Public Information Notice No. 09/03

Public Information Notice: IMF Executive Board Concludes Article IV Consultation with Liberia

January 12, 2009

On December 22, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Liberia.¹

Background

Over the past three years the Liberian authorities have achieved significant progress in laying a sound foundation to support the country's postwar reconstruction and sustain poverty-reducing growth. Liberia's Poverty Reduction Strategy Paper (PRSP) lays out a comprehensive strategy for sustaining higher growth by maintaining macroeconomic stability, attracting private investment, and improving infrastructure, governance and security. Guided by its PRSP, Liberia has made progress in strengthening public revenues and public finance management, revising its institutions to improve governance, and strengthening the banking sector. The authorities' efforts have been supported by considerable financial support from the international community—donor support is estimated at US$85-$100 per capita—and passage of key reforms by the Liberian legislature.

A key achievement has been the normalization of Liberia's relations with the international community. Long-standing arrears to the World Bank and African Development Bank were cleared in December 2007, and in March 2008, to the IMF. In April 2008, the authorities also agreed on a comprehensive rescheduling of outstanding obligations to the Paris Club group of creditors. The authorities are continuing discussions with other official and private creditors on rescheduling Liberia's obligations consistent with the requirements of the Enhanced Heavily Indebted Poor Countries Initiative.

Economic activity in Liberia has been solid in 2008 despite the significant impact of large food and fuel price increases; real GDP growth is estimated at about 7 percent (it was 9½ percent in 2007). Growth in 2008 was supported in particular by continued recovery in agriculture and healthy growth in construction services, as well as by the resumption of forestry-related activities. However, year-on-year inflation surged, peaking at 26½ percent in August before declining to 20 percent in September, mostly on account of higher food and fuel prices. These developments also widened Liberia's trade deficit by about 17 percentage points of GDP to 57 percent of GDP.

Responding to these developments is particularly challenging for Liberia given that around 64 percent of Liberians live below the minimum poverty line, the government has no access to new borrowing, its international reserves equal less than one month's imports, and monetary policy implementation is limited by a very high level of dollarization. To deal with this, the government developed a comprehensive food security strategy designed to: (i) mitigate the impact of domestic rice price increases and ensure domestic supply; (ii) maintain access to food for vulnerable households through safety nets; and (iii) promote domestic production.

Liberia improved its fiscal management further in 2007/08 (July-June). Government revenue, boosted by the continued economic recovery and better revenue administration, increased by 36.7 percent over 2006/07, and exceeded the budget target by 5.7 percent. Expenditure, which lagged revenues for most of the year (in part due to delayed passage of the budget), rose sharply in June, resulting in overall spending of US$203.3 million against total appropriations of $209.4 million, inclusive of a US$10 million supplementary budget late in the fiscal year. The government's balance at the Central Bank of Liberia (CBL) increased to US$51.2 million from US$40 million on account of the higher revenues and moderate underspending, as well as a small amount of checks issued but not yet cashed.

The Liberian dollar/U.S. dollar exchange rate has been relatively stable in 2008, depreciating by 3.1 percent in the 12 months through October. This is consistent with Liberia's current monetary policy which targets exchange rate stability in the recognition that in its highly dollarized and open economy, the foreign exchange market is the main channel through which monetary impulses affect prices. The real effective exchange rate (REER) has also been relatively stable since 2004.

Executive Board Assessment

While prospects for 2009 remain favorable, Directors noted the downside risks from a sharp fall in global growth or in world commodity prices, and from potential shortfalls in donor financing. Also, inflation remains high and the external current account deficit is large. Directors highlighted the significant medium-term challenges facing Liberia, including the need to diversify the economy-and, in particular, to develop the agricultural sector to enhance food security.

Directors called for continued fiscal prudence, and welcomed in this regard the authorities' commitment to a balanced cash budget, with zero borrowing. They noted the projected continued strong revenue growth and sharply higher current spending in 2009 and 2010. In view of Liberia's large reconstruction needs, Directors reiterated the importance of current expenditure restraint, effective cash management, and the availability of sufficient grant financing. They called for the identification of contingent expenditure cuts to cover any revenue shortfalls.

Directors commended the authorities' comprehensive food security strategy that was developed in response to higher world commodity prices. They supported the focus on securing donor financing for measures to mitigate the impact on the poor, and on policies to stimulate domestic food production.

Directors welcomed the authorities' commitment to strengthening public financial management, improving governance, and establishing an institutional framework to combat corruption. They applauded the creation of the Liberia Anti-Corruption Commission and the recommencement of public auditing by the General Auditing Commission, and called for continued donor support of these initiatives. They also stressed the importance of adopting a comprehensive Public Financial Management law. Particularly important will be to strengthen budget planning and execution and debt management in the context of a medium-term fiscal framework.

Directors supported efforts to strengthen central bank operations and improve the monetary policy framework. They agreed that monetary policy is appropriately focused on maintaining broad exchange rate stability in order to reduce inflationary pressures. Nevertheless, in view of the low level of foreign exchange reserves, they believed that the authorities should not target a specific level for the exchange rate. Directors urged continued progress in implementing the recommendations of the safeguards assessment report on the central bank.

Directors considered that dollarization has served Liberia well by helping to stabilize the post-conflict economy. They saw no urgency in reversing dollarization, and stressed that efforts to do so over the medium term should be market-based, and focus on implementing credible policies—including strengthening the banking sector and the payments system. In this regard, Directors commended the banking sector reforms being implemented, and looked forward to continued progress in this area. To address the possible impact of the recent dollar appreciation on Liberia's export competitiveness, Directors encouraged the authorities to press ahead with rebuilding Liberia's infrastructure and reforms to support private sector development.

Directors stressed that continued steadfast pursuit of sound policies and reforms, complemented by adequate external financial and technical assistance, will be crucial to achieving the HIPC completion point and Liberia's Millennium Development Goals. Acknowledging the good progress being made towards meeting the completion point triggers, a number of Directors took positive note of the authorities' desire to reach the HIPC completion point in 2009.

Directors noted that data deficiencies hamper surveillance and monitoring of program implementation. They welcomed the finalization of Liberia's medium-term national statistical development plan, and the ongoing efforts to improve the national account statistics.

The next Article IV consultation with Liberia is expected to be held in accordance with the relevant Executive Board decision on the consultation cycle for members with Fund arrangements.