Public Information Notice No. 04/22

Public Information Notice: IMF Discusses Liberia's Post-Conflict Situation and Prospects Through June 2004

March 18, 2004

On March 1, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the discussion of a report on Liberia's post-conflict situation and economic prospects through June 2004.

Background

Intermittent civil wars have largely destroyed Liberia's physical and economic structures and the government's capacity to devise and implement policies. As a result of hostilities, about one-third of the population is estimated to be internally displaced, and government functions have largely collapsed, owing to the departure of most civil servants. Following the signature of a peace agreement and the departure of President Taylor in August 2003, Mr. Gyude Bryant was named in mid-October head of the New Transitional Government in Liberia (NTGL). The UN Security Council has established the United Nations Mission in Liberia (UNMIL) with a broad mandate. The UNMIL's primary objective is the reestablishment of security throughout Liberia through the deployment of 15,000 peacekeepers.

The intense hostilities during 2003 further worsened an already dire economic situation. Real GDP is estimated to have contracted by 30 percent. While agriculture and forestry have suffered most from widespread violence and the UN sanctions on timber exports (since July), commerce and services recovered somewhat after security in Monrovia was re-established and donor activities on the ground picked up.

Monetary and external developments reflected the decline in economic activity while the fiscal situation was characterized by falling revenue and no access to credit. International reserves fell to negligible levels at end-September, and there was some draw-down of Liberian dollar deposits. The exchange rate, which showed considerable volatility throughout 2003, has appreciated somewhat since the end of hostilities and the resumption of external assistance. A higher trade deficit, caused by sharply lower exports, was financed through remittances and renewed inflows of humanitarian assistance.

The government has made progress in implementing measures (announced in October 2003) to strengthen revenue collections and resume an orderly budget process. The centralization of revenue collections at the Ministry of Finance has put an end to practices under which government institutions levied and retained taxes and fees at the margins of the budgetary process. It led to an increase in average monthly collections to US$5 million in the period October 2003—January 2004, three times more than monthly collections in the third quarter of 2003. The centralization of government accounts at the Central Bank of Liberia (CBL) has also largely taken place. A "mini-budget" for the period through end-January 2004 provided for payment of current civil service wages, the refurbishing of some looted government structures, and a small part of envisaged demobilization expenses.

To strengthen governance, the NTGL has taken a number of key first steps to address some long-standing issues. Imports of rice were liberalized, and important measures have been taken toward the full liberalization of imports of petroleum products. A pricing formula for petroleum products has been introduced to reflect international price movements in the domestic market. An exercise to purge "ghost workers" from the payroll is expected to be concluded shortly, and comprehensive audits of the major revenue-generating agencies and the CBL are being prepared, with foreign assistance.

Economic prospects for the first half of 2004 depend crucially on the establishment of security outside Monrovia and the pace of donor activities. The deployment of UN peace-keepers throughout Liberia is expected to help trigger the return of internally displaced persons and disarmed soldiers to their homes. Donor activities already provide an economic stimulus to the Monrovia area as delivery of humanitarian aid is increasing. Reconstruction activities that could begin in 2004 could bolster economic activity further.

The government has drawn up a basic macroeconomic framework, including a budget based on conservative revenue projections, for February-June 2004. The budget is cash-based since foreign budgetary assistance is uncertain at this stage. Spending will continue to focus on the current wage bill and further rehabilitation of government institutions.

Monetary and external prospects for the first half of 2004 should largely mirror the expected upswing of donor activities, contributing to some build-up of deposits and international reserves, and higher imports. Exports are expected to stagnate at low levels as long as UN sanctions on timber exports remain in place.

Liberia's banking system, which has suffered from the hostilities in 2003 and the sharp decline in economic activity, will require considerable strengthening so that it can play its role in the country's reconstruction. Also, the CBL needs to move toward more transparent and market-based instruments of monetary policy, including for foreign exchange transactions, and eliminate ceilings on lending rates.

Despite the largely devastated physical infrastructure, some institutional capacity remained in a few key areas. The formulation and implementation of a sound macroeconomic framework, however, would still require substantial and continued technical assistance in various areas. In the fiscal area, it is critical to strengthen tax and customs administration and the budget process; in the monetary area, technical assistance should focus on central bank operations; and Liberia's capacity to produce statistics on national accounts and prices needs to be rebuilt.

Liberia has been in continuous arrears to the Fund since 1984. As of end-January 2004, Liberia's arrears to the Fund amounted to SDR 503 million. Liberia's forthcoming obligations—consisting only of charges and interest on principal and net SDR charges—are estimated to amount to about SDR 5.2 million annually. The Executive Board decided to suspend the country's voting and related rights in March 2003 owing to a protracted lack of cooperation, including as regards payments to the Fund.

Executive Board Assessment

The transitional government has inherited a largely devastated economy, dysfunctional government institutions, and deeply rooted governance problems. Economic recovery will therefore depend critically on the re-establishment of security, and on concerted and sustained efforts of the international community to assist Liberia.

Directors noted that the authorities have quickly begun to address all of the issues described in the Managing Director's letter of April 2002. They urged them to identify a set of concrete actions to achieve the highest priority reforms in improving fiscal and monetary management and governance. In view of Liberia's recent record of cooperation and sound policies and its limited technical capacities and overwhelming reconstruction needs, Directors supported the resumption of Fund technical assistance.

Directors endorsed the authorities' macroeconomic framework for the first half of 2004, which envisages some economic growth and a modest recovery of international reserves, based on the use of a cash-based government budget and a prudent monetary policy. In view of the critical importance of the timber industry in Liberia's economy, Directors looked forward to the international community setting in motion a process that will lead to a lifting of the UN sanctions on exports of timber.

To restore budgetary operations, Directors commended the swift implementation of measures to strengthen revenue collection and improve budgetary management. They welcomed in particular the centralization of revenue collection at the Ministry of Finance and the removal of tax exemptions for petroleum products and rice, and supported additional measures to continue expanding the base of the sales tax, and to improve tax and customs administration. They welcomed the centralization of all government accounts at the Central Bank of Liberia, and recommended setting up a transparent and accountable mechanism to receive and manage all timber-related revenue and donor funds for social and humanitarian purposes.

They emphasized the critical importance of strengthening relations with donors and integrating donor financing into the budget process. In recognition of the overwhelming scale of Liberia's debt problems, they commended the government's efforts to settle domestic debts and arrears, and urged them to begin developing a strategy for dealing with external arrears.

Directors called on the authorities to make fundamental improvements in the area of governance. They urged that the planned external audit of the CBL be conducted in line with international best practices. They also welcomed planned audits of the main revenue-generating agencies, steps to demonopolize rice and petroleum imports and provide a mechanism for enhancing competition, and the development of a system for tracking "ghost workers" in the civil service.

Liberia's financial sector will need to be substantially strengthened to fulfill its role in economic recovery and support a unified currency system. Directors urged the monetary authorities to improve the efficiency and accountability of the CBL, and to develop more diversified and transparent instruments to operate monetary and exchange rate policies. They urged the authorities to improve the provision of monetary data to the Fund.

Directors observed that broad-based technical assistance will be essential to rebuild capacity in economic management. They urged the authorities to work with the Fund and other international institutions and donors to establish a coherent and fully coordinated strategy in this area.

Directors welcomed the NTGL's resumption of regular token monthly payments to the Fund. Directors discussed the modalities of future Fund engagement with Liberia, as well as its catalytic role going forward. They stressed that a continued track record of cooperation and strong policies will be needed to lay the basis for normalizing relations with the Fund and other creditors over time. If these conditions are met, Directors supported a flexible application of the Fund's policy on de-escalation of remedial measures. Directors also suggested that continued improvement in Liberia's cooperation with the Fund, implementation of sound policies, and establishment of the necessary administrative capacity—including to collect and disseminate data—should facilitate the development of a Staff-Monitored Program.