Liberia’s economy set for recovery

Liberia’s economy appears poised for recovery following a very difficult period, an International Monetary Fund (IMF) team said after discussions with the country’s administration for the 2018 Article IV Consultation.

In an end of mission statement issued in Monrovia, team leader Mika Saito observed that over the last five years, the Ebola crisis—with all its devastating humanitarian impact – combined with a large decrease in export prices, the ongoing withdrawal of the UN peacekeeping force, and some disruption associated with the end-December 2017 election period, to keep economic activity at low levels.

Liberia’s growth bottomed out in 2016 at -1.6 percent, before increasing somewhat to 2.5 percent in 2017.

“The same factors also contributed to a reduction of net foreign exchange inflows over the past year, which put pressure on the exchange rate and exacerbated inflation,” Saito said, noting that since January 2017, the exchange rate has depreciated by 28 percent.

The depreciation in turn drove inflation, which at 14 percent, remains at a relatively elevated level. Reduced levels of foreign exchange also put pressure on reserves of the Central bank of Liberia (CBL), which fell slightly to 2.8 months of import cover.

“With the economic shocks and the Ebola crisis now in the past, assuming the implementation of good policies – including measures to improve the business climate and support private sector development – the medium-term outlook appears favourable.

“The peaceful political transition will offer support to the recovery of the domestic economy (agriculture and service sectors) through improved consumer and investor confidence. Moreover, key commodity sectors are expected to be more active as global commodity price recovery.

“Better power supply is another positive development factor for both existing and new businesses, though the full effect of the Mount Coffee hydro plant will need to await resolution of the transmission bottlenecks. Over the next few years, the development plan of the new government, with large-scale road construction in its center, will act to expand and connect markets and spur economic development,” Saito pointed out.

The IMF team has expressed support to the Administration’s adoption of a strongly pro-poor agenda, stating that the needs of the poorest segments of the population are clearly large, and it is commendable that the Authorities have made this their policy priority.

“Within this ambition, it would be particularly important to ensure that the increase in expenditure goes hand in hand with measures to ensure macroeconomic and debt stability, as the impact of instability would fall disproportionately on the most vulnerable groups and undercut the goal of poverty reduction.

“The team also notes that the need to increase investment spending is coming at a time when resource mobilization – from external borrowing, domestic revenue generation, and aid – is facing challenges,” the team stated.

Given potential constraints on resource mobilization, the team advised that it would be important to not only mobilize significant quantities of additional domestic revenue and secure attractive terms for future contracted debt, but also to improve the efficiency of existing spending to create additional fiscal space.

Liberia’s debt levels have been rising steadily in recent years. While the risk of debt distress remains moderate, borrowing space has clearly been reduced over time. Looking forward, future obligations will need to be undertaken with caution, specifically with respect to securing favorable terms and conditions.

On governance, the IMF team suggested that improvements, particularly with respect to inculcating greater fiscal transparency and accountability would be key in this, as would instilling greater order and priority in Government’s fiscal relations.

Replacing development spending with current expenditure to the extent possible would need to be part of this, including by controlling growth of the wage bill. In addition, Government could also usefully consider adopting a comprehensive program to clear domestic arrears and prevent the emergence of new ones; utilizing realistic revenue estimates for budget formulation; and improving the monitoring of all expenditure, including grant- and loan-financed projects.

“Maintaining macroeconomic stability will also hinge on effective implementation of monetary policy, a precondition for which would be strengthening of the CBL’s balance sheet. To this end, Government should explore ways and means of ensuring the CBL has the financial wherewithal to effectively carry out its policy mandate,” Saito added..