A SECOND EDITION REPUBLIC OF LIBERIA Economic Update Finding Fiscal Space June 2021 B REPUBLIC OF LIBERIA – ECONOMIC UPDATE © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org SECOND EDITION REPUBLIC OF LIBERIA Economic Update Finding Fiscal Space June 2021 Abbreviations and Acronyms AfDB African Development Bank M1 Liberian money supply (narrow growth) AfT agenda for transformation M2 Liberian money supply (broad growth) CBL Central Bank of Liberia MACs ministries, agencies, and commissions CIT corporate income tax MFDP Ministry of Finance and Development Planning CPIA Country Policy and Institutional Assessment MTEF medium term expenditure framework CPI consumer price index NRF National Road Fund CSA Civil Service Agency ODA official development assistance CSM Civil Service Management PAN Personnel Action Notice DARs Development Assistance Report PAPD Pro-poor Agenda for Prosperity and Development DSA Debt Sustainability Analysis PEFA Public Expenditure and Financial DRMS Domestic Resource Mobilization Accountability Strategy PIMA Public Investment Management EAP East Asia and Pacific Assessment ECF extended credit facility PIUs project implementation units ECOWAS Economic Community of PPPs public-private partnerships West African States PSIP public sector investment program ER exchange rate PIT personal income tax EU European Union PV present value FDI foreign direct investment SOE state-owned enterprise GDP gross domestic product SSA Sub-Saharan Africa GFSM Government Finance Statistics Manual UN United Nations GNI gross national income US United States GOL Government of Liberia US$ United States dollar IFMIS Integrated Financial Management Information System USAID United States Agency for International Development IMF International Monetary Fund VAT value added tax kg kilogram WB World Bank L$ Liberian dollar WBG World Bank Group LRA Liberia Revenue Authority .  3 Table of Contents Executive Summary .................................................................................. 6 Recent Economic Developments and Outlook.....................................10 Recent Economic Developments.......................................................................................... 11 The Global and Regional Context.......................................................................... 11 The State of the Economy ...................................................................................... 13 Liberia’s Economy Contracted in 2020............................................................... 13 Macroeconomic Outlook and Risks..................................................................... 23 Finding Fiscal Space............................................................................... 28 Introduction............................................................................................................................... 29 Increasing Government Savings.......................................................................... 30 Domestic Revenue Mobilization............................................................................ 31 Controlling Current Expenditure ......................................................................... 33 Mobilization of External Resources..................................................................... 40 Improving the Efficiency of Capital Expenditure.............................................. 43 Conclusion................................................................................................50 References................................................................................................ 52 Annexes.................................................................................................... 53 LIST OF BOXES AND FIGURES BOXES Box 1.1: Evolution and Socioeconomic Impacts of the Ebola and COVID-19 Outbreaks in Liberia................................................................................................................. 18 Box 2.1: Recent Pay and Payroll Reform.................................................................................................37 TABLES Table 1.1: Liberia Government Fiscal (2015–2025).............................................................................. 27 FIGURES Figure 1.1 Global and Regional Economic Growth, 2018–21.............................................................. 12 Figure 1.2: Evolution of Commodity Prices (rice, crude oil, rubber, and iron ore)........................ 12 Figure 1.3: Trends in Key Output (volume) and Real GDP.................................................................. 13 Figure 1.4: Trends in the Consumer Price Index, 2018–21 ................................................................ 14 Figure 1.5: Poverty Rate, Real Private Consumption per Capita, and Food Security.................. 15 Figure 1.6: Value of Main Merchandise Imports and Exports............................................................ 16 Figure 1.7: Evolution of Selected CBL’s Monetary Aggregate........................................................... 19 Figure 1.8: Share of Liberian Dollars in M2 and Deposits................................................................. 20 Figure 2.1 Trends in Current Spending and Domestic Revenue (in percent of GDP)................ 30 Figure 2.2: Tax to GDP Ratio in Liberia and in Neighboring Countries.......................................... 31 Figure 2.3 Current spending in Liberia and in Neighboring Countries......................................... 33 Figure 2.4 Size of the Wage Bill in Liberia and in Neighboring Countries................................... 34 Figure 2.5: Authorized Number of Full-Time Equivalent Positions................................................ 35 Figure 2.6: Size of the Use of Goods and Services in Liberia and in Neighboring Countries.............................................................................................................................. 38 Figure 2.7: Trends in the Composition of Actual Disbursements.................................................... 40 Figure 2.8: Trends in the Composition of Public Debt ...................................................................... 41 Figure 2.9: CPIA Scores in Liberia and in Neighboring Countries................................................. 42 Figure 2.10: Capital Expenditure in Liberia and in Neighboring Countries.................................. 43 Figure 2.11: Efficiency Frontier (physical infrastructure indicators)................................................. 44 Figure 2.12: Size of Capital Expenditure Domestically Financed in Liberia and in Neighboring Countries.................................................................................................................. 45 Figure 2.13: Size of Capital Expenditure Externally Financed in Liberia and in Neighboring Countries.......................................................................................................................... 46 Figure 2.14: Planned versus Actual Disbursements by Sector and Pillar.......................................47 Executive Summary In the years leading up to the COVID-19 outbreak, Liberia’s economic performance was already weak. Since 2014, the growth momentum spurred by the Accra Comprehensive Peace Agreement of 2003 was stopped in its tracks by a series of shocks. The economy was buffeted by the devastating Ebola outbreak, a collapse in iron ore and rubber prices (the country’s main exports), and the drawdown of the United Nations (UN) peacekeeping forces. As a result, the economy virtually stagnated from 2014 to 2018, before contracting by 2.5 percent in 2019. With the COVID-19 pandemic, the economy has weakened further, with real gross domestic product (GDP) contracting by an estimated 3.0 percent in 2020. This is a shortfall of almost 5 percentage points against the pre-COVID-19 projection of growth for 2020 at 1.6 percent. Liberia reported its first confirmed case of COVID-19 on March 16, 2020. As of June 10, 2021, the country had recorded 2,484 confirmed cases, of which 2,065 have recovered, 326 remain active, and unfortunately, 93 died. The government’s response to the COVID-19 outbreak was swifter than during the Ebola epidemic, and compliance with the measures was much higher. The restriction measures put domestic activities on a standstill for months, causing the urban services economy to contract by an estimated 8.6 percent in 2020. On a positive note, inflation moderated sharply to 13.1 percent by December 2020 from 20.3 percent the year before, because of tight macroeconomic policies. The drop in world oil prices allowed some easing in Liberian fuel prices, a frequent driver of inflationary pressures, although their decline was moderated by the introduction of an excise tax early in the year. But it was macroeconomic policy that was at the center of the action, with tighter monetary and fiscal policies, and the ensuing lower aggregate demand pressures, helping to ease the self-reinforcing cycle of depreciation-inflation observed in late 2018 through 2019. The full cumulative effects on poverty and vulnerability of the two consecutive years of dire economic conditions, on top of a prolonged period of stagnation (2014–2018), is yet to be fully assessed. Extreme poverty has been on a rising trend since the Ebola epidemic in 2014. The proportion of households falling below the extreme poverty line is estimated at 51.0 percent in 2020, up from 38.6 percent in 2014. According to the High Frequency Phone Monitoring Survey Report launched in August 2020, two out of three households in Liberia are food insecure, three out of four households reported job losses, and two out of three households reported income losses. On the external side, the current account deficit narrowed in 2020 despite the effects of COVID-19 on tourism. The trade deficit widened to 13.2 percent of GDP in 2020 (from 11.9 percent of GDP in 2019), despite improvements in the terms of trade brought on by the increase in rubber, iron ore, and gold prices on the export side, and the decrease in oil prices on the import side. The balance of secondary income improved to 12.5 percent of GDP, thanks to higher official transfers (including budget support) and an increase in net remittances. Overall, the current account deficit narrowed to 16.4 percent of GDP in 2020, from 17.7 percent of GDP in the previous year. The financing of the deficit proved challenging, however, with a decline in foreign direct investment (FDI) (down to 6.9 percent of GDP), even as the country needed to rebuild its international reserves.  7 Despite the negative effects of COVID-19, the fiscal stance improved in 2020, with strong revenue efforts and consolidation on the spending side. Compared to the other countries in the region, the spread of COVID-19 was limited in Liberia, but the economic impact was still significant. Facing limited room to borrow on concessional terms, the government maintained its efforts to mobilize domestic revenue to respond to COVID-19-related expenditure pressures. Overall, total revenues and grants increased to 29.4 percent of GDP, while total expenditure was kept in line with the 2020 recast budget at 33.4 percent of GDP, despite intense COVID-19-related spending pressures. On the spending side, the government continued to implement fiscal consolidation measures initiated in 2019, including payroll reform and wage harmonization aimed at containing the rising trend of the public sector wage bill, and facilitating cash management. The number of public employees was reduced from about 74,000 to about 67,100 by the elimination of duplicates and ghost workers, and by the retirement of employees past the mandatory retirement age. Monetary and exchange rate (ER) policies remained tight in 2020, with the Central Bank of Liberia (CBL) exercising caution in view of uncertainties about the economic impact from COVID-19. In May, the CBL eased its stance by reducing its policy rate by 500 basis points to 25.0 percent. Still, with the sharp deceleration of inflation to 10.0 percent by end-November, the policy rate has effectively risen in real terms (by 12.0 percentage points) since December 2019. Liberia broad money (M2) money growth decelerated to 5.2 percent at end-2020, compared to 19.8 percent at end-2019. Growth in Liberia narrow money (M1) also slowed to 11.6 percent, compared to 14.0 percent in 2019, keeping a lid on the inflation-adjusted stock of currency in circulation. Liberia continued to face Liberian dollar (L$) liquidity shortages in 2020, especially at the end of the year. Liberia is highly dollarized. Though the complete universe of 8 REPUBLIC OF LIBERIA – ECONOMIC UPDATE money instruments is not well measured, the share of money in local currency, cash, or deposits in the total money stock has fluctuated in the 30–35 percent range in recent years, according to official data available. Given that the number of United States (US) dollars in circulation in Liberia is omitted, this overestimates the size of local currency in the money stock. Taking only bank deposits (which constitute about 80 percent of M2), the share of local currency has remained in the range of 15 to 20 percent in recent years, with a more recent tendency to even decrease slightly. It is therefore possible that local currency overall remains well below 30 percent of the money stock, and even as low as 20 percent. The cash shortages have made headlines and prompted the CBL to provide explanations. Shortfalls in overall liquidity, broadly speaking, appear to be limited by the widespread availability of the US dollar (US$) for transaction and savings purposes, so that large, sustained transactional frictions arising from liquidity shortages are unlikely to be severe. Moreover, they have tended to be short lived, lasting only a few months. Nonetheless, L$ cash shortages create temporary transaction problems, fuel unnecessary uncertainty, and undermine the expansion of the role of the local currency. Going forward, economic growth is expected to recover to 3.6 percent in 2021, before rising gradually to an average of 5.2 percent over 2022–2025. In the near term, growth will be driven by the expected recovery in the mining sector underpinned by the recent uptick in commodity prices. Iron ore prices surged 25 percent in the first quarter of 2021, and prices in April 2021 were almost double those of April 2020. The surge largely reflected robust demand for steel in China, whose iron ore imports account for two-thirds of seaborne trade. In the non-mining sectors, services growth is projected to rebound (to 3.4 percent in 2021, from –8.6 percent in 2020) if vaccine rollouts will prevent a new general lockdown in 2021–2022. As the global economy recovers over the medium term, and Liberia continues to implement reforms in agriculture and energy, the contribution of the non-mining sectors to growth is expected to increase to 5.2 percent in 2022–2025. The government must help restart the economic engine and find the fuel (fiscal space) to power it forward in the remainder of the Liberia Rising 2030 horizon. The government needs to create fiscal space to pay for the country’s massive investment needs in physical infrastructure (power/energy, roads, rails, ports, and airports). Moreover, Liberia must invest in its people and institutions, and create an educated, skilled, and healthy labor force, in both the public or private sectors, and protect its economy and vulnerable population against repeated exogenous shocks. The government needs first and foremost to reduce the very high level of current spending and strengthen domestic revenue mobilization to generate savings for public investment financing. Between 2012 and 2020, government operating expenses exceeded the domestic revenue it collected by 4 percent of GDP. This means that the external resources mobilized in the period financed a significant part of the government’s operating expenditure instead of financing public investment in infrastructure. Mobilization of domestic revenue could significantly augment fiscal space, even though this will only be a gradual process over the next few years. Domestic resource mobilization in Liberia is relatively low, below peer performance, and insufficient to sustain core public service delivery. The Liberian tax gap is estimated at 2–3 percent of GDP. Income tax revenues and trade taxes are the major revenue generating sources, while consumption tax revenues are low. About 80.0 percent of total income tax revenues arise from the personal income tax (PIT), while only around 19.5 percent of  9 income tax revenue is generated by the corporate income tax (CIT). This implies that Liberia is among the very lowest performers on the continent in terms of CIT revenues to GDP. Using sectoral contributions to GDP as proxies for sectoral tax bases, the Liberia Revenue Authority (LRA) has estimated that a revenue improvement of 50.0 percent could be obtained if all economic sectors contributed fairly to the CIT. The extensive use of tax exemptions and preferential rates in the CIT is undoubtedly a key explanation for the low CIT revenue performance. In addition, raising natural resource revenues has clear potential with the recent increase in iron ore prices. Fiscal space can be increased by improving the efficiency of current expenditure. The wage bill is 68 percent higher in Liberia than in a pool of neighboring countries, while spending on goods and services is nearly three times as high as in that pool. Rationalizing wages and public sector employment, as the government has started to do with its pay and payroll reform, will ultimately save resources, improve the efficiency of public expenditure, and increase transparency. In addition, reducing expenditure on goods and services associated with the use of consultancy services and specialized materials could potentially help reduce overall spending, especially in the public administration sector. Liberia can maximize on-budget and off-budget external grants, but these flows tend to be unpredictable. Off-budget external resources that support ongoing investment projects are projected to decline but will remain significant in the near term, ranging from US$250 million to US$450 million between 2022 and 2025. Liberia should implement reforms to improve its Country Policy and Institutional Assessment (CPIA) score to increase its access to concessional resources, from multilateral creditors, such as the World Bank (WB) and the African Development Bank (AfDB). A higher CPIA score could also influence the level of resources allocated to Liberia by other multilateral creditors, such as the European Union (EU), and some bilateral creditors, such as the United States Agency for International Development (USAID). Liberia should remain prudent on external borrowing in its quest to meet the large investment required by the Pro-poor Agenda for Prosperity and Development (PAPD). Liberia is at moderate risk of external debt distress, but already at high risk of public debt distress, so there is very limited space to borrow. Under the baseline scenario of the external Debt Sustainability Analysis (DSA), the present value (PV) of debt-to- GDP and the PV of debt-to-export ratios remain below the respective thresholds of 30 and 140 percent in the medium to long term, but come very close to them. The debt-service to export and debt-service to revenue ratios also remain below but very close to their respective thresholds. Standard stress tests show that the situation will remain fragile, and a further deterioration of the macroeconomic outlook could lead to breaches of the policy-dependent thresholds. Finally, Liberia should improve the efficiency of its public investment through better planning, project preparation and management, and better alignment with PAPD priorities. Liberia’s overall efficiency gap in terms of physical indicators is estimated at 38 percent, in comparison with other countries in Sub-Saharan Africa (SSA) and low- income developing countries generally. This means that the country should be able to increase the return on its infrastructure by 38 percent by improving public investment efficiency at an unchanged level of its public sector capital stock. This result also points to the importance of strengthening the public investment management institutions. 10 REPUBLIC OF LIBERIA – ECONOMIC UPDATE PA R T 1 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Recent Economic Developments In the years leading to the COVID-19 outbreak, Liberia’s economic performance was already weak. A series of severe shocks, starting in 2014, stopped the growth momentum that had been spurred by the Accra Comprehensive Peace Agreement of 2003, which had put an end to 15 years of civil strife (economic growth averaged 7.4 percent in the subsequent decade, thanks to the peace dividend, high commodity prices, significant foreign direct investment [FDI] inflows, and strong financial support from donors). From 2014, however, the country’s economy was buffeted by the devastating Ebola outbreak, a collapse in iron ore and rubber prices, and the economic impact of the drawdown of United Nations (UN) peacekeeping forces. Iron ore and rubber prices declined by 70.0 percent and 50.0 percent, respectively, over 2014–2015; FDI inflows decreased by 37.7 percent between 2013 and 2019; and official grants declined from an annual average of 17.0 percent of gross domestic product (GDP) in 2015–2017 to 13.3 percent of GDP in 2019. As a result, the contribution of the services sector to GDP declined cumulatively by 9.5 percent between 2014 and 2019. Over the same period, thanks to some recovery in iron ore and rubber prices in 2017–2019, the cumulative decline of industry was contained at 1.1 percent. Offsetting these negative effects to some extent, the agriculture sector proved resilient, recording a cumulative growth of nearly 10.0 percent between 2014 and 2019, albeit just in line with population growth in rural areas. THE GLOBAL AND REGIONAL CONTEXT The global economy experienced a severe recession in 2020 due to COVID-19. The world economy contracted by 4.3 percent in 2020, compared to an annual average growth rate of 2.7 percent during 2018–19 (a relatively poor performance already, attributable to trade tensions, diminishing consumer and business confidence in some advanced economies, falling commodity prices, volatile financial markets, and lower-than-expected capital inflows to emerging economies). The COVID-19 crisis exacerbated preexisting weaknesses, exacting a large toll on lives and livelihoods across the world, disrupting global supply chains and investment activities, and straining public health systems and public finances, especially during the first half of 2020. Except for the East Asia and Pacific (EAP) region (that experienced modest growth because of China’s swift bounce back), all other regions, including Sub- Saharan Africa (SSA) experienced a deep recession in 2020. In SSA, economic output contracted steeply by 3.7 percent in 2020, compared to an average growth rate of 2.5 percent per year during 2018–19. Commodity prices declined sharply in early 2020 at the onset of the COVID-19 pandemic, but started to recover in the third quarter of 2020. Crude oil prices declined from US$63.4 per barrel in December 2019 to only US$21.0 in April 2020, its lowest 12 REPUBLIC OF LIBERIA – ECONOMIC UPDATE level since February 2002, before starting to recover. Although prices have doubled since then, supported by sharp supply cuts by the Organization of the Petroleum Exporting Countries (OPEC)+, they remain one-third lower than their pre-pandemic levels. Over the year, crude oil prices averaged US$41.7 per barrel, 32.5 percent below the 2019 average. The price of rice (the other major merchandise import for Liberia) increased by 18.0 percent in 2020. Metal prices declined in early 2020 but recovered rapidly in response to the faster-than-expected pickup of China’s industrial activity. Iron ore prices increased by 16.6 percent to average US$110.0 per dry metric ton in 2020, up from US$94.3 in 2019. The price of rubber (SGP/MYS) also increased by 5.9 percent in 2020 to average US$1.75 per kg. Figure 1.1 Global and Regional Economic Growth, 2018–21 8.0 5 6.0 4 3 4.0 2 2.0 1 0.0 0 -2.0 -1 -2 -4.0 -3 -6.0 -4 -8.0 2018 2019 2020e 2021f -5 PRE-COVID COVID AE EAP ECA LAC MNA SAR SSA WORD Source: World Bank. Note: AE = Advanced Economies; EAP = East Asia and Pacific; EAC = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SAR = South Asia. Figure 1.2: Evolution of Commodity Prices (rice, crude oil, rubber, and iron ore) Liberia’s main imports Liberia’s main exports 1000 140 7.0 250 120 6.0 800 200 100 5.0 600 80 4.0 150 400 60 3.0 100 40 2.0 200 50 20 1.0 0 0 0.0 0 01 03 05 07 09 11 13 15 17 19 21 64 69 74 62 83 88 92 97 02 06 11 16 20 20 20 20 20 20 20 20 20 20 19 19 20 19 19 19 19 19 19 20 20 20 20 20 20 Rice, Thai 5% Rice, Thai 25% Crude Oil, average (RHS) Rubber, SGP/MYS Iron ore, cfr spot (RHS) Source: World Bank Commodity Markets Outlook. Note: RHS = right hand side. Recent Economic Developments and Outlook 13 THE STATE OF THE ECONOMY Liberia’s Economy With the COVID-19 pandemic,1 real GDP contracted by an estimated 3.0 percent in Contracted in 2020 2020 (compared to a projected growth of 1.6 percent before the outbreak). Liberia reported its first confirmed case of COVID-19 on March 16, 2020. A year later, 2,042 confirmed cases and 85 deaths were recorded. To contain the spread of the virus, the government declared a state of emergency between April 10 and July 22, 2020, and imposed lockdown measures. The government’s response was swifter than during the Ebola epidemic and compliance with the measures was also much higher. But the restrictions put domestic activities on a standstill for months, causing the urban services economy to contract by an estimated 8.6 percent in 2020. Industry stagnated only because the decline in manufacturing and other industries was compensated by growth in mining (owing to rising prices of iron ore and gold). Agriculture grew at 2.4 percent with the increased production of food and nonfood crops (mainly cassava, rice, rubber, and palm oil). On the demand side, the contraction was driven by declines in non-mining exports, including services exports (tourism), public spending (both consumption, –11.4 percent, and investment, –11.6 percent), and private investment, especially (FDI) (–8.7 percent). Private consumption (by far the main driver of GDP growth) stagnated in real terms. Figure 1.3: Trends in Key Output (volume) and Real GDP Agriculture output Mining output 35,000 700,000 10,000 4,000 9,000 3,500 30,000 600,000 8,000 3,000 25,000 500,000 7,000 2,500 6,000 20,000 400,000 5,000 2,000 15,000 300,000 4,000 1,500 3,000 10,000 200,000 1,000 2,000 500 5,000 100,000 1,000 – – Jul-15 Nov-16 Apr-18 Aug-19 Jan-21 Jan-15 Jan-16 Aug-16 Mar-17 Sep-17 Apr-18 Oct-18 May-19 Dec-19 Jun-20 Jan-21 Rubber (Mt) Cocoa Beans (Mt) (RHS) Gold (ounces) Diamond (Carat) Iron Ore (Mt) (RHS) 10 GDP by sector 10 GDP growth mining and non-mining 8 8 6 6 4 4 2 2 0 0 -2 -2 Source: Liberian authorities, IMF, and World Bank staff. -4 -4 2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020 Primary Secondary Services GDP Mining & panning Non-mining GDP Source: Liberian authorities, IMF, and World Bank staff. 1 As of March 16, 2021, Liberia, with a population of close to 5 million, recorded 2,042 confirmed cases, of which 1,899 have recovered, 58 remain active, and unfortunately, 85 died. 14 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Tight macroeconomic policies led to a sharp moderation in inflation in 2020. Domestic fuel prices, a frequent driver of inflationary pressures in Liberia, fell only slightly in response to the drop in international oil prices, because of the introduction of an excise tax early in the year. However, tighter monetary and fiscal policies appear to have slowed the self-reinforcing cycle of depreciation-inflation that was observed in late 2018 through 2019. The inflation rate moderated to 13.1 percent by December 2020, from 20.3 percent a year before. The average Liberian dollar (L$) inflation rate for 2020 is estimated at 17.0 percent compared with 26.9 percent in 2019. When corrected for the movement in the exchange rate (ER) (that is, expressing prices in the widely available United States (US) dollar in which purchases are often made and wages are often paid), the change in aggregate prices averaged only 2.3 percent in 2020. The bilateral nominal ER to the US dollar remained stable around L$199 per United States dollar (US$) in the first nine months of 2020 (a marked departure from the previous three years when it depreciated by 40.0 percent), and the L$/US$ ER even appreciated to L$160 per US$ in the last quarter of 2020. As a result, the consumer price index (CPI) index in US dollars, which had increased by only 1.3 percent in the first nine months of 2020, accelerated in October and November to 10.0 percent. Figure 1.4: Trends in the Consumer Price Index, 2018–21 70 60 35 50 Annual percent change 30 40 30 25 Percentage points 20 20 10 0 15 -10 10 -20 5 -30 0 Ma 8 Ma 18 Ju 8 Se 18 No 8 Ja 8 Ma 9 Ma 19 Ju 9 Se 9 No 9 Ja 9 Ma 0 Ma 20 Ju 0 Se 20 No 0 Ja 0 Ma 21 1 r-2 n-1 y-1 p-1 v-1 n-1 y-1 l-1 p-1 v-1 n-2 y-2 p-2 v-2 r- l- r- n- r- l- Ja 8 8 8 9 9 9 0 0 0 1 n-2 n-1 y-1 p-1 n-1 y-1 p-1 n-2 y-2 p-2 Ma Ma Ja Ja Ja Se Se Ma Ja Se Imported Food CPI Domestic Food CPI Imported Fuel CPI Headline CPI Food Non-Food 15 250 40 30 10 200 20 Percentage change (%) 5 150 10 0 0 100 -10 -5 50 -20 -10 0 -30 -15 Ap 7 Ju 7 Oc 7 Ja 7 Ap 8 Ju 8 Oc 8 Ja 8 Ap 9 Ju 9 Oc 9 Ja 9 0 0 0 0 1 n-2 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-1 r-1 l-1 t-1 n-2 r-2 l-2 t-2 Jan-18 Aug-18 Mar-19 Sep-19 Apr-20 Oct-20 Ja Ju Oc Ja Ap Imported Food CPI (US$) Domestic Food CPI (US$) Annual percent change (RHS) Market exchange rate (average) LHS Imported Fuel CPI (US$) Headline CPI (US$) Source: LISGIS, Central Bank of Liberia, and World Bank staff. Note: RHS = right-hand side; LHS = left-hand side. Recent Economic Developments and Outlook 15 Poverty is increasing The full cumulative effects of two consecutive years of dire economic conditions (on top of a prolonged period of stagnation over 2014–2018) on poverty and vulnerability are yet to be fully assessed. According to the High Frequency Phone Monitoring Survey report launched in August 2020, two out of three households in Liberia are food insecure, three out of four households reported job losses, and two out of three households reported income losses because of COVID-19. According to World Bank Group (WBG) projections,2 the prevalence of extreme poverty has increased since the Ebola epidemic in 2014 and is estimated at 51.0 percent in 2020 (up from 38.6 percent in 2014). On average, 81.9 percent of the households interviewed in round 6 of the COVID-19 High Frequency Phone Monitoring Survey indicated that they were worried about not having enough food to eat, while 27.2 percent effectively ran out of food. In this context, little progress could be made on the jobs front. Most of the working- age population is in the labor force and employed, but most workers depend on precarious low wage jobs in the informal sector. The labor force participation rate (those who are employed and unemployed) increased from 69.1 percent in 2007 to 75.3 percent in 2016, but women are significantly less likely (by almost 10 percentage points) to be in the labor force than men. Only 3.2 percent of those in the labor force are unemployed (most simply cannot afford not to work); however most Liberians lack access to good jobs that provide sustainable earnings. Three out of four of those in the labor force are self-employed in agriculture (36 percent of all employment) or nonagricultural activities (almost 40 percent). Only 20 percent of workers are in wage employment, which tends to provide higher and more stable earnings. Figure 1.5: Poverty Rate, Real Private Consumption per Capita, and Food Security 80 250 81.9 79.1 78.9 76.9 70 74.7 Real private consumption per capita (LCU) 200 60 50 Poverty Rate (%) 150 40 34.1 30 100 27.2 23.1 20 50 10 0 0 Were Were Ate only Had to Ate less Ran out Were Went worried unable to a few skip a than you of food hungry without 2007 2009 2011 2013 2015 2017 2019 2021 2023 about not eat kinds of meal thought but did eating for a having healthy foods because you not eat whole day International Poverty Rate Real priv. cons. pc enough and because there should food to eat nutritious was Source: LISGIS and World Bank staff. 2 MPO October 2020 http://pubdocs.worldbank.org/en/733441492188161968/mpo-lbr.pdf. 16 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Liberia’s external position improved On the external side, the current account deficit narrowed in 2020 despite the impact of COVID-19. The trade deficit is estimated to have widened to 13.2 percent of GDP in 2020, from 11.9 percent of GDP, despite improvements in the terms of trade (higher prices for rubber, iron ore, and gold, and lower oil prices). Merchandise exports reached 17.9 percent of GDP in 2020, thanks to an uptick in sales of gold (5.3 percent of GDP) and iron ore (8.7 percent of GDP), but imports of goods increased faster to reach 31.2 percent of GDP in 2020, up from 28.1 percent of GDP in 2019. The balances in services and in primary income also widened in 2020 to 11.1 percent and 4.5 percent of GDP, respectively, as exports of services (mainly tourism and transportation) collapsed because of COVID-19. In contrast, the balance of secondary income improved to 12.5 percent of GDP, thanks to higher official transfers (including budget support) and an increase in net remittances (which operate as a countercyclical buffer and were also aided by the suspension of the surrender3 requirement on remittances in banks). Overall, the current account deficit narrowed to 16.4 percent of GDP in 2020, from 17.7 percent of GDP in 2019. The financing of the deficit proved challenging with declines in both FDI (down to 6.9 percent of GDP) and net private financing (2.4 percent of GDP), given limited international reserve buffers. However, Liberia benefited from strong support from the International Monetary Fund (IMF) (3.2 percent of GDP), including through the ongoing extended credit facility (ECF) program (US$47 million, 1.5 percent of GDP). Thus, the gross official reserves position improved to US$358 million at end-2020 (2.6 months of imports), up from US$292 million (2.3 months) in 2019. Figure 1.6: Value of Main Merchandise Imports and Exports 40,000 60,000 35,000 50,000 30,000 40,000 25,000 30,000 20,000 15,000 20,000 10,000 10,000 5,000 – – Nov-16 Jun-17 Dec-17 Jul-18 Feb-19 Aug-19 Mar-20 Sep-20 Nov-16 Jun-17 Dec-17 Jul-18 Feb-19 Aug-19 Mar-20 Sep-20 Food and Live Animals Minerals, Fuel, Lubricants Rubber Iron Ore Diamonds Gold Chemicals & Related Products Machinery & Transport Equipment Source: Central Bank of Liberia and World Bank staff. 3 A surrender requirement on inward US$ remittances was introduced in December 2016, but was suspended in November 2019 owing to acute shortages of Liberian dollar banknotes. Recent Economic Developments and Outlook 17 Fiscal consolidation continued Despite the negative effects of COVID-19, the fiscal stance improved in 2020, with strong revenue efforts and consolidation on the spending side. Total revenue and grants increased to 29.4 percent of GDP, while total expenditure was kept in line with the 2020 recast budget at 33.4 percent of GDP in 2020, compared to 32.2 percent of GDP in 2019, and despite increased COVID-19-related spending pressures. The government pursued efforts to mobilize domestic revenue to respond to the new COVID-19-related expenditure pressure. Domestic revenue, at 14.9 percent of GDP, overperformed the recast budget by 1.3 percentage points of GDP, reflecting better performance of the Liberia Revenue Authority (LRA)4 and the introduction of the 30 percent excise tax per gallon on fuel in May 2020. The total tax waived on imports dropped by an aggregate 22 percent from US$132.9 million in FY2018/19 to US$103.4 million in FY2019/20. Program grants increased to 1.2 percent of GDP in 2020 from 0.4 percent in 2019, together with project grants (13.4 percent of GDP), as the government mobilized higher than expected budget support. On the spending side, the government continued to implement fiscal consolidation measures initiated in 2019, including payroll reform and wage harmonization aimed at containing the rising trend of the public sector wage bill and facilitating cash management. The number of public employees was reduced from about 74,000 to about 67,100 by the elimination of duplicates and ghost workers, and the retirement of employees past the mandatory retirement age. The overall fiscal deficit declined from 6.0 percent of GDP in 2019 to 4.0 percent of GDP in 2020. The primary deficit also narrowed from 5.8 percent of GDP in 2019 to 2.8 percent of GDP in 2020, only slightly above the medium-term debt-stabilizing deficit of 2.5 percent. The financing of the deficit was met with no new external nonconcessional borrowing, but with a small net contribution from the Central Bank of Liberia (CBL) in the first half of 2020 (reflecting the on-lending of IMF rapid credit facility [RCF] disbursements to the government and the Catastrophe Containment and Relief Trust (CCRT). Nevertheless, total public debt-to-GDP increased to 58.8 percent of GDP (from 45.3 percent of GDP in 2019) mainly because of the recognition5 of past government debt (amounting to 6.0 percent of GDP) to the CBL, and ER effects on the domestic currency value of the external debt. 4 LRA could retain 4 percent of revenue collected to fund its operations as opposed to a direct budget allocation. This helped to improve operational efficiency. 5 https://www.mfdp.gov.lr/index.php/media-center/press-release/brief-on-the-increase-in-gol-debt-stock- between-december-2017-and-march-2020 18 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Box 1.1: Evolution and Socioeconomic Impacts of the Ebola and COVID-19 Outbreaks in Liberia Ebola epidemic. Liberia reported its first confirmed case of Ebola on March COVID-19 pandemic. Liberia reported its first confirmed case of COVID-19 on 30, 2014. As of July 30, 2014, Liberia recorded 10,672 confirmed cases, of March 16, 2020. As of March 16, 2021, the first anniversary of the outbreak, which 5,864 recovered, and unfortunately, 4,808 died. The initial cases were Liberia recorded 2,042 confirmed cases, of which 1,899 have recovered, 58 thought to be malaria, an extremely common disease in Liberia, which led remain active and, unfortunately, 85 died. COVID-19 spread faster than the to doctors being infected with the Ebola virus. It took time to implement Ebola in the first months of the pandemic but was quickly contained. Building containment measures but by end-July 2014, most border crossings were on the lessons from the Ebola epidemic, the government declared a state closed, with medical checkpoints set up at the remaining ports, quarantines of emergency between April 10 and July 22, 2020, and imposed lockdown in some areas, and schools shut down in an attempt to contain the outbreak. measures to contain the spread of the virus. The number of cases peaked at There was also weak compliance to the containment measures. For example, 300 in early July 2020 before falling to about 20 cases in October. According in August 2014, residents from a suburb area of Monrovia descended to the high frequency household surveys (2020), the compliance with the upon an Ebola clinic to protest its presence. The protesters turned violent, containment measures was high. Virtually all respondents washed hands threatening the caretakers, removing the infected patients, and looting the with soap more often, and 99 percent avoided handshakes and groups were clinic of its supplies, including blood-stained bed sheets and mattresses. limited to no more than 10 persons, such as at family gatherings. Ebola had devastating socioeconomic impacts on Liberia. According to the The COVID-19 crisis negatively impacted the economy. The lockdown socioeconomic impact of Ebola report,^ all sectors were affected and for a measures put domestic activities at a standstill for months, causing the long period. About 40.0 percent of household heads reported not working economy to contract by an estimated 3.0 percent in 2020 against a projected between October 2014 and March 2015, causing economic growth to decline growth of +1.6 percent before the pandemic. Over 75.0 percent of businesses to an estimated 0.7 percent in 2014 compared to a projected growth of 6.8 closed during the lockdown and over 90.0 percent reported lower sales in percent before the epidemic. The inflation rate rose to 9.9 percent compared the industry and trade sectors. Thanks to improved macroeconomic policy, to 6.6 percent projected before the outbreak. Thanks to massive inflows of the inflation rate was out at 17.0 percent in 2020, lower than the projected grants, the fiscal deficit was reduced to 1.2 percent of GDP compared to 4.2 20.5 percent before the pandemic. The fiscal deficit also improved to reach percent of GDP projected prior to the pandemic. The current account deficit 4.0 percent of GDP compared to 4.7 percent of GDP projected prior to the was also lower than expected. pandemic. * https://www.worldbank.org/content/dam/Worldbank/document/Poverty%20documents/Socio-Economic%20Impacts%20of%20Ebola%20in%20Liberia%2C%20 April%2015%20(final).pdf. Trends in Ebola confirmed cases and deaths Trends in COVID-19 confirmed cases and deaths 2000 12000 350 2500 1800 1600 10000 300 2000 1400 8000 250 1200 1500 200 1000 6000 800 150 1000 600 4000 100 400 500 2000 50 200 0 0 0 0 W-1 W-5 W-9 W-14 W-18 W-20 W-22 W-27 W-31 W-34 W-38 W-42 W-47 W-51 W-55 W-1 W-5 W-9 W-14 W-18 W-20 W-22 W-27 W-31 W-34 W-38 W-42 W-47 W-51 W-55 Weekly new cases (LHS) Total Confirmed cases (RHS) Total number of deaths (RHS) Selected economic impact of Ebola Selected economic impact of COVID-19 Current Current Growth Inflation Fiscal deficit Growth Inflation Fiscal deficit account deficit account deficit Projection 6.8 6.6 56.2 4.2 Projection 1.6 20.5 21 4.7 Actual 0.7 9.9 28.7 1.2 Actual -3.0 17.0 16.4 4.0 Difference 6.1 -3.3 27.5 3.0 Difference 4.6 3.5 4.6 0.7 Source: IMF World Economic Outlooks Source: IMF World Economic Outlooks Note: LHS = left-hand side; RHS = right-hand side. Recent Economic Developments and Outlook 19 Monetary policy was tight Monetary policy remained tight in 2020, as the CBL exercised caution in view of uncertainties about the economic impact from COVID-19. In May, the CBL eased its stance, but kept reserve requirements unchanged, reducing its policy rate by 500 basis points to 25 percent. Still, with the sharp deceleration of inflation to 10 percent by end-November, the policy rate has effectively risen in real terms (by 12 percentage points) since December 2019. The trend in the real interest rate, along with a shortening of the tenor of CBL bills, enhanced the attractiveness of CBL bills for commercial banks. The CBL also suspended its surrender requirement on remittances throughout 2020 and took other prudential and administrative measures to unlock the interest rate transmission channel, enhance the effectiveness of its new monetary policy framework, and increase public confidence in the financial system. Credit to the private sector bottomed out in the first half of 2020 and started to recover thereafter; coordination between fiscal and monetary policies improved with the Government’s strict adherence to zero monetary financing of the fiscal deficit, except for the on- lending of the IMF disbursement. Broad money (M2) growth slowed significantly in 2020, reflecting restrictive monetary policy and weak economic activity. The growth rate of M2 decelerated to 5.2 percent, year-on-year at end-2020, compared to 19.8 percent at end-2019. Growth in narrow money (M1) also slowed at 11.6 percent, compared to 14.0 percent in 2019, due to a slack in currency outside of banks. Meanwhile, the volume of currency in circulation remained high at about 95.0 percent the total, or L$22.6 billion. The economy remained highly dollarized with the US dollar share of M2 at 67.3 percent at end-2020. Private sector credit recovered in 2020 following a contraction in the previous year and expanded by 5.5 percent. The key drivers of the recovery in credit to the private sector were trade finance, personal loans, and loans to services following the easing of restrictions in the second half of 2020. The COVID-19 pandemic highlighted financial sector vulnerabilities. By December 2020, the share of nonperforming loans (NPLs) had increased to 21.6 percent of total gross loans, up from 17.2 percent in December 2019. However, both the return on equity (ROE) and return on assets (ROA) stood at 7.2 percent and 1.2 percent, respectively. Meanwhile, the capital adequacy ratio (CAR) and liquidity ratio (LR) remained above regulatory requirements at 31.7 percent and 36.8 percent, respectively. Figure 1.7: Evolution of Selected CBL’s Monetary Aggregate 45,000 400 40,000 350 Value in millions of Liberian Dollars Value in millions of US Dollars 35,000 300 30,000 250 25,000 200 20,000 150 15,000 100 10,000 50 5,000 0 Jun-14 Oct-15 Mar-17 Jul-18 Dec-19 Jun-14 Oct-15 Mar-17 Jul-18 Dec-19 Iron Ore Diamonds CBL’s Net Reserves, O cial CBL’s Gross Reserves, O cial Source: Central Bank of Liberia. 20 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Liquidity shortage persisted in 2020 Just like too much money can be problematic, too little money can be problematic as well. There have been at least two episodes of seasonal L$ currency shortages in recent years in Liberia, once at end-2019 and again toward end-2020. Both instances took place in the last months of the year during a season of high currency demand and were met with popular complaints and media reports of cash shortages at banks and ATMs. Since Liberia can ill afford to confront further instances of economic shocks in the current context, these developments warrant a close look at their causes and consequences. There are two currencies simultaneously in circulation: the Liberian dollar and the US dollar. Expanding the role of the national currency, even in a dollarized context, remains highly desirable: besides modest seigniorage benefits, a national currency provides some degree of autonomy in monetary policy, which is crucial to deal with shocks. At the same time, it also creates risks of inflationary pressures (fueled by excessive monetary expansion) and a conduit for the propagation of shocks to the economy (through the ER market). On balance, however, a national currency is an unmatched tool of macroeconomic management, and efforts should be made to entrench its role. However, Liberia remains highly dollarized. Though the complete universe of money instruments is not well measured, with limited data on US$ cash in circulation, there is official data on L$ cash outstanding,6 as well as bank deposits in L$ and foreign currency. On this basis, the estimated share of money in local currency (cash or deposits) in the total money stock has fluctuated within a 30.0–35.0 percent range in recent years. However, given that the number of US dollars in circulation in Liberia is not known, this probably overestimates the importance of local currency in the money stock.7 Taking only bank deposits (which constitutes about 80.0 percent of M2) into account, the share of local currency has remained in a range of 15.0 to 20.0 percent in recent years. More recently, that share even declined slightly; for example, in 2017, local currency deposits accounted for 19.6 percent of total deposits, while in 2020, the average was about 16.2 percent. It is therefore possible that local currency remains well below 30.0 percent of the money stock, and even as low as 20.0 percent. Figure 1.8: Share of Liberian Dollars in M2 and Deposits 40 35 30 25 20 15 10 2013 2014 2015 2016 2017 2018 2019 2020 2021 Share of L$ in M2 Share of L$ in deposits Source: CBL, IMF, and WBG staff. 6 Of course this is an estimate of currency in circulation that does not precisely count the value of damaged (“mutilated”) or destroyed banknotes, nor those that may have been taken outside the country or out of physical circulation. 7 And, needless to say, besides US$ in circulation, there are undoubtedly other currencies, including British pounds and euros, as well as those of neighboring countries (e.g., Cedi, Naira, and CFAF), that are hoarded or somewhat useable as means of payments in Liberia. Recent Economic Developments and Outlook 21 Several factors appear to have been at the core of the shortage problems, the first being the low rate of new currency issuances. Already, for 2019, the CBL had not been able to obtain the statutory authorization to secure from its printer the quantity of banknotes that it deemed necessary to meet both the replacement needs for damaged (“mutilated”) notes and the ordinary expansion of cash demand. In the event, the CBL was authorized to obtain only 4.0 billion of its 7.5 billion requested. This is equivalent to a 20 percent annual expansion of the stock of currency in circulation, a number that does not appear to account for a severe cash shortage, although the critical issue would be to compare it to the likely growth in nominal money demand. Second, limited cash infusions by the CBL took place against a backdrop of generally tight money, especially in currency, in the last three years. Since 2018, the CBL has maintained a tight issuance of national currency. From January 2018 to October 2020, the real value of L$ in circulation deflated by the CPI declined by 21 percent (shortly before the latest episode of liquidity shortage). Over the same period, the real total stock of Liberian dollars in circulation (cash and deposits) declined by 17 percent.8 Although it is possible that part of this decline reflected a lower desired amount of local currency money, the emergence of temporary shortages of cash still appears to have been a natural consequence of the attempts by the CBL to limit overall money in circulation, as part of its efforts to tame inflation. Third, the COVID-19 recession may have made the situation even more difficult. With disruptions to activity and lockdowns which affected the normal flows of transactions, the flow of currency across the system may have been impeded,9 with localized cash shortages amplified by hoarding behaviors. Fourth, some transient demand shifts toward L$ currency, away from US cash, could also have played a role in the end-2020 episode (compared to 2019). The short-term behavior of the ER is suggestive of a temporary demand shift, possibly reinforced in a self-fulfilling way by speculative hoarding behavior. The two episodes of currency shortage were both accompanied by significant appreciations, of about 10 percent from end-September to end-December 2019, and 20 percent for the same quarter in 2020. But this evidence is suggestive only, since the ER is influenced by a broad array of factors, including economic activity, monetary policy, domestic price shocks, ER market interventions, and commodity prices, as well as remittances, donor aid, and capital flows. In particular, in Q4 2020, the CBL reports a large increase in net remittances into Liberia. Overall for the year, total inward remittances were stable in US$, somewhat surprisingly given the COVID-19 recessions in host countries. However, there was a very sharp (–46 percent) decline of outward remittances, translating into a 77 percent surge in net (inward minus outward) remittances, equivalent to US$92 million compared to 2019, or about L$16 billion. Even if a fraction of this amount added to the net demand for L$ cash (since these would be foreign currency balances that would not be demanded for transfer purposes), it could represent a substantial short-term shift in both the demand for L$ cash and a shift out of US$, accounting for some of the appreciation pressure in the ER market. Whether it could also account for L$ liquidity shortages depends in part on the sources of earnings for the sender of remittances. 8 Over the same period, M2 has declined by a much smaller 3 percent, reflecting in part the higher local currency value of the US dollar component of money due to nominal depreciation. 9 This is a putative reason (advanced by Chairman Powell of the US Federal Reserve) for reported coin shortages in the US during 2020. 22 REPUBLIC OF LIBERIA – ECONOMIC UPDATE In a country with deep dollarization, the microeconomic costs of local currency shortages are limited, but there are still negative impacts. In Liberia, most buyers or sellers accept US dollars in transactions—for at least 65–70 percent of the value of the transactions they carry out. Shortfalls in L$ liquidity, broadly speaking, appear to be limited by the widespread availability of the US dollar for transaction and savings purposes, so that large, sustained transactional frictions arising from liquidity shortages are unlikely to be severe. Moreover, they have tended to be short lived, lasting only a few months. This said, there can still be negative impacts. First, cash shortages hurt at least some people, typically the urban poor that rely on informal cash earnings and those poor consumers that need to make very small purchases for which the US dollar is not convenient. Second, if some transactions are restricted by regulations or policies to be carried out in local currency, a local currency cash shortage could have a negative impact. Examples could include tax payments, civil service or project staff salaries, or legal penalties. Whatever purposes these restrictions may serve, they may conflict with the smooth performance of transaction activities at a time of cash shortages. Third, cash shortages can become self-fulfilling if they recur with some frequency and increasing intensity, since they will tend to be viewed as entrenched and encourage speculative hoarding behavior. In this case, cash shortages, even if temporary, could signify more intense disruptions to the transaction function of money, even when cash represents only 20 percent of means of payments.10 The CBL’s recent authorization to issue sufficient cash to meet demand will go a long way to addressing the problem for the time being. The remedy of issuing enough cash is not at loggerhead with the CBL’s inflationary objectives. The inflationary consequences of excessive cash issuance are easily managed by policy steps dealing with bank deposits, given the 20–80 ratio of cash to deposits. The “dollar-shift solution” used at end-2019, whereby the CBL used up some of its foreign reserves to meet emergency dollar cash demand by banks (who could then turn around and provide US$ in cash to their customers), had the disadvantages (1) that foreign reserves are used for a purpose for which they are not primarily intended for, and (2) that these foreign reserve interventions need to be sterilized to some degree; otherwise they only amplify the local currency monetary tightening and associated shift toward the US$ (sterilization has some costs). On the institutional front, the management of the supply of Liberian dollar currency will also be improved with recent legislative steps. One first step is the implementation of the recent Amendment and Restatement of the Act Establishing the Central Bank of Liberia of 1999. Moreover, in October 2020, the legislature approved amendments to the CBL Act to strengthen the independence of the CBL while enhancing transparency and accountability. Among the changes incorporated are provisions that grant the CBL the power to seek approvals from the legislature for the printing of currency notes over a three-year period, with flexibility on how the total amount is printed within the approved period. 10 With dollarization, the damage should remain limited, however, and even a Gresham’s Law phenomenon (bad money drives out good money) is limited to the extent that the bad money doing the driving (the US$) would still be very good money. Recent Economic Developments and Outlook 23 MACROECONOMIC OUTLOOK AND RISKS Global growth is expected to rebound in 2021 albeit with continued uncertainty and significant downside risks. The anticipated recovery is supported by partial easing of containment measures and ongoing vaccinations. Global growth is projected to rebound to 4.0 percent, thanks to improvements in trade and a recovery in consumption globally, while growth in the SSA is expected at 2.7 percent because of sluggish recoveries in private consumption and investment. However, prospects remain uncertain and subject to several significant risks, chief among them, a delayed rollout of vaccines in emerging markets and developing countries, and new waves of the pandemic. Commodity prices continued to recover in the first quarter of 2021, with 80 percent of commodities now above their pre-pandemic price levels. Prices have been lifted by the global recovery and commodity-specific supply factors for crude oil, copper, and several food commodities. Looking ahead, oil prices are forecasted to average $56 per barrel in 2021, more than 33 percent higher than in 2020, and to increase further to $60 per barrel in 2022 as demand pressures continue. Metal prices are expected to be 30 percent higher on average in 2021 (relative to 2020), including iron ore and gold, before dropping back somewhat in 2022. Food prices are forecast to be 14 percent higher in 2021 on average (relative to 2020), driven by a few food commodities, and to stabilize thereafter. The main risks to the price forecasts are the evolution of the pandemic for industrial commodities and weather shocks for agriculture products. Liberia’s medium-term economic outlook is positive, with per capita growth expected to recover in 2021, but COVID-19 and Ebola-related uncertainties remain. Economic growth is expected to recover to 3.6 percent in 2021, before gradually accelerating to an average of 5.2 percent over 2022–2025. In the near term, growth will be driven by the mining sector thanks to favorable commodity price trends: iron ore prices which surged 25 percent in the first quarter of 2021 and doubled between April 2020 and April 2021.11 In the non-mining sector, services are forecast to rebound slowly, growing at 3.4 percent (after contracting by 8.6 percent in 2020) if the vaccine rollout12 will prevent the need for a new general lockdown in 2021–2022. As the global economy recovers over the medium term and Liberia continues to reform its real sector (including in agriculture and energy), the growth of non-mining activities is expected to increase to 5.2 percent in 2022–2025. Agriculture and manufacturing are expected to play pivotal roles in making growth more broadbased, inclusive, and sustainable, as structural reforms in key enabling sectors such as energy, trade, transportation, and financial services help spur productivity-enhancing investments. Improvements in domestic food supply, lower electricity tariffs, reduced trade costs, and better public services are expected to boost the country’s competitiveness and contribute to more robust economic growth. Meanwhile, macroeconomic stability and improvements in the business environment should positively affect savings, investment, and private consumption. Inflation is expected to fall to the single digits in 2021 and stay in that territory over 2022–2025. Average inflation is expected to decline to 11 percent by 2021, before falling further to 7 percent over 2022–2025, thanks to the continued implementation 11 The surge largely reflected robust demand for steel production in China, whose iron ore imports account for two-thirds of seaborne trade. (https://thedocs.worldbank.org/en/doc/ c5de1ea3b3276cf54e7a1dff4e95362b-0350012021/original/CMO-April-2021.pdf). 12 Liberia received 96,000 doses of vaccines for the COVAX initiative that is being rolled out in the country. 24 REPUBLIC OF LIBERIA – ECONOMIC UPDATE of the new monetary policy framework and sustained fiscal consolidation. Under the IMF program, the CBL is committed to maintaining a tight monetary stance, refraining from monetizing fiscal deficits, and implementing the new interest rate-based monetary policy framework. The CBL is also committed to intervening in the foreign exchange market solely to smooth short-term fluctuations and rebuild reserves. Also, the CBL plans to reduce the Liberian dollar reserve requirement (RR) from 25 to 15 percent and align the US dollar RR from 10 to 15 percent, thereby enhancing the relative attractiveness of holding Liberian dollar deposits in banks. Liberia’s external position is projected to improve over the medium term. The current account deficit, including grants, is projected to narrow from 16.4 percent of GDP in 2020 to 14.9 percent in 2025, as imports decline gradually (as a share of GDP) and mining and agricultural exports increase. Since the drawdown of the United Nations Mission in Liberia (UNMIL), imports of goods and services have fallen, and this trend is expected to continue. Structural reforms designed to alleviate constraints on productivity growth and economic diversification are expected to boost agricultural exports (especially cocoa, palm oil, and wood), while reducing Liberia’s dependence on imported food (especially rice). The growth in mining exports will be driven primarily by gold and iron ore, as both Hummingbird and ArcelorMittal are planning to expand output. As a result, the trade deficit is expected to narrow from 13.2 percent of GDP in 2020 to 10.0 percent in 2025. The balance of services is also expected to improve as import-related services (maritime transport and insurance) decline and tourism gradually resumes post-COVID-19. The current account deficit will be increasingly financed by capital inflows, especially FDI in agriculture, mining, and infrastructure. Gross official reserves are expected to increase to 2.9 months of imports in 2021 and average 3.1 months of imports over 2022–2025. With the projected current account deficits, the scheduled amortization of public debt and the need to reconstitute international reserves, the gross external financing requirement is projected at US$2.0 billion in 2021–2023 (US$685 million or 18.8 percent of GDP per year on average). Available external financing is projected to average 18.7 percent of GDP, comprised mainly of FDI (8.3 percent of GDP), capital transfers (6.8 percent of GDP), and official financing (4.6 percent of GDP). The prospects for FDI have improved recently with the announcement by ArcelorMittal that its operational, technical, and administrative prerequisites to advance into the next phase of its mining operations were met. Monetary policy will continue to aim at achieving low inflation and a reduction in the current account deficit. The monetary policy stance will remain consistent with the CBL’s objectives of reducing inflation to single digits while enhancing the store-of- value function of the Liberian dollar. The CBL will continue to strengthen the monetary policy implementation framework by further fine-tuning its operation of open market instruments over the near term, particularly as government gradually increases its expenditure share in Liberian dollar. The CBL will keep the 14-day tenor of CBL bills to conduct ongoing liquidity management and retain longer tenor CBL bills—28 days to 90 days—to proactively manage structural liquidity and to ensure that monetary conditions remain consistent with inflation targets. These refinements will ultimately help the CBL to communicate its monetary policy stance more effectively. In addition, as noted above, the CBL will align the reserve requirement ratios for both currencies in circulation with the objective to incentivize savings in Liberian dollars and to restore the store-of-value function of the national currency. Overall, broad money is expected to increase by 10.0 percent on average in the period 2022–2025. Credit to the economy is projected to increase by 11.6 percent per year as the government improves fiscal policy and limits the domestic financing of the fiscal deficit, leaving more room for private sector credit growth. Recent Economic Developments and Outlook 25 Fiscal policy, which will remain challenging in the short and medium terms, is expected to stay tight. The overall fiscal deficit is projected to narrow from 4.0 percent of GDP in 2020 to an average of 2.3 percent of GDP over 2021–2025, with the primary deficit remaining below 2.0 percent of GDP (below the debt-stabilizing level of 2.5 percent of GDP). This is to be achieved by improved domestic revenue and tight expenditure management. Domestic revenue is expected to decline temporarily (by one-half a percentage point of GDP) in FY2021 because of the lingering effects of the COVID-19 pandemic on corporate income tax, before recovering in FY2022. Over the medium term, domestic revenue is expected to increase to 16.6 percent of GDP in 2025, up from 14.9 percent of GDP in 2020, as the government implements its ambitious Domestic Resource Mobilization Strategy (DRMS). The DRMS includes reforms to excise tax laws, a transition to the Economic Community of West African States (ECOWAS) Common External Tariff (CET) regime, a review of tax waivers, and a boost to the collection of tax arrears, especially those owed to the road fund. The total tax waived on imports declined recently by an aggregate 22.0 percent from 2019 to 2020, even before the amendment of the revenue code to further streamline tax expenditures. Despite these improvements and because external grants are expected to continue to decline, total revenue and grants are projected to decline from 29.4 percent of GDP in 2020 to 27.0 percent of GDP in 2025. To ensure fiscal sustainability, the ratio of public expenditure to GDP is projected to fall over the medium term. The government has committed to improving budget credibility, realism, and execution, and to implementing expenditure reduction measures over the medium term. The fiscal consolidation program assumes that total expenditure will decline from 33.4 percent of GDP in 2020 to 29.3 percent of GDP in 2025, thanks mainly to reductions in current expenditures, as the government continues implementing its pay and payroll reform13 and other measures to control expenses. The government is also committed to reducing expenditures on goods and services associated with the use of consultancy services and specialized materials, a line item that has been identified in a recent Public Expenditure Review as unusually high, relative to country comparators, especially in the Public Administration Sector (see Part 2 of this report). All told, revenue and current spending measures will allow capital expenditure to be maintained at around 11.0 percent of GDP on average between 2021 and 2025, mainly financed by external resources (grants and loans). The contribution of the national budget to the financing of capital expenditures will remain modest but is projected to increase gradually from 0.4 percent of GDP in 2021 to 1.5 percent of GDP in 2025. Underpinning the projected decline in current spending, the government is committed to maintaining and sustaining the payroll cleaning efforts over the medium term. In March 2019, the government embarked on a pay and payroll reform initiative involving a comprehensive public sector personnel management restructuring, and a new pay and grade system to standardize wages and rationalize salaries across all spending entities. Specific measures included elimination of the allowance schedules, formulation and implementation of standardized pay and salary structures, and validation of both the payroll and the employees. The pay and payroll reform initiative has been successfully implemented across all 107 spending entities, including all ministries, agencies, and commissions (MACs), resulting in standardized salary readjustments for all personnel in the workforce and reported salary reductions for many of the higher income earners. The completion of the installation of the Civil 13 The government already made significant progress in streamlining the wage bill. In addition to the reduction of 6,900 public employees, 80 percent of the civil servants had both national identification registry (NIR) cards and skills verified by end-November 2020. The remaining 20 percent were verified in early 2021. 26 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Service Management (CSM) module enables the government to effectively manage the civil service employment cycle from recruitment to retirement. A new Personnel Action Notice (PAN) process has already reduced the arbitrary addition of staff to the payroll. The migration of the entire civil service payroll to an Integrated Financial Management Information System (IFMIS), and the recently completed work to have biometric records for the entire civil service, strengthens payroll management. The government is committed to maintaining and sustaining the payroll cleaning efforts over the medium term, especially in the Public Administration Sector. The government is also committed to reducing expenditure on goods and services associated with the use of consultancy services, and specialized materials could potentially reduce overall spending, especially in the Public Administration Sector. This will allow capital expenditure to be maintained at around 11.0 percent of GDP on average between 2021 and 2025, mainly financed by external resources (grants and loans). The contribution of the national budget to the financing of capital expenditures will remain modest but is projected to increase gradually from 0.4 percent of GDP in 2021 to 1.5 percent of GDP in 2025. For FY2021, the legislature has approved a credible on-budget spending envelope of US$570 million (17.1 percent of GDP) that is fully financed. The budget sets the wage bill at US$292 million (8.8 percent of GDP), contributions to the National Road Fund (NRF) at US$24 million (0.7 percent of GDP), the clearance of FY2019 arrears at US$10 million (0.3 percent of GDP), and an amount of US$31 million (0.9 percent of GDP) for the financial sector reform plan. There are significant downside risks that could affect the medium-term macroeconomic and fiscal outlook. The most significant near-term risk remains the COVID-19 pandemic and its impact on the global and domestic economies. New or successive waves (domestic or overseas) would further dampen economic activity and put additional pressure on the country’s public finance. In March 2021, Liberia received 96,000 doses of COVID-19 vaccine through the COVAX initiative and started vaccinations, prioritizing frontline health workers and the elderly. However, this covers only 1.9 percent of the population, and thus, much more remains to be done. Moreover, the risks of a new Ebola outbreak have increased recently with the reports of new cases in Southern Guinea, even if the swift response by the Guinean authorities and the availability of the Ebola vaccine have considerably reduced the risk. On the policy front, fiscal slippage could lead to a rapid increase in the public debt stock, compromising macroeconomic stability and slowing medium-term growth. Insufficient progress on key structural reforms—including improvements in domestic revenue mobilization, the business climate, and public investment efficiency—could undermine medium-term growth and economic diversification prospects. On the external side, deteriorating global conditions (including terms-of-trade shocks or slowing growth among major trading partners) could further weaken Liberia’s fiscal and external balances. The ECF program and the implementation of the structural reforms will help to mitigate these downside risks. There is also some scope for positive shocks, including rising commodity prices (especially for iron ore and rubber) or increased donor grants, either of which could improve macroeconomic and financing conditions. Recent Economic Developments and Outlook 27 Table 1.1: Liberia Government Fiscal (2015–2025) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Est. Proj. Proj. Proj. Proj. Total revenue and grants 30.8 32.2 29.7 24.8 25.4 29.4 28.4 27.1 26.6 27.3 27.0 Domestic Revenue 13.6 13.9 13.7 12.4 12.9 14.9 15.2 15.8 16.0 16.3 16.6 Tax revenue 11.2 11.7 11.4 11.0 10.5 12.1 12.3 12.7 12.8 13.0 13.2 Nontax revenues 2.4 2.2 2.3 1.4 2.3 2.7 2.9 3.1 3.2 3.3 3.4 External grants 17.2 18.3 16.0 12.4 12.5 14.6 13.2 11.3 10.5 11.0 10.4 Program 2.0 0.9 0.4 1.2 1.9 1.1 1.0 1.0 0.9 Project 14.0 11.5 12.2 13.4 11.4 10.2 9.5 10.0 9.5 Total expenditure and net lending 35.7 37.5 33.6 29.4 32.2 33.4 31.3 29.4 28.6 29.3 29.3 Current expenditure 19.3 18.1 21.5 20.3 22-2 23.7 20.9 19.1 17.8 18.1 17.8 Wages and salaries 7.6 7.6 8.5 8.9 9.6 10.3 8.8 7.9 7.5 7.2 6.8 Good and services 8.1 6.9 10.7 9.4 9.9 10.5 9.5 8.9 7.9 8.3 8.3 Subsidies and transfers 3.4 3.3 1.9 1.4 1.7 1.5 1.5 1.5 1.7 1.8 1.9 Interest payments 0.2 0.3 0.3 0.6 1.0 1.2 2.0 0.7 0.7 0.6 0.6 Capital Expenditure 16.4 19.4 12.1 9.1 10.0 9.7 10.4 10.4 10.7 11.2 11.4 Overall balance incl. grants (commitment basis) -5.0 -5.3 -3.9 -4.6 -6.8 -4.0 -2.9 -2.4 -2.0 -2.1 -2.3 Overall balance excl. grants -22.2 -23.5 -19.9 -17.0 -19.3 -18.6 -16.1 -13.7 -12.5 -13.0 -12.7 Primary fiscal balance -4.7 -5.0 -3.7 -4.0 -5.8 -2.8 -1.9 -1.6 -1.3 -1.4 -1.7 Total public debt 22.2 24.8 29.5 32.6 45.3 58.8 58.7 56.2 55.4 53.2 51.4 Source: Government of Liberia (MFDP and CBL), IMF, and WBG staff. 28 REPUBLIC OF LIBERIA – ECONOMIC UPDATE PA R T 2 FINDING FISCAL SPACE Introduction Liberia has faced successive exogenous shocks since 2014, resulting in prolonged economic stagnation. Most macroeconomic indicators deteriorated over 2014 to 2020. Low domestic revenue mobilization efforts, pervasive tax waivers, and insufficient expenditure adjustments resulted in large fiscal deficits and increased public debt. By 2020, two consecutive years of economic contraction (2019–2020) had further eroded the country’s fiscal space. Extreme poverty incidence has increased with the poverty rate at 51 percent,14 wiping out nearly one-half of the gains made previously. Other nonmonetary poverty indicators, such as access to health care, education, and basic utilities, continue to be low by regional and international standards, with especially acute rural-urban and gender disparities driven by unequal access to productive assets, infrastructure, public services, and markets for both goods and labor. In the wake of these challenges, a relatively high wage bill continues to crowd out the fiscal space and mute investments in infrastructure development and other key sectors, including health, education, and agriculture. Despite these setbacks, Liberia retains the bold ambition (laid out in the National Vision “Liberia Rising 2030” adopted in 2012), to achieve middle-income status by 2030. The economy’s strong performance in the first decade after the end of the civil war showed that this bold ambition is achievable. In that period, the economy recovered, yielding sustained growth, especially in the urban areas, boosted by (1) strong inflows of foreign direct investment to the agriculture and mining sectors, and (2) supportive macroeconomic policies, with declining inflation, nearly balanced budgets, and a significant reduction in external debt. Looking ahead, the government must restart the economic engine and find the fuel (fiscal space) to power it for the remainder of the period to 2030. Crucially, the government needs to create adequate fiscal space to pay for the country’s massive investment needs (in physical infrastructure as well as people and institutions) and crowd in private investment. Furthermore, against the background of repeated shocks, fiscal space will also be crucially needed to meet the needs of social protection, promote equity, and ensure the inclusiveness of the growth process. This section of the report explores options to create fiscal space. It focuses on (1) generating Government savings; (2) increasing the amount of external grants; (3) rationalizing public sector borrowing; and (4) improving the efficiency of capital expenditure. To simplify the notation, the abbreviation of fiscal year will be ignored since the country is transitioning to a calendar budget starting from 2022. For all information related to the budget, the year referred to in this report is the one when budget execution closed. For example, the budget for FY2019/2020 which started in July 2019 and ended in June 2020 will be referred to as the 2020 budget in this document. Also, all fiscal numbers in this report are quoted in United States (US) dollars, rather than Liberian dollars to facilitate multiyear comparisons, given the high and varying degrees of Liberia dollar (L$) inflation over the years, and the fact that the US dollar enjoys wide circulation in the country. 14 https://www.worldbank.org/en/publication/macro-poverty-outlook/mpo_ssa p. 251. 30 REPUBLIC OF LIBERIA – ECONOMIC UPDATE INCREASING GOVERNMENT SAVINGS The government needs first and foremost to strengthen domestic revenue mobilization and reduce the very high level of current spending to bring government savings into positive territory in the medium term. The Government of Liberia saves much less than those in neighboring countries and contributes less to the financing of its own public investment. Between 2017 and 2020, the tax-to-gross domestic product (GDP) ratio was 7.0 percent, lower than in Côte d’Ivoire, Ghana, Guinea, and Sierra Leone, while the ratio of current expenditure to GDP was 47.2 percent, which is higher than in these countries. Between 2012 and 2020, on average, domestic revenue (tax and nontax) covered only about three-quarters (76.8 percent) of current spending, and this share has declined significantly in recent years. It was almost 100.0 percent in 2012–2014, but declined to only 60.0 percent in 2018–2020, as the government’s operating cost increased while domestic revenue mobilization stagnated as a share of GDP. In the budget for 2021, there is an encouraging increase in coverage to 72.0 percent, reflecting mainly savings on the wage bill and the projected improvement in domestic revenue mobilization, but the country remains highly dependent on external resources to finance its operating costs. A very high level of current expenditure, especially for wages and salaries, has two implications: (1) they crowd out other productive spending (such as capital expenditure), and (2) they undermine fiscal sustainability by increasing the liability of the government in the future. Because current expenditure has more than doubled between 2012 and 2020, fueled by increases in the wage bill and in spending on goods and services, a thorough analysis is warranted to determine the extent to which the government can rationalize these expenditures and generate fiscal space to meet national investment priorities. Figure 2.1 Trends in Current Spending and Domestic Revenue (in percent of GDP) 25 120% 20 100% 15 80% 10 60% 5 40% 0 20% -5 -10 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 Government savings Current expenditure Domestic revenue Domestic revenue to opex (RHS) Source: MFDP, WBG, and IMF. Note: RHS = right hand side. Finding Fiscal Space 31 Domestic Revenue Greater domestic revenue mobilization could significantly augment fiscal space, albeit Mobilization gradually over the next few years. Domestic resource mobilization is relatively low in Liberia, below peer performance and insufficient to support core public service delivery. The tax-to-GDP15 ratio was 11.3 percent on average over 2017–2020, and Liberia is in the group of “low tax collection” countries in Sub-Saharan Africa (SSA). An international “rule of thumb” suggests that countries with a tax-to-GDP below 15.0 percent will have difficulties in providing basic services and maintaining sustainable fiscal balances.16 On that metric, the Liberian tax gap is estimated at 2–3 percent of GDP. In addition, the composition of tax revenue is such that there will be tax policy challenges going forward. Income tax revenue and trade taxes are the major revenue generating sources, while by all comparisons, consumption tax revenues are low. Still, income tax revenues (3.7 percent of GDP) are below the SSA average. This is because 80.0 percent of total income taxation revenue arises from the personal income tax (PIT), while only around 19.5 percent of income tax revenue is generated by the corporate income tax (CIT), which puts Liberia among the very lowest performers on the continent in terms of CIT revenues to GDP. The Liberia Revenue Authority (LRA) has estimated that a revenue improvement of 50.0 percent could be obtained if all economic sectors contributed more fairly to the revenue mobilization in CIT, using sectoral contributions to GDP as proxies for sectoral tax bases.17 The extensive use of tax exemptions and preferential rates in the CIT is undoubtedly a key explanation for the poor yield of the CIT. Figure 2.2: Tax to GDP Ratio in Liberia and in The consumption tax bases are also significantly underutilized Neighboring Countries (in the current Goods and Services Tax (GST) and excises),18 and the envisaged transition to a value added tax (VAT) could 12,5 make a significant difference. Liberia stands out relative to peers in that it has low proceeds from consumption taxes and a high reliance on trade taxes. With the new VAT, one could 12,0 realistically expect to see an improvement of at least 2–3 percent to GDP over the medium term. In addition, the revenue yield on excises should also benefit from the new Excise Tax 11,5 Act under preparation. Tax reforms, in addition to the introduction of the VAT, could 11,0 include the following: – Personal income taxation (PIT), presumptive taxation, various withholding tax sources. While the revenue performance of the 10,5 PIT has been good, further improvement could be considered, such as establishing a “dual-income” scheme with separate regimes on recurrent and capital income. Withholding taxes 10,0 on nonresident drives the significant part of relative decline Guinea Ghana Cote d'Ivoire Sierra Leone Liberia in personal income tax revenues. Withholding on service rendered is the leading driver in this area, and some reduction Source: LRA, IMF, and WBG 15 Hereafter, we have been using the latest IMF GDP numbers for Liberia; for cross-country compassion, we have been using an average for the last two years to smooth out the data and ensure overall consistency with the peers. 16 OECD 2012. Cotarelli, IMF (2011) notes that the 15.0 percent benchmark was laid out originally by Kaldor in 1963. 17 Domestic Resource Mobilization PPT. LRA 2017. 18 Liberia has established a road fund levy, which in functional terms resembles an excise, though not formally classified as such. Even when considering revenues from the road fund, the revenue performance of “excises” remains below peers in the region. 32 REPUBLIC OF LIBERIA – ECONOMIC UPDATE in contract services from the mining sector may explain this trend. The area could be further reviewed, with a view eventually to seek to return to earlier levels of revenues. Revenues from the presumptive income tax scheme are immaterial. Revenue generation in this area, including by capturing activities in the informal economy, could be improved by the enhanced use of withholding taxes for residents. – Corporate income taxation (CIT). Revenues from the CIT are low by any comparison, and they have been in relative decline since 2013. This is because the efficiency of the CIT (revenues to GDP/statutory rate) is very low. The narrow tax base on CIT is a result of numerous tax expenditures and incentives. Tax incentives should be rationalized to eliminate overly generous and poorly targeted incentives. The goal should be to achieve a much broader and fairer burden sharing across economic sectors. Some sectors, such as financial services and “construction and communication,” contribute much beyond their share of GDP, while others, such as the primary sectors, mining, and construction are not contributing even close to what their shares of GDP would predict. – Excise taxation. Low revenues from consumption taxes, including on excises, are the main factor behind the structural tax gap in Liberia (relative to its peers). For instance, excise revenues are less than one-fourth of the SSA average (1.8 percent). Since excise taxation will provide an important revenue source in the transition period of the implementation of VAT, the authorities should elaborate a specific plan on excise, with items, rates, and revenue impacts, and with due allowance for any administrative issues or expected behavioral reactions from consumers. The Revised Excise Law of 2019 is a step in the right direction, but a more thorough strategy should be elaborated. Rationalizing tax expenditures is critical. In addition to eliminating inefficient tax expenditures in the CIT base, as mentioned above, other measures could include the following: – Mainstream access to “executive orders” into the revenue code, given that they can be awarded, currently, without legal backing. – Establish a database for exemption management. The Ministry of Finance and Development Planning (MFPD) and the LRA need to have a database of exemptions to support tax audits. Electronic information concerning the persons granted tax relief, income, goods, services produced domestically or imported free of tax, and periods of exemption are required to quickly trace any unlawful requests. As a first step, tax declarations should be redesigned to incorporate information on the various incentives granted to the taxpayer in question. The information system should also capture requests that may have been refused earlier on. Finally, hard copy information is not amenable to quick reference when there are many exemption users, and when documents could be misplaced or stolen through collusion with revenue authority staff. – Conduct periodic studies to evaluate the effectiveness of tax incentives. The government grants tax incentives to meet various socioeconomic objectives. Thus, it should check periodically that the tax incentives are fulfilling the desired objectives. Finding Fiscal Space 33 Controlling Current Fiscal space can also be increased through improved efficiency of current Expenditure expenditure. Current spending accounts for 60 to 70 percent of total public expenditure in Liberia. Total public spending almost doubled between 2012 and 2020, growing from US$514 million to more than US$1 billion. As noted above, this was driven mainly by a steady increase in current spending, while capital expenditure fluctuated significantly. The increase in current expenditure was driven by rising personnel costs, and goods and services. Interest payments increased in the period but remain low relative to the other components, while transfer and subsidies declined. The scope for improving the efficiency of current spending is significant. Current spending as a share of GDP is high in Liberia (relative to comparators with similar levels of development). Current spending amounted to 20.5 percent of GDP on average over 2015–2019,19 in contrast, the average for least-developed countries (United Nations [UN] classification) is 14.9 percent. This suggests that government operating costs are 38.0 percent higher in Liberia than in countries with gross national income (GNI) per capita below US$1,000 (measured in real terms at 2010 constant US$). The differences are mostly due to higher spending on wages and salaries, and goods and services, and relatively less so by interest payments. Current expenditure is also 47.0 percent higher in Liberia than in neighboring countries (figure 2.3). As a share of GDP, Liberia’s average current spending over 2017–2020 amounted to about 21.0 percent, while it was 19.3 percent in Ghana, 15.1 percent in Sierra Leone, 13.6 percent in Côte d’Ivoire, and 11.6 percent in Guinea. The difference is greater still as the percentage of tax revenue. In the last four years (2017–2020), current spending was estimated at 194.8 percent of tax revenue in Liberia compared to 154.0 percent in Ghana, 131.8 percent in Sierra Leone, 112.4 percent in Côte d’Ivoire, and 92.8 percent in Guinea. Figure 2.3 Current spending in Liberia and in Neighboring Countries In percent of GDP In percent of tax revenue Liberia Liberia Ghana Ghana Sierra Leone Sierra Leone Cote d'Ivoire Cote d'Ivoire Guinea Guinea 0 5 10 15 20 25 0 50 100 150 200 Source: Constructed from IMF 2020 staff report documents. 19 The countries with the closest level of current expenditure to Liberia are Malawi (19.6 percent of GDP) and Mozambique (19.1 percent of GDP). 34 REPUBLIC OF LIBERIA – ECONOMIC UPDATE The economic breakdown of current spending highlights the large role of wages, and goods and services. On average over 2012–2020, current spending was composed of 42 percent of wages and salaries, 41 percent of goods and services, 15 percent of transfers and subsidies, and 2 percent of interest payments. Over that period the share of goods and services almost doubled from 26 to 44 percent, and interest payments rose from 1 to 5 percent of the total, while the wage bill grew from 42 to 44 percent, and the share of transfers and subsidies declined from 31 percent in 2012 to only 7 percent in 2020, mainly crowded out by other current expenditure. The trends are also reflected in absolute values of the different components of current spending in the 2012–2020 period. The wage bill, which includes base salaries, allowances, contractual employees, training stipends, overtime, social contributions (social security and pension), and other employee costs (medical and death benefits, and severance payments), has increased by 81.4 percent between 2012 and 2020. Expenditures on goods and services (travel, operating costs,20 office supplies and consumable services, specialized material and services, education and training expenses, insurance and licenses charges, and other expenses) almost tripled. Transfers and subsidies (direct grants to vulnerable households and subsidies to state- owned enterprises [SOEs], counties and autonomous agencies), however, declined by 60.0 percent between 2012 and 2020. The wage bill A sustained reduction of the wage bill could help free up resources for productive investment and for countercyclical fiscal policy. Liberia’s wage bill has been rising in recent years as measured by most conventional measures. Between 2012 and 2020, the ratio of the wage bill to total current expenditure increased from 41.4 to 43.4 percent. As a share of the government budget, the wage bill rose from 38.9 percent in 2013 to 52.2 percent in 2020. The ratio of the wage bill to domestic revenue Figure 2.4 Size of the Wage Bill in Liberia and in Neighboring Countries In percent of GDP In percent of expense In percent of tax revenue 45% 90% 10 9 80% 8 40% 70% 7 60% 6 35% 50% 5 40% 4 30% 30% 3 2 20% 25% 1 10% 0 20% 0% a ire a e ia a a ire ia e a ire a e ia ine an ine an ine an on on on er er er vo vo vo Gh Gh Gh Lib Lib Lib Le Le Le Gu Gu Gu d'I d'I d'I rra rra rra te te te Sie Sie Sie Co Co Co Source: Constructed from IMF 2020 staff report documents. 20 Basic utilities, rental and leases, fuel and lubricants, repair, and maintenance Finding Fiscal Space 35 increased from 41.5 percent in 2013 to a staggering 74.2 percent in 2019, before declining to 69.1 percent in 2020. Wage bill expenditures are 68 percent higher in Liberia than in peer countries in West Africa. Over 2017–20, compensation of employees averaged 9.3 percent of GDP in Liberia, compared to 7.0 percent in Sierra Leone, 6.5 percent in Ghana, 5.0 percent in Côte d’Ivoire, 3.7 percent in Guinea, and 7.0 percent overall in SSA. In other words, Liberia’s wage bill is 68.4 percent higher than the average of neighboring countries and 33.0 percent higher than the average for SSA countries. In percent of current expenditure, the wage bill average of 42.5 percent in Liberia is lower than in Sierra Leone (46.0 percent), but higher than in Côte d’Ivoire (36.8 percent), Ghana (33.9 percent), and Guinea (31.6 percent). As a share of tax revenue, compensation of employees was 82.9 percent on average over 2017–2020, as compared to 60.6 percent in Sierra Leone, 50.2 percent in Ghana, 41.3 percent in Côte d’Ivoire, and 29.3 percent in Guinea. The size of the establishment could be further reduced. The true size of the civil service was not known until recently. According to the Civil Service Agency (CSA), there were approximately 43,000 official civil servants prior to the payroll reform and pay harmonization initiative, which started in March 2019. These were staff accepted into the civil service were receiving a salary administered through the Civil Service Management (CSM) of the Integrated Financial Management Information System (IFMIS). In addition, there were close to 30,000 other government employees who had not undergone official entry procedures for civil servants. According to a United States Agency for International Development (USAID) commissioned report,21 these personnel were employed by ministries, independent agencies, and commissions, and carried out functions in the security sector, hospitals, the judicial sector, and others. These employees were administered directly by their employing institution and not by the CSA. As a result, by early 2020, the number of employees on the public sector payroll had increased from 43,000 (representing the Figure 2.5: Authorized Number of Full-Time Equivalent Positions 29 entities in CSM, managed by the CSA) before the implementation of the harmonized salary structure 80.000 and the integrated system, to a new total of 72,550, 72.550 representing 107 agencies (consisting of both civil 70.000 service ministries and other public service institutions managed by the CSA as part of the One 60.000 Pay System). 50.000 Until the recent wage bill and pay harmonization 43.049 (2020), the structure of salary and allowance was 40.000 very complex. Total personnel cost is composed 31.506 mainly of base salaries (54.3 percent of total 30.000 compensation) and allowances (39.5 percent of total compensation). The total salary bill is split as 20.000 follows: 78.9 percent for the civil service; 5.7 percent 10.000 for the military; and 15.4 percent for paramilitary forces. General allowances are monthly lump 0 sum cash allowances paid in local currency to all 2018 2019 2020 staff, while special allowances are paid in a lump sum in US dollars to officials holding appointed Source: Constructed from Liberia MFDP budget documents. positions, as well as individuals designated by 21 USAID. 2020. Process Mapping Study, Pay and Payroll Reform in the Government of Liberia (June 2020), https://pdf.usaid.gov/pdf_docs/PA00WQZ3.pdf. 36 REPUBLIC OF LIBERIA – ECONOMIC UPDATE ministers (or equivalent) to receive such payments (World Bank 2013). Allowances were a formalized payment system distributed directly from the MFDP to the heads of spending entities for discretionary distribution to those they deemed worthy of extra compensation. They were not administered, regulated, or approved by the CSA and were not issued from the CSM. Rather, the MFDP disbursed them directly to employees based on distributions approved by heads of spending entities (although often misused by heads of spending entities [USAID 2020]). Social security contributions make up a small portion of public sector employees’ compensation (6.0 percent). Similarly, other components of the wage bill, including contract work (professional and nonprofessional services); pensions for general civil service; and employee medical expenses; as well as payments, related to incapacity, death benefits, and severance payments were a small portion of total compensation to employees (6.0 percent) in 2019. Following the wage bill harmonization, all forms of allowances and other items were abolished. The total personal cost is now composed of a basic salary, a social security payment, and pensions for public service. However, salaries are still paid in dual currencies (US dollar and Liberia dollar) with varying payout ratios (USAID 2020). Despite the perceived high Liberia dollar inflation in the last five years, total compensation of employees increased in real terms. Given the fact that much of the salary civil servants receive is paid in US$, the L$ inflation rate measured by the consumer price index (CPI) probably significantly overstates the increase in the cost of living for civil servants (especially in 2018 and 2019, where the increase in the CPI averaged 25.0 percent due to the depreciation of the L$). In the computation of the CPI, the prices of several items are collected in US$ and converted to L$ using the end of month exchange rate (ER). Using the CPI in US$ as a deflator, total real compensation increased 69.7 percent cumulatively between 2014 and 2019, as the cumulative depreciation of the L$ (122.2 percent) was higher than the inflation rate (99.6 percent) measured in the same currency (L$), leading to a decline in the CPI measured in US$ terms. The government should focus on a few sectors to further reduce the wage bill. Four of the budget’s 11 sectors account for the largest share of the wage bill. The four sectors are public administration; security and rule of law; education; and health. Between 2014 and 2019, these sectors jointly accounted for 80.0 percent of the total government wage bill. In 2019, public ddministration accounted for 29.3 percent of total compensation of employees in the overall wage bill; security and rule of law for 19.6 percent; education for 16.3 percent; and health for 15.7 percent. The wage bill of the health sector increased very fast between 2014 and 2019, with a cumulative growth of 154 percent (20.5 percent on average per year), reflecting mainly the country’s decision to upgrade public health services through improvement in remuneration during and after the Ebola crisis. In terms of number of employees, education, security and rule of law, and health grew the fastest. In 2020, the three sectors combined represented 72.0 percent of the total number of civil servants; with 31.9 percent for education; 21.4 percent for security and rule of law; and 18.8 percent for health. With the implementation of the harmonized salary structure and the integrated system, which reevaluated the actual number of government employees from 43,000 to 72,550, the share of employees in public administration, municipal government, and education integrated to the CSA system increased significantly. Unsurprisingly, the sectoral distribution of the wage bill is broadly and positively correlated with the sectoral distribution of the number of employees. This said, the education sector seems to be characterized by lower average wages compared to Finding Fiscal Space 37 the other sectors. Its high share in the wage bill is mainly driven by the even higher share in total employment. In contrast, the public administration sector is characterized by a higher unit wage compared to other sectors, and this high average wage per staff explains the high share of the sector in the overall wage bill. Box 2.1: Recent Pay and Payroll Reform After several attempts, the Government of Liberia (GOL) is on track to CSA has reorganized itself with this enhanced role. For example, with succeed in the reform of its pay and payroll processes and management. the outbreak of the COVID-19 pandemic, the CSA prepared a hazard In March 2019, the GOL embarked on a pay and payroll reform initiative allowance payment policy that is being used to pay frontline health involving a comprehensive public sector personnel management workers. Recruitments are based on a merit system developed by the restructuring, and a new pay and grade system to standardize wages and CSA. All new recruits go through a process of writing a civil service rationalize salaries across all spending entities. Specific measures include test before Personnel Action Notices (PANs) are prepared. Promotions commitments to eliminate allowance schedules, formulate and implement in the civil service are based on a performance management system standardized pay and salary structures, and validate both the payroll and that was designed and introduced by the CSA and rolled out to MACs. the employees on it. The current pay and payroll reform initiative has been However, recruitment, promotions, and dismissals at the top echelon of successfully implemented across all 107 spending entities, including all the wider public service, but outside the civil service, are made without ministries, agencies, and commissions (MACs), resulting in standardized consideration of experience, merit, and performance, as the legal salary readjustments for all personnel in the workforce, and reported safeguards to ensure integrity in these processes are entirely lacking. salary reductions for many of the higher income earners. Payroll management has been improved with the installation of the Civil The National Remuneration Standardization Act was passed in 2019. Service Management (CSM) system. The completion of the installation Through this law, the government has standardized pay grades for all of the CSM module enables the government to effectively manage the positions within central government entities, and has consolidated, civil service employment cycle from recruitment to retirement. A new centralized, and automated the payroll, including hiring through the Civil PAN process has already reduced the arbitrary addition of staff to the Service Agency (CSA), which is independent from all other ministries payroll. The migration of the entire civil service payroll to the Integrated and agencies of government and responsible for managing the civil Financial Management and Information System (IFMIS) and the recently service. All new employments across government must be authorized by completed work to have biometric records for the entire civil service, the CSA and the Ministry of Finance and Development Planning (MFDP) strengthens payroll management. before placement on the wage bill. MACs can no longer hire without any Employees that are most vulnerable to salary changes were identified recourse to the CSA and the Ministry of Finance. Job descriptions have and protected from downward adjustment in pay. However, the GOL been prepared for civil service positions, and this was rolled out in 2020. has a less clear vision of how to increase salaries that need to be The phenomena of other agencies setting up their own payscale has been adjusted upward. When the reform started, about 85 percent (56,338) eliminated. The performance management system that was introduced in of employees who had undergone grading were assessed as having to 2017 has provided a basis for objective personnel management. Most of be protected from pay reduction. Those were mainly teachers, nurses, the ministries (especially ministries of health, education, internal affairs, and security sector officers. Of those, 14,900 received immediate pay justice, foreign affairs, finance and development planning, and so forth) increases, though incrementally so. The stakeholders consulted and are using the outcome of the performance management to recommend confirmed that the GOL had a plan to increase below standard salaries staff for promotions. Employees who performed well are recommended to the standardized level once there was sufficient fiscal space. How for promotion, while those who performed below average are put on that would be measured with benchmarks, over what period, or at what performance improvement plans and monitored. increment, remains unclear. 38 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Use of goods and services A reduction in expenditures on goods and services could also help create fiscal space for productive investment and for countercyclical fiscal policies. Spending on goods and services by the government has increased very fast in recent years. Between 2012 and 2020, the ratio of goods and services to total current expenditure rose from 26.0 to 44.3 percent. As a share of domestic revenue, they rose from 26.4 percent in 2012 to 70.6 percent in 2020. As a share of the government budget they rose from 38.0 percent in 2014 to 65.5 percent in 2020. All three indicators started to increase very fast in 2014 until 2017, before declining somewhat thereafter. Government use of goods and services is three times higher in Liberia than in peer countries in West Africa. Government consumption of goods and services averaged 10.1 percent of GDP in Liberia between 2017 and 2020, compared to 4.9 percent in Côte d’Ivoire, 3.4 percent in Guinea, 3.3 percent in Sierra Leone, and only 1.6 percent in Ghana. On average, it was 207.0 percent higher in Liberia than in neighboring countries. In percentage of current expenditure, the use of goods and services averaged 46.2 percent in Liberia compared to 35.7 percent in Côte d’Ivoire, 29.2 percent in Guinea, 22.0 percent in Sierra Leone, and only 8.4 percent in Ghana. As a share of tax revenue, the use of goods and services was at 90 percent in Liberia compared to 40.1 percent in Côte d’Ivoire, 29.0 percent in Guinea, 27.1 percent in Sierra Leone, and only 13.0 percent in Ghana. In contrast to the wage bill, government spending on goods and services is increasingly composed of off-budget spending. Between 2014 and 2020, US$978 million (4.2 percent of GDP on average over the period) of on-budget expenditure was executed. However, on-budget spending represented less than half (48.5 percent) of the total use of goods and services in the period. Between 2014 and 2020, US$1.03 billion (4.5 percent of the cumulative GDP in the period) was executed off budget. The structure of goods and services spending is quite different from what is observed in other countries. For example, transport costs, travel expenses, rent, utilities, and office consumables represent only a limited share of the government expenditure on Figure 2.6: Size of the Use of Goods and Services in Liberia and in Neighboring Countries In percent of GDP In percent of expense In percent of tax revenue 50% 90% 10 45% 80% 8 40% 70% 35% 60% 6 30% 50% 25% 40% 4 20% 30% 15% 2 10% 20% 5% 10% 0 0% 0% a e a ire ia a e a ire ia a a e ire ia an ine an ine an ine on on on er er er vo vo vo Gh Gh Gh Lib Lib Lib Le Le Le Gu Gu Gu d'I d'I d'I rra rra rra te te te Sie Sie Sie Co Co Co Source: Constructed from IMF 2020 staff report documents. Finding Fiscal Space 39 goods and service. Between 2014 and 2018,22 government spending on transport (fuel and lubricant, repairs and maintenance), travel expenses, rent, utilities, and office consumables represented less than one-third (30.5 percent) of the expenditures in goods and services. Fuel and lubricant, and repair and maintenance represented 16.0 percent of the consumption, while office expenses represented 6.9 percent. In contrast, government use of consultancy services, and study and audit fees represented 15.5 percent of the total government consumption, while specialized material and services reached 12.1 percent in the period. Clearance of domestic arrears averaged 7.0 percent of the consumption budget in the period. The consumption of most of the items declined between 2014 and 2020, except the use of consultancy services, that augmented by 42.0 percent cumulatively in the period. Government use of consultancy services, and study, and audit fees are relatively high, although this is largely because of an unusually large observation in 2015. The government spent US$164.8 million in consultancy services, studies, and audit fees between 2013 and 2018 (averaging US$27.5 million per year and representing 15.5 percent of total government consumption in the period). The government spent US$139.0 million in consultancy services alone between 2013 and 2018 (averaging US$23.2 million per year and representing 84.3 percent of the total consultancy services, studies, and audit fees in the period). The government spent US$105.98 million in consultancy services, studies, and audit fees in 2015 alone. This was driven by one-off expenditure in municipal government (US$27.5 million) and infrastructure and basic services (US$38.5 million). Consultancy services, studies, and audit fees remain under US$1.0 million per year in other sectors, except for public administration, security and law, and energy and environment. Spending on specialized materials and services is mainly composed of special operations, intelligence services, security operations, and drugs and medical consumables. These four items (out of 18 listed) represented 68.8 percent of government spending on specialized materials and services on average between 2013 and 2018. The government spent US$144.4 million in specialized materials and services between 2013 and 2018, averaging US$24.0 million per year. The government spent US$35.5 million in special operation services in the period (US$5.9 million per year on average or 24.5 percent of the total expenditure on specialized materials and services). Similarly, the government spent US$30.4 million, US$18.1 million, and US$15.4 million for intelligence services, security operations, and drug and medical consumables, respectively, between 2013 and 2018 (US$5 million, US$3 million, and US$2.6 million, respectively, per year on average). Expenditures on agriculture supplies and inputs, vaccine and vaccination supplies, and family planning supplies were marginal. 22 The BOOST data for 2019 are uncomplete. 40 REPUBLIC OF LIBERIA – ECONOMIC UPDATE MOBILIZATION OF EXTERNAL RESOURCES Liberia can maximize on-budget and off-budget external resources, but these flows tend to be unpredictable. Official development assistance (ODA) is critical to Liberia’s economic and social development. Liberia receives ODA from more than 20 Development Partners (DPs) on average per year. Between 2013 and 2020, the country has benefited from US$4.1 billion of aid, or US$513.4 million on average per year (15.7 percent of GDP). This amount is well below the US$5.7 billion projected in the different budget documents in the period, but the execution rate, at 72.0 percent, was reasonable. The execution rate is even higher when the actual disbursements are compared to the amounts (US$4.8 billion) projected in the agenda for transformation (AfT) and Pro-poor Agenda for Prosperity and Development (PAPD) between 2013 and 2020. Overall, US$2.7 billion was mobilized under the AfT, amounting to 90.0 percent of the projected amount (US$3.0 billion), reflecting mainly the scaling up and frontloading of projects during the Ebola crisis. Total disbursements increased from 2013 to 2016 before progressively declining between 2018 and 2020. So far, US$1.4 billion are mobilized under the PAPD (or 40.0 percent of the targeted total). The share of the grants is relatively high. Out of the US$4.1 billion of aid disbursed between 2013 and 2020, US$3.2 billion (78 percent) was in the form of grants, while US$899 million (22 percent) was in the form of loans. On average, in the last eight years, Liberia received US$400 million per year in grants and US$113 million per year in loans. The share of loans has significantly increased in recent years. External loans for development projects require the approval of the legislature. External grants for development projects do not require legislative approval, but must be approved by either the Minister of Foreign Affairs or the MFDP, depending on the specific protocols that govern the signing of financing agreements with the various donor agencies. The increasing role of loans has translated into increases in external debt. The total public and publicly guaranteed (PPG) external debt stock increased from US$165 million (6.1 percent of GDP) in 2012 to US$1.2 billion (38.7 percent of GDP) in 2020. Figure 2.7: Trends in the Composition of Actual Disbursements 700 600 500 400 300 200 100 0 2013 2014 2015 2016 2017 2018 2019 2020 Grants Loans Source: Constructed from Liberia MFDP budget documents and DARs. Finding Fiscal Space 41 Figure 2.8: Trends in the Composition of Public Debt 2.000 1.800 1.600 1.400 1.200 1.000 800 600 400 200 0 2013 2012 2014 2015 2016 2017 2018 2019 2020 External Domestic Source: MFDP and IMF. Almost 90.0 percent of the debt is owed to multilateral agencies, mainly the World Bank (WB) (44.1 percent), the International Monetary Fund (IMF) (21.6 percent), and the African Development Bank (AfDB) (13.9 percent). Domestic public debt increased from US$278.0 million (10.2 percent of GDP) in 2012 to US$644.0 million (20.1 percent of GDP) in 2020, largely because of the restructuring and consolidation of existing government debt to the Central Bank of Liberia (CBL). This debt is denominated in US dollars and carries an interest rate of 4.0 percent, with repayments slated to start in 2029. These dynamics have significantly reduced the room for the country to borrow without compromising debt sustainability. The most recent Debt Sustainability Analysis (DSA) (December 2020) carried out by the WB and IMF concluded that Liberia remained at a moderate risk of external debt distress. Under the baseline scenario of the external DSA, the present value (PV) of debt-to-GDP and the PV of debt-to-export ratios remain below the respective thresholds of 30 and 140 percent in the medium to long term. The debt-service to export and debt-service to revenue ratios remain below their respective thresholds as well. Standard stress tests, however, show that a deterioration of the macroeconomic outlook could lead to breaches of the policy dependent thresholds; specifically, under several standard stress tests, shocks of one-standard deviation in real GDP growth, the primary balance, exports, other non-debt creating flows, ER depreciation, or a combination of all shocks, would result in breaching the thresholds of the PV of debt-to-GDP ratio; while other thresholds may also be breached under various shock scenarios, calling for continued prudent external debt management. According to the public DSA, Liberia remains at a high risk of public debt distress, with an extended breach of the PV of public debt-to-GDP ratio. However, public debt is assessed to be sustainable as (1) both the PV of public debt-to-GDP and PV of debt-to- revenue ratios are projected to be on a downward trend, and (2) the high PV of public debt ratios largely reflect debt to the CB, for which the interest rate is relatively low but is not discounted in the PV calculations. The government is committed to not relying on CB financing to fill budgetary needs, but still borrows to repay past extended credit facility (ECF) and rapid credit facility (RCF) budget support, amounting to US$107.8 42 REPUBLIC OF LIBERIA – ECONOMIC UPDATE million. The government will also repay US$65.0 million of bonds issued by the banking sector over the 2020–24 period. The average real interest rate is projected to remain positive in the medium, term in line with current levels of nominal rates and with inflation developments. The rollover risk for domestic debt is low, as most of the domestic debt is constituted by the government’s consolidated debt to the CBL. Still, to keep debt distress vulnerabilities contained, it will be important to maintain fiscal discipline and rely on concessional financing. Liberia’s strategy to mobilize external resources should continue to prioritize grants and exclude borrowing on nonconcessional terms. The two consecutive years of economic contraction have further reduced Liberia’s borrowing space, while financing needs were rising, including to respond to the COVID-19 pandemic. However, implementing an appropriate set of policies (such as domestic revenue mobilization, rebuilding confidence in the banking sector, and preventing further drains on the international reserves) is expected to promote GDP growth and expand the borrowing space thereafter. The strategy to mobilize external resources should continue to prioritize grants and borrowing exclusively on concessional terms. Importantly, reforms that trigger an increase in the Country Policy and Institutional Assessment (CPIA) score will directly help increase access to concessional resources from multilateral creditors, such as the WB and AfDB, and may also translate into larger aid from the European Union (EU) and bilateral creditors such as USAID. In this regard, Liberia’s CPIA score is low. In the last assessment, the country scored at 2.9, compared with 3.6 for Ghana, 3.5 for Côte d’Ivoire, 3.3 for Guinea, and 3.1 for Sierra Leone. Liberia’s score was the lowest in the cluster of the CPIA relative to governance and public sector institutions, which carry the highest weight in the resource allocation formula for both the WB and the AfDB. On this cluster, the country scored at 2.7, compared with 3.6 for Ghana, 3.5 for Côte d’Ivoire, 3.2 for Sierra Leone, and 2.9 for Guinea. However, scaling up external grants should not be viewed as a sustainable substitute for mobilizing domestic revenues. According to some research, scaling up external aids can induce aid dependency, weaken the government’s capacity to generate domestic revenues, and undermine the democratic process (Bevan 2005). When citizens pay fewer taxes, it is unlikely that they will closely monitor government actions and enforce accountability. Thus, scaling up external aid should go hand in hand with higher domestic revenue efforts, as well as encouraging private saving and investment. Figure 2.9: CPIA Scores in Liberia and in Neighboring Countries In percent of GDP In percent of expense In percent of tax revenue 3.7 3.7 3.6 3.5 3.5 3.5 3.4 3.3 3.3 3.3 3.2 3.1 3.1 3.1 2.9 2.9 3.0 2.9 2.7 2.7 2.8 2.5 2.5 2.7 a ire a e ia a ire e a ia a ire a e ia ine an an ine an ine on on on er er er vo vo vo Gh Gh Gh Lib Lib Lib Le Le Le Gu Gu Gu d'I d'I d'I rra rra rra te te te Sie Sie Sie Co Co Co Source: WBG Finding Fiscal Space 43 IMPROVING THE EFFICIENCY OF CAPITAL EXPENDITURE Liberia could also create fiscal space by improving the allocative efficiency of capital expenditure, to get more positive results for their investment. Liberia’s capital expenditure amounted to 11.3 percent of GDP between 2012 and 2020 and 37.0 percent of total government spending. The nominal amount was US$3.3 billion, including externally financed capital expenditure (whose share of total capital spending was almost 90.0 percent). Consequently, because there were large fluctuations in externally financed capital spending (as donors frontloaded several development projects between 2014 and 2016 to respond to the Ebola outbreak), there was a sharp increase between 2012 and 2016, followed by a rapid decline between 2016 and 2018. Capital expenditure is higher in Liberia than in comparator countries at similar levels of development. Capital expenditure amounted to 10.2 percent of GDP over 2017–2020, a share much higher than in Guinea Bissau (0.5 percent), Madagascar (3.7 percent), Mozambique (4.4 percent), Malawi (5.3 percent), Burkina Faso (7.0 percent), or Mali (8.0 percent). The countries with similar levels of capital expenditure (to GDP) are Rwanda (10.3 percent) and Togo (11.9 percent). Capital expenditure is also higher in Liberia than in neighboring countries. Over the period 2017–2020, capital spending amounted to 6.8 percent of GDP in Sierra Leone, 4.9 percent of GDP in Côte d’Ivoire, 4.7 percent of GDP in Guinea, and only 2.0 percent of GDP in Ghana. Similarly, while capital expenditure represented 31.8 percent of total expenditure in Liberia in the last four years (2017–2020), that share was 30.9 percent in Sierra Leone, 28.9 percent in Guinea, 26.4 percent in Côte d’Ivoire, and 9.3 percent in Ghana. Liberia’s investment spending is less efficient and its capital stock lower than in comparator countries. Although Liberia spends more on public investment as a share of GDP than countries in the Economic Community of West African States (ECOWAS) and SSA in general, its overall capital stock is estimated to be lower than that of ECOWAS comparators, according to the IMF’s Public Investment Management Assessment (PIMA) report (PIMA 2016). Figure 2.10: Capital Expenditure in Liberia and in Neighboring Countries Liberia Liberia Sierra Leone Sierra Leone Cote d'Ivoire Guinea Guinea Cote d'Ivoire Ghana Ghana 0 5 10 5 15 25 35 Source: Constructed from IMF 2020 staff report documents. 44 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Figure 2.11: Efficiency Frontier (physical infrastructure indicators) 160 140 120 Physical indicator (Output) 100 80 60 40 Low-Income Developing Countries All Other Countries 20 Liberia Frontier 0 0 10,000 20,000 30,000 40,000 Public Capital Stock per Capita (Input) Source: IMF PIMA 2016. This reinforces the need to increase public investment efficiency. While part of the efficiency gap with other countries is attributable to the need to replace the public capital that was destroyed during the 15 years of civil war, it also reflects weaknesses in some of the 15 public investment management institutions that were assessed in the 2016 PIMA exercise. Liberia’s overall efficiency gap in terms of physical indicators is estimated at 38 percent in comparison with other countries in SSA and low-income developing countries generally. This means that the country should be able to increase the return on its infrastructure by 38 percent through improvements in public investment efficiency. This result also points to the importance of strengthening public investment management institutions. Liberia’s public sector investment program (PSIP) comprises investment projects financed by the budget (domestically financed capital spending) and projects financed by donors (externally financed capital spending). Investment projects financed by the budget are prepared by ministries and agencies based on their sector strategies and submitted to the MFDP for approval. Subsequently, they are included in the PSIP to be funded by the annual budget. For investment projects financed by donors, funding allocations are decided independently of the national budget process. Typically, they are based on agreements between the government and donor agencies based on respective donors’ country strategies. These externally financed investment projects are not subject to review or scrutiny by the MFDP; however, projected disbursements for these projects are included in an annex of the National Budget Book. The government has defined criteria to select projects to be included in the PSIP. The selection criteria for sectoral investment projects include (1) consistency with the objectives of the AfT and PAPD; (2) economic and social returns on investment, such as the impact on job creation, revenue generation, and support to disadvantaged Finding Fiscal Space 45 groups; and (3) project appraisal based on the contribution to sector goals and objectives consistent with the AfT and PAPD, geographical distribution of investment, and project readiness. Implementation and delivery of the approved projects are the responsibility of specific ministries and agencies, and progress is tracked through project-level output indicators. The investment requirements in the PAPD are essentially in infrastructure and basic services, energy and the environment, and agriculture. In the PAPD, which targeted capital spending in the order of US$3.5 billion over 2018–2023, the three priority sectors were infrastructure, energy, and agriculture (together accounting for 62.9 percent of total investment requirements, with 40.7 percent for infrastructure, 11.6 percent for energy, and 10.5 percent for agriculture). They were followed by education (8.3 percent), security (7.8 percent), health (6.5 percent), and social protection (5.9 percent). With very limited fiscal space in the government budget, the bulk of capital spending is externally financed. Over 2014 and 2020 the share of domestically financed capital expenditure to total capital expenditure averaged only 8 percent. This is partly a reflection of low domestic revenue mobilization, which is insufficient to finance current expenditure alone. Nevertheless, the government continues to include resources for the acquisition of nonfinancial assets (capital expenditure) in each year’s budget, but the execution rate turns out to be very low, averaging only 56 percent between 2014 and 2020. Domestically financed capital expenditure Domestically financed capital expenditures are relatively small in Liberia compared to those in neighboring countries (figure 2.12). Over the last four years (2017–2020), domestically financed capital expenditure was estimated at only 0.5 percent of GDP in Liberia compared to 2.9 percent in Côte d’Ivoire, 2.7 percent in Sierra Leone, 2.3 percent in Guinea, and 0.6 percent in Ghana. As a share of total capital expenditure over the same period, it amounted to 4.9 percent in Liberia, compared to 36.9 percent in Côte d’Ivoire, 32.5 percent in Sierra Leone, 28.4 percent in Guinea, and 24.0 percent in Ghana. Figure 2.12: Size of Capital Expenditure Domestically Financed in Liberia and in Neighboring Countries In percent of GDP In percent of expense In percent of tax revenue 3.0 40 25 35 2.5 20 30 2.0 25 15 1.5 20 15 10 1.0 10 5 0.5 5 0 0 0 ire e a a ia ire a e a ia ire e a a ia ine an ine an ine an on on on er er er vo vo vo Gh Gh Gh Lib Lib Lib Le Le Le Gu Gu Gu d'I d'I d'I rra rra rra te te te Sie Sie Sie Co Co Co Source: Constructed from IMF 2020 staff report documents. 46 REPUBLIC OF LIBERIA – ECONOMIC UPDATE Not only is domestically financed capital expenditure low, but it has fluctuated widely in recent years. The ratio of domestically financed capital expenditure to the national budget, domestic revenue, and total capital expenditure increased between 2014 and 2015, collapsed in 2017,23 and recovered slightly over 2018–2020. Domestically financed capital expenditure is mainly on account of counterpart funds for donors financed projects. According to the BOOST database, US$135.0 million was approved for domestically financed capital expenditure in 2018 and 2019, of which US$27.8 million (16.1 percent) was allocated to the construction or rehabilitation of roads and bridges, US$5 million (3.7 percent) to build information and communication technology (ICT) infrastructure and networks, and US$4.7 million to buy vehicles and transport equipment. The remainder was for acquisitions of other fixed assets, including counterpart funds to donor financed projects. Most capital spending is caried out by the following three sectors: infrastructure, public administration, and transparency and accountability. US$65.6 million (48.6 percent), US$24.9 million (18.4 percent), and US$19.8 million (14.7 percent) were approved for these three sectors, respectively (which together represented more than 80 percent of total domestically financed capital expenditure in 2018 and 2019). Externally financed capital expenditure and official development assistance (ODA) Externally financed capital expenditure is relatively high in Liberia compared to neighboring countries. Over 2017–2020, externally financed capital expenditure was estimated at 9.7 percent of GDP in Liberia, compared to 4.1 percent in Sierra Leone, 2.7 percent in Guinea, 2.0 percent in Côte d’Ivoire, and 1.4 percent in Ghana. In percentage of total capital expenditure, the share of externally financed capital spending amounted to 95.0 percent in Liberia, compared to 68.2 percent in Ghana, 60.4 percent in Guinea, 51.9 percent in Sierra Leone, and 41.5 percent in Côte d’Ivoire. The percent of total expenditure was at 30.3 percent in Liberia, compared to 18.6 Figure 2.13: Size of Capital Expenditure Externally Financed in Liberia and in Neighboring Countries In percent of GDP In percent of expense In percent of tax revenue 100 32 90 27 80 70 22 60 17 50 40 12 30 20 7 10 2 0 a ire a e ia ire e a a ia a ire a e ia ine an ine an an ine on on on er er er vo vo vo Gh Gh Gh Lib Lib Lib Le Le Le Gu Gu Gu d'I d'I d'I rra rra rra te te te Sie Sie Sie Co Co Co Source: Constructed from IMF 2020 staff report documents. 23 The budget documents indicated that actual acquisition of nonfinancial assets was zero in 2017. Finding Fiscal Space 47 percent in Sierra Leone, 15.0 percent in Guinea, 11.0 percent in Côte d’Ivoire, and 6.4 percent in Ghana. Three sectors (energy and environment, infrastructure and basic services, and health) account for nearly three-fourths of actual disbursements of externally funded capital expenditure. Together, they accounted for 71.0 percent of total disbursements, with energy and environment at 34.9 percent, infrastructure and basic services at 26.0 percent, and health at 10.6 percent. Other key sectors, such as social development, education, agriculture, and security accounted for much smaller shares (6.6, 5.7, 4.5 and 1.8 percent, respectively). In terms of PAPD pillars, actual disbursements for pillar 4 (the economy and jobs) accounted for 66.0 percent of the total, followed by pillar 2 (power to people at 22.9 percent), pillar 1 (governance and transparency at 9.3 percent), and pillar 3 (sustaining the peace at 1.8 percent). Actual disbursements were broadly in line with the projections in the budget documents. Actual disbursements were tilted slightly toward the fourth pillar of the PAPD due to higher disbursements than projected in the budget for the energy and education sectors. Actual disbursements in the energy sector reached 34.9 percent of the total (compared to 24.5 percent projected in the budget). Actual disbursements in the education sector were at 5.7 percent of the total (compared to 3.4 percent in the budget). However, the level of alignment between actual disbursements and PAPD plans is lower. When compared to the levels planned in the PAPD, actual disbursements were tilted away from the third pillar of the PAPD (sustaining the peace), possibly because substantial progress was achieved. While the actual share of the other pillars is higher than planned in the PAPD, there is some significant misalignment within pillars. Under the first pillar (governance and transparency), the share of actual disbursements was higher than planned for municipal government (+1.4 percent) and public administration Figure 2.14: Planned versus Actual Disbursements by Sector and Pillar 70 Social Governance and development Transparency 60 services The Economy and Jobs Projected disbursement in budgets (share in %) 50 Health Energy and 40 environment Public administration Power to 30 the People Infrastructure and basic services 20 10 Agriculture Sustaining the Peace Education 0 0 10 20 30 40 50 60 70 Projected disbursement in PAPD (share in %) Source: Constructed from Liberia MFDP budget documents, DARs, and PAPD. 48 REPUBLIC OF LIBERIA – ECONOMIC UPDATE (+1.2 percent), but lower for transparency and accountability (–0.7 percent). Under the second pillar (power to people), the share of actual disbursements was higher than planned for health (+4.2 percent) and social development services (+0.6 percent), but lower for education (–2.7 percent). Finally, under the fourth pillar (the economy and jobs), the share of actual disbursements was tilted toward the energy sector (+23.2 percent) at the expense of investments in infrastructure and basic services (–14.7 percent), agriculture (–6 percent), and industry and commerce (–0.4 percent). In other words, there was a misalignment between the budgets and the PAPD. When the levels planned in the PAPD are compared to the projected disbursements in the budget documents, a similar pattern as the one between planned versus actual emerges, though the fourth pillar also underspends (–5.5 percent), as does the third pillar (–3.4 percent). Also, there is significantly higher misalignment within pillars. For the first pillar (governance and transparency), the share of projected disbursements in the budget was higher than planned for the public administration (+3.7 percent) and the municipal government (+1.8 percent), but lower for the transparency and accountability sector (–0.7 percent). In the second pillar (power to people), the share of projected disbursements was higher than planned for health (+7.7 percent) and social development services (+1.4 percent), but lower for education (–5 percent). Finally, in the fourth pillar (the economy and jobs) the share of actual disbursements was largely squeezed toward the energy sector (+12.8 percent) at the expense of investments in infrastructure and basic services (–13.2 percent), in agriculture (–4.7 percent), and industry and commerce (–0.4 percent). Public Investment Management (PIM)24 Liberia’s institutions for managing public investment compare favorably to those of other developing countries but, nonetheless, require further development. According to the IMF’s PIMA (2016), planning institutions are broadly effective, although domestically and externally financed projects are handled through separate processes. The efficient allocation of resources, however, is undermined by (1) the absence of multiyear project costs; (2) the exclusion of externally financed capital spending in budget documents; (3) inadequate or limited information from development partners on their spending; and (4) inadequate distinction between capital and recurrent spending in the chart of accounts. Moreover, there is no comprehensive legal framework for managing public-private partnerships (PPPs) and SOEs. With respect to implementation, project management and procurement institutions generally score well, but more efforts could be made to provide predictable cash releases for capital spending, carrying over funds for existing commitments, and developing a comprehensive registry of infrastructure and other capital assets. Existing institutions for multiyear budgeting cannot generate comprehensive medium- term projections of capital spending on a full cost basis. There is no integrated public sector investment strategy comprising a multiyear presentation of all development projects, regardless of their source of funding. Ideally, the Medium Term Expenditure Framework (MTEF) would incorporate the first three years of this integrated strategy, thereby providing the legislature with a comprehensive overview of planned recurrent and development spending. Projects are mostly externally financed and their costing over the life cycle of projects is not published in the national budget documents. Most government-funded projects are included in the PSIP, but only for one year. Thus, there is no document that presents forecasts of the life-cycle costs of projects, including the recurrent 24 This section is based on the Public Investment Management report prepared by the IMF in 2016. Finding Fiscal Space 49 costs of operations and maintenance. The Aid Management Unit (AMU) of the MFDP collects information on externally financed projects directly included in loan or grant agreements, but does not consolidate the information into a multiyear database of anticipated project outlays. Thus, when several financing sources or loans are required to finance a single project (as was the case for the Mt. Coffee Hydropower plant), these are presented as separate items in the database. The budget classification does not distinguish adequately between capital and recurrent expenditure. In particular, the current CoA includes an “economic classification” entitled “development projects.” Within the budget, all allocations for PSIP projects are assigned to this single classification, even though in practice they include a mixture of capital and recurrent spending. The economic classification that is applied to externally financed projects does not meet the latest Government Finance Statistics Manual (GFSM) standards. Thus, it is impossible to distinguish the capital investment component of development expenditure for domestic or externally financed projects (and the proportion of development spending dedicated to recurrent costs is also unknown). In other words, it would make sense to introduce an international economic classification system for all development projects at the formulation and execution stage. Project appraisals and evaluations are done by the project implementation units (PIUs) in accordance with MFDP guidelines. However, the evaluation template lacks critical elements, such as (1) implementation arrangements, (2) detailed costs and sources of funding, and (3) ranking assigned to the project. There are no national guidelines for planning capital projects. Such guidelines could enhance project planning, as well as project execution. It is vital that comprehensive support documentation be prepared at the project appraisal stage to enable the evaluation team to fully understand the project. According to the IMF, the PIU at the MFDP lacks the ability to professionally scrutinize and appraise work carried out by the ministries and agencies, as there is no national guideline available on how to carry out appraisals. Moreover, there are no formal project selection and management procedures. A set of procedures has been established for submitting projects for inclusion in the PSIP and for screening them by the PIU, using criteria defined in the National Project System. However, these procedures do not incorporate a clearly defined project cycle (from identification, to initial screening and approval, and to design and appraisal). Finally, donor agencies reported that delays in the release of counterpart funds are commonplace. In cases where counterpart funds were pooled with donor funds in project accounts, donors were often willing to continue funding projects directly, recognizing the constraints facing the government’s budget. However, in cases where counterpart funds were dedicated to specific project components, their late release had a negative impact on execution. 50 REPUBLIC OF LIBERIA – ECONOMIC UPDATE CONCLUSION The foregoing analysis identifies four options for increased fiscal space in Liberia. These include (1) strengthening domestic revenue mobilization; (2) improving the efficiency of current expenditures; (3) increasing external grants and concessional loans, and improving aid effectiveness; and (4) improving the efficiency of capital expenditure. The second and last options can generate additional fiscal space with limited implications as to higher levels of tax or debt, while the first and third options have consequences in terms of levels of taxes and debt, and therefore have economic and social impacts. The mobilization of domestic revenue could significantly augment fiscal space, even though this will only be a gradual process over the next few years. The expected increase in revenue is based on the expansion of iron ore production and the introduction of policy reforms (with the regional common external tariff [CET] and the replacement of the goods and services tax [GST] with a value added tax [VAT]). Fiscal space from natural resource revenues has a clear potential with the recent increase in iron ore prices, but the volatility associated with the sector should lead to some caution and be managed properly. The implementation of the CET in compliance with Economic Community of West African States (ECOWAS) also has the potential to increase revenues, as the alignment would gradually increase tariffs on some imports that are deemed necessities and on products considered important to protected industries, albeit with efficiency costs. Replacing the GST by VAT will also have a positive impact on tax revenue over the medium and long term. The estimated increase depends on the rate of VAT, the extent of VAT exemptions, and the tax effort. However, implementation of VAT will be held up until the government completes its deliberations on the issue. Fiscal space can be increased through improved efficiency of current expenditure. A reduction in current expenditure on wages, and goods and services would help free up resources for productive investment and for countercyclical fiscal policy. The analysis shows that current expenditures on both wages, and on at least some goods and services, are particularly high. Rationalizing wages and public sector employment will ultimately save resources, improve the efficiency of public expenditure, and increase transparency. However, in the near term, the scope for increasing fiscal space may be limited. The government has recently implemented a pay and payroll reform that resulted in a reduction in the wage bill and the number of employees in the public sector. These efforts should be maintained and sustained over the medium term, especially in the Public Administration Sector. Reducing expenditures on goods and services, associated with the use of consultancy services and specialized materials, could potentially reduce overall spending, especially in the Public Administration Sector. Increased fiscal space from on-budget and off-budget external grants is an option, but the flows will be unpredictable. Based on available information, on-budget support grants are provided by the World Bank Group (WBG), the African Development Bank (AfDB), the European Commission, France, and the United States Agency for International Development (USAID). Off-budget external grants that support ongoing investment projects are projected to decline but will remain significant in the near term, ranging from US$250 million to US$450 million between 2022 and 2025, respectively. Liberia should implement reforms to improve its Country Policy and Institutional Assessment (CPIA) score to increase its access to concessional resources Finding Fiscal Space 51 from multilateral creditors, such as the World Bank and the AfDB. A higher CPIA score could also influence the level of resources allocated to Liberia by other multilateral creditors such as the European Union (EU) and some bilateral creditors such as USAID. Liberia should remain prudent on external borrowing in its quest to meet the large investment required by the Pro-poor Agenda for Prosperity and Development (PAPD). Liberia is at a moderate risk of external debt distress and already at a high risk of public debt distress, and there has been very limited space to borrow. Under the baseline scenario of the external Debt Sustainability Analysis (DSA), the present value (PV) of debt-to-GDP and the PV of debt-to-export ratios remain below the respective thresholds of 30 and 140 percent in the medium to long term but is very close to it. The debt-service to export and debt-service to revenue ratios remain below but very close to their respective thresholds as well. Standard stress tests show that the situation will remain fragile, and that a further deterioration of the macroeconomic outlook could lead to breaches of the policy dependent thresholds. Finally, Liberia could create additional fiscal space by improving the efficiency of its public investment. Liberia’s overall efficiency gap in terms of physical indicators is estimated at 38 percent in comparison with other countries in Sub-Saharan Africa (SSA) and low-income developing countries generally. This means that the country should be able to increase the return on its public investment by 38 percent with an unchanged level of spending. This result also points to the importance of strengthening public investment management institutions for better project planning, project preparation and management, and stronger alignment with PAPD priorities. Any decisions on policy options for fiscal space enlargement must be accompanied by institutional strengthening. In particular, the government will need to focus on four areas (World Bank 2007): credible controls over the level of fiscal deficit; policy transparency and contestability to establish and enforce strategic priorities in public spending; a well-functioning system for selection and implementation of public investment; and a resource management system that enforces accountability for results. As part of this institutional strengthening, it should be a top priority for the government and donors to make a concerted effort to generate timely, comprehensive, and accurate fiscal accounts that cover all spending, both on and, currently, off budget. The absence of such information is a major impediment to the analysis of fiscal space and strategic prioritization, as well as monitoring and evaluation. 52 REPUBLIC OF LIBERIA – ECONOMIC UPDATE References Dessus, Sébastien, Jariya Hoffman, and Hans Lofgren. 2012. Liberia: Strategic Policy Options for Medium Term Growth and Development. World Bank Policy Research Working Paper WPS 6081. Government of Liberia, Ministry of Finance. 2013. Annual Fiscal Outturn 2012 to 2019. Monrovia, Liberia. Government of Liberia, Ministry of Finance. 2013–2020. Mid-year Budget Performance Report. Monrovia, Liberia. Government of Liberia, Ministry of Finance and Development Planning. Budget Documents for FY2005/2006 to FY2020/2021, Monrovia, Liberia. Government of Liberia, Ministry of Finance and Development Planning, Development Assistance Reports for FY2013/2014 to FY2018/2019. Monrovia, Liberia. Government of Liberia, Liberia Revenue Authority, Annual Reports for FY2014/2015 to FY2019/2020. Monrovia, Liberia. Gupta, S., R. Powell, and Y. Yang. 2005. The Macroeconomic Challenges of Scaling Up Aid to Africa. IMF Working Paper, WP/05/179, Washington, DC. Gupta, S., B. Clements, A. Pivovarsky, and Tiongson, E. 2003. Foreign Aid and Revenue Response: Does the Composition of Aid Matter? IMF Working Paper, WP/03/176, Washington, DC. Heller, P. 2005. Understanding Fiscal Space. IMF Policy Discussion Paper, Washington, DC. IMF. 2016. Technical Assistance Report: Public Investment Management Assessment (PIMA). IMF Country Report No. 16/352. Lofgren, Hans. 2013. Creating and Using Fiscal Space for Accelerated Development in Liberia. Background paper. World Bank. USAID. 2020. Process Mapping Study: Pay and Payroll Reform in the Government of Liberia. Monrovia Liberia. World Bank. 2013. Liberia: Public Expenditure Review: Options for Fiscal Space Enlargement. Washington, DC. World Bank. 2021. PEFA 2020 report, ongoing. World Bank. 2017. PEFA 2016 report. World Bank. 2020. World Development Indicators. December. World Bank. 2012. Liberia: Public Expenditure Review—Meeting the UNMIL Security Transition Challenges. Washington, DC. Liberia: Selected Economic Indicators (2015–2025) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Est. Proj. Proj. Proj. Proj. Proj. National Accounts (growth rates, %) Agriculture 3,2 -2,6 1,3 4,5 2,8 1,2 0,2 2,4 3,3 4,5 5,2 5,7 5,8 Industry 22,0 5,0 -3,5 -11,7 8,2 4,9 1,0 0,2 3,9 5,3 5,6 5,9 6,0 Services 9,2 1,7 0,1 -2,9 0,6 -0,8 -6,6 -8,6 3,4 4,6 4,6 5,1 5,2 GDP at market prices 8,7 0,7 -0,0 -1,6 2,5 1,2 -2,5 -3,0 3,6 4,7 5,0 5,5 5,5 Mining 50,4 3,2 -16,8 -34,8 27,5 24,8 13,1 1,7 5,0 5,0 5,0 5,0 5,0 Non-mining 7,1 0,6 0,9 -0,0 1,7 0,3 -3,2 -3,2 3,6 4,7 5,0 5,5 5,6 Population 2,7 2,6 2,6 2,6 2,5 2,5 2,5 2,5 2,5 2,5 2,5 2,5 2,5 Real per capita GDP 4,3 -1,9 -2,6 -4,1 -0,1 -1,3 -4,9 -5,5 1,1 2,2 2,5 3,0 3,0 Annual average inflation 7,6 9,9 7,7 8,8 12,4 23,5 27,0 17,0 11,1 8,5 7,5 7,0 7,0 End of period inflation 8,0 12,5 13,9 28,5 20,3 13,1 9,0 8,0 7,0 7,0 7,0 GDP deflator 5,1 4,7 -2,6 -0,2 -0,6 -0,6 1,7 4,7 1,0 1,5 1,5 National Accounts (% GDP at current market prices) Agriculture 35,9 35,9 35,9 35,5 36,4 39,0 38,9 39,0 39,1 39,4 39,6 Industry 13,3 13,8 15,4 16,9 17,0 16,8 16,9 17,1 17,2 17,4 17,5 Services 50,8 50,3 48,6 47,6 46,6 44,2 44,1 43,9 43,7 43,3 42,9 GDP at market prices 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Mining 2,8 2,9 4,7 6,4 6,5 6,4 6,5 6,6 6,6 6,6 6,5 Non-mining 97,2 97,1 95,3 93,6 93,5 93,6 93,5 93,4 93,4 93,4 93,5 Gross domestic investment 25,0 28,8 24,8 26,5 19,3 18,0 18,9 16,7 18,9 19,9 21,4 20,0 20,4 Private investment 19,1 12,2 8,4 7,2 7,1 8,9 8,9 6,9 8,6 9,6 10,6 8,8 9,0 Public investment 5,9 16,6 16,4 19,4 12,1 9,1 10,0 9,7 10,4 10,4 10,7 11,2 11,4 Gross domestic savings 3,5 2,5 -26,5 -20,5 -16,2 -13,1 -5,8 -7,7 -3,5 -1,4 0,2 -1,3 -0,2 Public 0,5 -0,5 -5,8 -4,1 -7,8 -7,9 -9,4 -8,8 -5,7 -3,3 -1,2 Private -27,1 -20,1 -10,4 -8,9 2,0 0,3 5,8 7,4 5,9 2,0 1,0 Net primary income -12,1 -10,8 -8,5 -7,7 -8,9 -8,7 -2,9 -4,5 -4,4 -4,2 -4,1 -3,9 -3,8 Net secondary income 33,3 46,3 35,4 31,4 21,7 17,7 9,9 12,5 11,5 10,2 10,0 10,2 9,5 Gross national savings 24,7 38,0 0,4 3,1 -3,4 -4,1 1,2 0,3 3,5 4,6 6,2 4,9 5,5 Saving - Investment balance -18,1 -20,1 -24,4 -23,4 -22,7 -22,1 -17,7 -16,4 -15,4 -15,3 -15,2 -15,1 -14,9 Balance of Payments (% GDP, except otherwise indicated) Current account balance -18,1 -20,1 -24,4 -23,4 -22,7 -22,1 -17,7 -16,4 -15,4 -15,3 -15,2 -15,1 -14,9 Balance in trade and services -39,3 -55,6 -51,4 -47,1 -35,4 -31,1 -24,7 -24,4 -22,4 -21,4 -21,2 -21,3 -20,6 Primary income (net) -12,1 -10,8 -8,5 -7,7 -8,9 -8,7 -2,9 -4,5 -4,4 -4,2 -4,1 -3,9 -3,8 Secondary income (net) 33,3 46,3 35,4 31,4 21,7 17,7 9,9 12,5 11,5 10,2 10,0 10,2 9,5 Current account balance excl. grants -7,2 -5,1 -6,7 -9,6 -5,2 -1,8 -2,2 -4,0 -4,7 -4,1 -4,5 Foreign Direct Investment 8,4 7,2 7,1 8,9 8,9 6,9 7,4 8,3 9,3 7,6 7,8 Current account balance excl. grants and FDI related imports 1,2 2,0 0,5 -0,8 3,8 5,1 5,3 4,4 4,6 3,5 3,3 Gross Official Reserves (in months of next year’s imports) 1,6 1,9 2,1 2,7 2,6 2,3 2,3 2,6 2,9 3,1 3,1 3,1 3,2 Debt Indicators (in % of GDP) Total Public Debt 18,9 21,6 22,2 24,8 29,5 32,6 45,3 58,8 58,7 56,2 55,2 53,8 52,5 External 7,7 11,9 21,7 24,8 32,7 38,7 39,9 39,2 39,1 38,7 38,7 Domestic 14,5 12,9 7,9 7,8 12,7 20,1 18,7 17,1 16,1 15,1 13,8 Government finance (% GDP) Current revenue 16,6 15,0 13,6 13,9 13,7 12,4 12,9 14,9 15,2 15,8 16,6 17,4 17,9 Current expenditure 16,1 15,5 19,3 18,1 21,5 20,3 22,2 23,7 20,9 19,1 17,8 18,1 17,8 o/w wages and salaries 6,9 6,4 7,6 7,6 8,5 8,9 9,6 10,3 8,8 7,9 7,5 7,2 6,8 Capital expenditure 5,9 16,6 16,4 19,4 12,1 9,1 10,0 9,7 10,4 10,4 10,7 11,2 11,4 Overall fiscal balance including grants (commitment basis) -0,9 -1,2 -5,0 -5,3 -3,9 -4,6 -6,8 -4,0 -2,9 -2,4 -1,4 -1,0 -1,0 Overall fiscal balance excluding grants (commit. basis) -5,4 -17,1 -22,2 -23,5 -19,9 -17,0 -19,3 -18,6 -16,1 -13,7 -11,9 -12,0 -11,4 Monetary indicators Broad money M2 (% annual growth) 2,2 2,3 5,0 -18,4 4,9 0,5 20,3 2,8 9,4 12,0 9,5 9,9 Broad money M2 (% of GDP) 21,6 22,0 18,0 18,7 19,4 24,2 23,6 23,6 24,9 25,5 26,1 Liberian dollar component (in % of M2) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Credit to the economy (% annual growth) 5,6 9,0 10,2 11,7 4,7 -11,3 5,5 14,5 12,0 12,2 9,5 9,8 Credit to the economy (in % of GDP) 12,8 13,2 14,0 15,0 15,5 15,0 16,4 16,9 17,2 18,2 18,6 19,1 Velocity (GDP/M2; end of period) 4,5 4,5 4,6 4,5 5,5 5,3 5,2 4,1 4,2 4,2 4,0 3,9 3,8 Memorandum items GDP at current market prices (FDJ billion) 363,1 393,9 434,6 465,4 491,7 525,3 574,5 629,5 693,8 768,4 852,0 945,5 1.050,8 GDP at current market prices (USD million) 3.065,0 3.137,0 3.296,2 3.398,4 3.390,7 3.422,8 3.319,6 3.201,2 3.375,5 3.698,1 3.921,7 4.199,0 4.498,6 Per capita GDP (USD current) 721,5 719,6 737,0 740,9 721,1 710,3 672,3 632,5 650,7 695,5 719,6 751,7 785,7 Exchange rate (per 1$US, average) 77,5 83,9 86,2 94,4 112,7 144,1 186,4 191,5 Exchange rate (per 1$US, end of period) 82,5 82,5 88,5 102,5 125,4 157,6 188,4 164,2 Liberia: Indicators of PPG External Debt under Alternatives Scenarios Source: Joint WBG/IMF DSA (December 2020). Liberia: Indicators of Public Debt under Alternative Scenarios, 2021–31 Projections and Quarterly Disbursement by Donors Aid Distribution by PAPD Pillar, Sector, and Donors (2019) Finding Fiscal Space 57 58 REPUBLIC OF LIBERIA – ECONOMIC UPDATE