Public Information Notice: IMF Concludes 2001 Article IV Consultation with Liberia

July 18, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2002 Article IV consultation with Liberia is also available.

On February 25, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Liberia.1


The pace of economic recovery following Liberia's 1989-96 civil war has slowed substantially. GDP grew by 5 percent in 2001 compared with an average annual growth rate of 24 percent in the previous three years. Political developments—including domestic conflict, poor governance and deteriorating international relations—have contributed to the slowdown, alongside the continued poor state of critical infrastructure and weak international markets. Logging activity, limited by extended rains, stagnated while the growth in rubber output fell to 11 per cent in 2001. Smallholder agriculture, manufacturing and services also grew at a more moderate pace than in the preceding years. Nominal per capita GDP in 2001 is estimated at US$188. Consumer price inflation rose from a 12—month rate of 8 percent in April 2001 to 21 percent in October 2001, reflecting a rapid depreciation in the exchange rate for the Liberian dollar.

Slowing growth and rising inflation added to strains on government finances. Although total government inflows remained roughly unchanged in 2001 in US dollar terms, there was a decline in tax revenue, offset by increased grant income. The structure of the tax base, reflecting the implementation of a new tax code at mid-year, and subsequent derogations to that code during July-August, changed substantially; taxes on income and international trade fell sharply while the share of tax revenues accounted for by taxes on goods and services rose from 26 percent to 35 percent.

In the absence of an approved budget for 2001/02, beginning in July 2001, the government operated under a continuing resolution. A Financial Management Committee (FMC) was given the task of establishing priorities and allocating available funds. With spending for security purposes continuing at a high level, and given a policy decision to reduce civil service wage arrears to four months by end-2001, it was decided to implement a further cut of 17 percent in other government spending, including the social sectors, in order to remain within financing constraints.

In December 2001, a budget for FY2001/2002 was submitted to the legislature. This envisaged an unchanged revenue base, while proposing a radical change in the structure of spending. In particular, it earmarked around US$35 million (41 percent of projected income) for priority development projects. Included in this was US$17 million (equivalent to 3 percent of GDP) in transfers to county government administrations for development purposes. A further US$14 million was designated for unspecified priority projects. The budget proposal also allocated US$9.5 million to unspecified government special commitments and US$23 million to civil service wages, leaving US$17 million to cover the purchase of goods and services—a 60 percent reduction from the level in 2000/2001.

Monetary growth accelerated in the first half of 2001, with the 12-month expansion of the major Liberian dollar component of the money supply peaking at 40 percent in June. There was an associated depreciation of the Liberian dollar by 31 percent against the US dollar between end-2000 and July 2001. Acting to stem the monetary expansion, the Central Bank of Liberia (CBL) increased the reserve requirement on Liberian dollar-denominated deposits at end-June 2001 from 22 percent to 44 percent, while decreasing the requirement for US dollar-denominated deposits from 22 percent to 18 percent. In July 2001, the reserve requirement for Liberian dollar-denominated deposits was further increased to 50 percent. Nonetheless, the Liberian dollar continued to come under pressure during the third quarter of 2001 and the CBL intervened in the foreign exchange market on several occasions in order to counter further depreciation of the exchange rate.

While falling international prices contributed to slowing economic activity, the impact on Liberia's external balance of payments was offset by lower import unit values. On a cash basis, Liberia's external current account deficit remained roughly unchanged between 2000 and 2001. With lower interest falling due, the deficit narrowed on an accrual basis from US$75 million in 2000 to US$57 million in 2001. A further US$76 million in external arrears was accumulated. At the end of 2001, Liberia's medium and long-term external debt amounted to about US$2.5 billion (equivalent to 480 percent of GDP).

Recent progress towards the liberalization of key domestic markets in Liberia has been limited. Government controls remain in place on the retail prices for cement, rice, and petroleum products as well as on farm gate prices for coffee and cocoa. In the petroleum sector, the Liberia Petroleum Refinery Corporation retains a regulatory monopoly on the provision of petroleum products to the market and prices seem to be substantially above the levels that would be expected on the basis of international prices, freight and operating costs, and taxes. In the domestic rice market, some tentative steps were taken towards liberalization and the share of the four largest importers declined. However, they continue to dominate the market, accounting for about 90 percent of permitted rice imports.

Executive Board Assessment

Executive Directors expressed concern regarding the deterioration in Liberia's economy in the last two years. They noted that the combination of growing domestic conflict, the absence of normalized relations with the international community—which has limited Liberia's access to critical external assistance—and problems of governance had cut short the economic recovery that had been underway following the civil war of 1989-96. In this regard, with the substantial decline in economic growth in 2001, reflecting paused reconstruction activities and the poor environment for investment, per capita income has stalled at just over one-third of the pre-war level. Directors expressed concern that, in the absence of remedial action, prospects for re-establishing a sound economic foundation and for reducing poverty appear very bleak, given especially the growing prevalence of HIV/AIDS, an impending deterioration in rubber production coupled with environmental limits on logging activities, and a further decline in the terms of trade.

Directors noted that Liberia's liberal exchange regime has helped ensure price stability and has served the economy well. However, the impact of monetary expansion during 2001 eroded price stability and gave rise to a substantial depreciation of the Liberian dollar. Given the central bank's limited official reserves and narrow policy options, Directors cautioned that a failure to implement prudent monetary policies in the period ahead could give rise to a depreciation-inflation spiral. In this context, Directors suggested that government net borrowing from the banking system be strictly limited and that the central bank issue currency only for foreign exchange.

Directors urged the authorities to address the substantial issues of governance surrounding Liberia's financial administration. They observed that an inadequately functioning budgeting process, non-transparent arrangements for granting incentives for large projects, and limited overall budgetary oversight have undermined the integrity of government finances, and urged that remedial action be taken as a high priority.

Directors observed that the sustainability of government financial operations has become increasingly tenuous. They noted the government's increasing dependence on logging activities and the shipping registry for revenue generation, both of which are at some risk. While acknowledging the introduction of a first phase of tax reform during 2001, Directors expressed concerns that ad hoc derogations to the reforms have undercut an already weak tax base, and urged the removal of these temporary exceptions. They also advised the authorities to improve accountability with respect to income receipts from the shipping registry and logging activities, grant the Bureau of Customs full authority to enforce customs collections, and fully review the tax incentives outstanding, eliminating exemptions and refraining from granting new tax incentives wherever possible.

While recognizing the difficult circumstances under which expenditure management is being undertaken, Directors were concerned about the high proportion of resources allocated to security-related activities, the ad hoc and short-term focus of the spending program, and limited oversight of the operations of the Bureau of Maritime Affairs and the Forest Development Authority. They noted that, in the absence of a well-functioning budgeting process and administrative structure, the plan to reallocate a significant share of budgetary revenue to a County Development Fund in 2002 could detract significantly from ensuring a well-targeted social spending program.

Directors stressed that structural reforms will be critical to economic recovery. Directors expressed disappointment, however, with the general weakening of policy implementation during 2001, especially as regards continued extra budgetary spending, and the absence of progress in reducing non-wage domestic arrears, satisfactory accounting for tax incentives and reducing concessions, and liberalizing petroleum imports. In addition, they urged greater efforts to reduce civil service wage arrears and intensify the reforms in the rice importation sector.

Directors noted that severe weaknesses in data collection and compilation persist. They urged the authorities to pay more attention to improving data systems especially in the areas of consumer prices, public finance and balance of payments.

Directors noted that Liberia has been in continuous arrears to the Fund since December 1984, has been declared ineligible to use the general resources of the Fund, and that a declaration of non-cooperation was issued in respect of its arrears. Directors regretted that Liberia's cooperation with the Fund had not improved since the last review of its overdue financial obligations, that delays had been encountered in Liberia's monthly payments of US$50,000 to the Fund, and that its arrears to the Fund have continued to mount. In view of these developments, and as envisaged at the time of the last review, a majority of Directors noted the intention to initiate the procedure to suspend Liberia's voting and related rights in the Fund. Directors encouraged the authorities to use the period ahead to build up their policy implementation and relations with the Fund. They urged the authorities to take advantage of any technical assistance that the Fund may make available during this period. Directors encouraged the Fund and Liberia to work toward developing a roadmap to help Liberia set realistic goals for reducing its arrears to the Fund.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the Article IV Consultation with Liberia is also available.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100