Creation of Liberia Revenue Authority Came At A Cost For Liberia – IMF
Washington DC. – A Multi-Country report by the International Monetary Fund (IMF) says while the establishment of the new organization like the Liberia Revenue Authority (LRA) has been instrumental in diverting limited resources, those successes came at a loss of revenue for Liberia.
The IMF report covers multilateral issues and cross-country analysis and summarizes the views of the Executive Board as expressed during its May 12, 2017 consideration of the report. The report prepared by IMF staff and completed on April 18, 2017 for the Executive Board’s consideration on May 12, 2017.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Regarding the creation of the LRA, the report concluded: “While this was a success, it came at the cost of revenue mobilization efforts at the Ministry of Finance, and delays in laying the fundamental foundations of tax administration such as the reliability of the taxpayer register, reconciliation of taxpayer accounts, and tax arrears management. This emphasizes the need to focus on the basic building blocks of tax administration, while sustaining the reforms that have been achieved thus far.”
The report explained that the nature and pace of reform in fragile contexts can be slow or reactive to immediate needs, and sometimes stop altogether in moments of crisis. “In such circumstances, reform can be sustained through properly sequenced and innovative TA approaches, championed by strong leadership in the government.”
The combination of diagnostic Technical Assistance, followed by focused hands-on short-term assistance, and dedicated training, complemented by resident long-term advisors, enabled the IMF to adjust its capacity development priorities as circumstances and needs changed.
The report said this was evidenced, for instance, through the legal drafting assistance for tax policy, the combination of in-country and international training in PFM, the sequenced reforms to address debt reduction, and the delivery of remote TA during the Ebola crisis that led to the implementation of major reforms.
The report added: “Coordination of donors in the same assistance space is critical to success as seen in revenue administration.
“There has been some lack of coordination in PFM, including duplication of efforts and failure to prioritize needs, which may have contributed to the lack of progress in addressing basic PFM requirements, due to the focus on advanced reforms including implementing an integrated financial management system.”
The report credited the strong and consistent leadership from President Ellen Johnson-Sirleaf, which enabled Liberia to launch its revenue agency in 2014. “This is in stark contrast to PFM where significant TA support has resulted in slower progress over time.”
Liberia emerged from civil war in 2003, facing an infrastructure in complete disrepair, little economic activity, and a cash-strapped government saddled with a high debt burden. The country’s socioeconomic structure was characterized by inequality of income, lack of education and opportunity, and social tensions. It took a few years after the end of the war for the economy to gather momentum, and for government to embrace economic reforms.
Foreign assistance flooded the country to assist with the reconstruction efforts, especially after the presidential elections and the signing of an IMF-supported Staff Monitored Program in 2006. 51. The Governance and Economic Management Assistance Program (GEMAP) was established for 2005-2010 to facilitate donor coordination.
Under this program, responsibilities for TA in fiscal policy was allocated principally to the IMF and the WB. In 2010, Liberia’s payment arrears to the IMF were cleared under the Heavily Indebted Poor Countries (HIPC) initiative, and the country could access IMF resources under the Poverty Reduction and Growth Facility (PRGF).
After a decade of strong performance (2003 to 2013), the report said, growth abruptly stalled in 2014 due to the Ebola outbreak and the decline in international commodity prices.
“Real GDP growth dropped from 8.7 percent in 2013 to 0.7 percent in 2014, and 2015 saw no growth. Output and revenue from mining concessions fell, adding extra pressure on the budget, particularly health spending to fight the Ebola crisis.”
“By June 2016, Liberia was declared Ebola free, and medium-term forecast growth now is estimated to stabilize at 6 percent over the next five years.26 B. Technical Assistance Approach Revenues.”
The IMF undertook a needs assessment shortly after the signing of the Accra Peace Agreement in 2003, which marked the end of the Second Liberian Civil War. In revenue policy and administration, the TA approach began with a basic short- and medium-term actions list to increase government revenue.
After the January 2006, presidential election, Liberia’s reform program proceeded rapidly. To support the program, the IMF coordinated with other donors and took a multi-faceted approach to the delivery of TA in tax policy and administration.
Technical Assistance was delivered in phases on a range of topics, to help create a tax system based on sound economic principles, broad tax bases, and limited discretionary tax policy.
In 2011, the IMF launched a multi-year TA program financed by the Tax Policy and Administration Topical Trust Fund (TPA-TTF). It focused on strengthening the revenue administration organization, defining the organizational structure, administrative and operational frameworks, building a comprehensive risk strategy for large taxpayers, and building the capacity of the Liberia Revenue Authority (LRA) to service taxpayers.
From 2015, several TA activities started to deal with the particularities of customs administration. Having noted the first positive steps taken by LRA and demonstrated commitment of LRA to move forward with customs administration modernization, the approach adopted for TA was to promote progress of core functions toward international standards.
This included the preparation for implementing the World Trade Organization (WTO) rules on import valuation given that WTO accession was underway, and capacity building in modern customs techniques such as risk management and post-clearance tax audit.
In addition, since the Freeport of Monrovia has the potential to become a regional transit port in the future, Liberia Customs has been included in a TA project benefiting West African coastal countries and aimed at a coordinated modernization of the customs procedures in use in their seaports. Expenditures 55.
In PFM, the IMF provided substantial support through a long-term resident expert and advisory missions from headquarters to develop the Public Finance Management Act and regulations, and to craft a PFM reform strategy and action plan.
Due to slow progress, the IMF intensified its TA after 2012, by complementing its long-term experts with in-country training on 26 IMF Staff Report for the Fifth and Sixth Review under the Extended Credit Facility Arrangement, December 2016.
Technical Assistance provided in-country came to a halt with the outbreak of the Ebola epidemic. However, the IMF continued its support through remote interactions with government officials, including conference calls, Skype sessions, and ongoing email exchanges. In-country TA resumed when travel restrictions were lifted, and included posting long-term experts in revenue administration.
The IMF also organized a workshop for a broad range of senior government officials to define post-Ebola strategic plans in revenue policy and administration, and PFM, and to address human resource capacity issues related to the intensity of TA.
Liberia emerged from the civil war in 2003 with a tax-revenue-to-GDP ratio of 6.4 percent, among the lowest in the world. The tax base had been severely eroded by the granting of tax concessions, poor administration, extremely low tax morale, and widespread governance problems. Liberia was heavily dependent on trade and income taxes; the contributions of domestic sales and excise taxes were very small.
A major success of the TA provided in tax policy was an amendment to the tax code, the Consolidated Tax Amendments (CTA) to the Liberian Revenue Code, ratified in 2011. The CTA contained a clear investment policy, modifications to the customs and excise tax regimes, and a specified regime for the mining, petroleum and large-scale agriculture sectors. It improved significantly the transparency of the tax policy framework, and curtailed the discretionary provision of tax incentives in various codes and investment agreements with foreign investors.
The success of the CTA owes to strong leadership and momentum at the Ministry of Finance, and sustained advice from the IMF, including legal drafting to help overcome capacity constraints. However, the institutional challenges for implementing the new act became quickly evident shortly after it was passed by the legislature.
Reforms in revenue administration began through addressing short-term actions to increase revenue soon after the end of the civil war. Starting in 2006, reforms included the redesign of the organizational structure of the tax administration, developing a new tax identification number, implementing an integrated tax administration system, establishing tax policy capacity in the Ministry of Finance, and building a comprehensive compliance program.
As TA intensified under the multi-year program starting in 2012, Liberia demonstrated its commitment to tax reform by passing legislation to create a revenue authority, and a transition team was formed under strong 27 The Ministry of Finance merged with the Ministry of Development Planning in 2013 and was renamed Ministry of Finance and Development Planning.
The IMF report noted that its Technical Assistance focused on providing support to the design, transition and implementation of the LRA, in coordination with other donors.
Innovative delivery modes of intensive Technical Assistance were required to support reforms through the travel restrictions in 2014, brought on by the Ebola outbreak.
Technical Assistance was delivered remotely through electronic modes to include face to face Skype sessions.
“Once the Ebola crisis subsided, a long-term expert was embedded with the LRA to guide the reforms on the ground as in person short-term expert assignments were re-established.”
“Intensive assistance was provided to set-up the new LRA to include establishing the organizational structure with a taxpayer service and functional offices segmented by taxpayers; establishing a strategic plan and accountability framework; and compliance enforcement.”
Despite adversity, the LRA opened its doors on July 1, 2014, at the height of the Ebola crisis. Supported through intensive FAD TA, the LRA now operates under a new accountability framework with a strategic plan in place; taxpayers are managed by segments; and the LTO along with the medium, small and micro departments, are functional.
LRA employees are recognized as professionals, and jobs at the LRA are regarded as rewarding and career promising, and continue to attract Liberians from abroad. The fundamental facilities are in place to assess and collect revenues, and a taxpayer service unit has been established.”
However, the shift of resources to operationalize the new organization left gaps in fundamental tax reforms. The focus on the LRA also shifted resources away from tax policy planning and implementation capacity at the Ministry of Finance, hampering ongoing domestic revenue collection efforts in the short term.
IMF’s Technical Assistance is now focusing resources on aligning business processes to optimize operational procedures, and improve the integrity of the registration and taxpayer account databases to support effective compliance management.
In addition, Liberia is focused on implementing e-filing and e-payment and considering expanding the Goods and Services Tax to a VAT system with a broader tax base. The LRA has emerged as a major player in the government to help facilitate a strong economic recovery in Liberia.
Basic infrastructure was destroyed during the civil war, and hampered day-to-day functions.
According to the report, the Ministry of Finance’s building lacked windows, office furniture, equipment, and an automated reporting system. Lack of electricity supply necessitated the use of expensive generators. Staff capacity was limited due to lack of training and low wages—the average salary was only equivalent to US$50 a month—and could not attract skilled staff.
The IMF initial needs assessment mission in 2003 highlighted Liberia’s fragility across all PFM Institutions. The legacy issues of rationalizing the salaries of teachers—often paid by donors at much higher rates than the rest of the public service—had to be addressed as a priority along with cleaning up the wage bill.
Commitments control and cash management practices were lacking, there was a backlog of unaudited financial statements, and the legal framework was outdated. Prior to independence, budget formulation was fragmented between the Bureau of Building Fiscal Capacity In Fragile States—Case Studies 24 International Monetary Fund Budget—located in the Office of the President—and the Ministry of Finance, resulting in duplication of budget formulation functions.
Moreover, the separation of the capital budget from the recurrent budget compounded the fragmentation, further limiting the presentation of a comprehensive annual budget. These areas were subject to condition in the 2006 IMF-supported staff monitored program.
The GEMAP was considered inadequate as it did not recognize the authority of the newly appointed Minister of Finance to approve payments, but rather assigned this responsibility to international experts. To allow the government discretion to manage its own payments, officials found creative ways to circumvent the co-signatory authority for all payments exercised by international experts. 67. Despite these difficulties, progress was made in some important PFM areas.
The PEFA scores showed improvement between 2007 and 2012 in monitoring of expenditure arrears, comprehensiveness of the budget, recording of cash balances, debt and guarantees, effectiveness of internal audit, and timeliness of audit reconciliation.
In addition, the implementation of a Poverty Reduction Strategy Plan, implementation of a PFM Act in 2009, enhanced transparency in procurement, merger of the Bureau of Budget and Ministry of Finance, development of a debt management strategy, and auditing of pilot ministries met the requirements of the HIPC completion point, signaling debt relief from multilateral and bilateral lenders and improved relations with them.
Progress in other areas—particularly on the TSA, medium-term expenditure framework, and full implementation of the integrated financial management information system—has been less pronounced. Successive Fund-supported programs included structural benchmarks to target these priority PFM reforms, but benchmarks on cash management and implementation of the TSA have not been met.
It is likely that these benchmarks were too advanced for the country capacity, and the lack of progress could be partly attributed to the poor working relationship between the Ministry of Finance, the Central Bank, and other ministries and agencies.
Moreover, continuous failure of the Legislature to approve the budget on time, contributed to under spending, especially on public investment projects.
Through the implementation of new TA approach starting in 2012, PFM reforms were progressing well until the shock of the Ebola crisis in early 2014, which caused a renewed setback. TA delivery was stalled until travel restrictions were lifted.
The Technical Assistance approach was further refined after the Ebola crisis, to respond to concerns from Liberian officials about the human resource implications of the intensity of TA. A seminar to officials from various government ministries helped to reprioritize reforms and address remaining program benchmarks.
This initiative was highly rated by officials and identified commitment control, fiscal reporting, cash management, the TSA, and public investment management as priority areas.