.
- Fiscal rules in the DMS:
  - Hold the level of debt stock below 60 percent of GDP.
  - Earmark borrowing only for investment purposes to ensure intergenerational fairness in the budget process.
- Commitment to fully implement the National Debt Management Strategy and build institutional and professional capacity of the Debt Management Unit in the Ministry of Finance.

### Structural reforms
- Commitment to full implementation of ongoing structural reforms to consolidate macroeconomic stability gains and boost growth; reforms to enhance efficiency and improve the business climate.
- Continued efforts to improve:
  - Public financial management (PFM).
  - Debt management.
  - Budget process.
  - Tax policy and tax administration.
- Payroll and payment reforms:
  - Direct deposit payment of central government civil servant salaries has markedly expanded and covers the whole city of Monrovia and some rural counties; plans to include remaining sectors and explore options for remote areas.
  - Regularization of payrolls has expanded to cover 15 ministries, producing substantial savings from eliminating fraudulent payments.
- Financial management systems:
  - An integrated financial management information system will be the basis for government accounting, incorporating the new chart of accounts from July 1, 2011.
- Financial sector legal and regulatory reforms were carried out to strengthen stability, increase intermediation, and widen access to financial services.
- Legislature actions: approved a new commercial code to establish a commercial court and changes to the revenue code.

### Conclusion and request
- Authorities emphasize prudent fiscal and monetary policies and debt sustainability to achieve and maintain macroeconomic stability and sustain growth.
- Continued implementation of appropriate revenue and expenditure measures aims to enhance fiscal space to address the large infrastructural deficit, increase employment, and boost pro-poor spending.
- Authorities appreciate continued support of Management and development partners and solicit the Executive Board’s support in completing the fifth review under the ECF arrangement.

*Source: IMF staff report content provided in the supplied document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10373.pdf_