IMF Calls For ‘Strong Policy Actions’ To Fix Liberia’s Depreciated Exchange Rate, Inflation

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Washington – The latest report from the International Monetary Fund’s Article IV Mission to Liberia has painted a rather bleak outlook for Liberia’s economic future. “Liberia’s economic situation is challenging, and strong policy actions will be required to maintain as favorable an outlook as anticipated at this time last year,” the team noted in its report released Friday.

The IMF team led by Mika Saito, visited Monrovia from February 25-March 8 to conduct discussions for the 2019 Article IV Consultation with Liberia and held discussions with President George Weah, Speaker of the House of Representatives Bhofal Chambers, Minister of Finance and Development Planning Samuel Tweah, Governor of the Central Bank of Liberia Nathaniel Patray, Minister of Commerce and Industry Professor Wilson Tarpeh, other senior government officials, private sector representatives, and development partners. The team thanks the authorities for their collaboration and fruitful discussions.

In its report, the team reported that Macroeconomic stability has proved elusive despite improved revenue collection in the first half of FY2019, while the fiscal stance has loosened significantly.

Said the report: “With accommodative monetary policy meeting fiscal needs, the exchange rate depreciated by 26 percent over the year, and inflation accelerated to 28 percent at end-December. This is detrimental to the living standards of the most vulnerable Liberians who earn and spend primarily in Liberian dollars and threatens the success of the pro-poor agenda. Growth for 2018 is now estimated at 1.2 percent, while the forecast for 2019 on current policies has been revised down to 0.4 percent from 4.7 percent.”

The team reported that discussion with the authorities centered on the policies required to address the current situation and promote strong noninflationary growth over the medium term and noted that the commencement of sales of central bank bills, supplemented by the introduction of the standing deposit and credit facilities in the interbank market, represent major milestones in modernizing the monetary policy framework.

“With the appropriate preconditions firmly in place, a timely reduction of the rate of inflation to single digits appears possible. Of the necessary preconditions, the most critical is that the Government refrain from borrowing from the central bank,” the team noted.

The IMF mission recommended that the budget for fiscal year 2020 be based on realistic estimates of the resource envelope giving Ministries and Agencies a reliable estimate of the actual resources that will be available to them is critical to improving the quality of public services, even if this represents less than the amount budgeted in the past. “Without central bank borrowing, financing a sufficient level of public service provision will require policies to prioritize and improve the composition of expenditure, enhance its efficiency, and expand the resource envelope.”

The mission noted that productive spending is being crowded out by a wage bill, including discretionary allowances, that totals about two-thirds of government-funded expenditure. “This is not a new issue—it has been a characteristic of the Liberian economy for a number of years. However, as grants and other external assistance decline, this is no longer a tenable situation. Freeing up resources in an equitable manner for pro-poor development will likely require effective actions to reduce the share of government resources devoted to this budget item.”

The mission said improving the efficiency of government spending will be key and stressed that policies should aim at improving the monitoring, accountability, and transparency of spending. “Intensifying actions to improve governance and fight corruption, including through rigorous adherence to existing procurement rules, would also be effective.”

According to the IMF team: “Revenue reforms have considerable potential to directly expand the resource envelope and facilitate a needed increase in social spending. The mission notes the recent finalization of the Domestic Revenue Mobilization Strategy.”

The mission recommended that the authorities pursue the envisaged reforms, including excise tax, tax exemptions, and compliance. “Increased uncertainty and volatility in the external environment argues for further measures to safeguarding the foreign exchange reserves of the central bank. The mission noted that creation of a well-functioning monetary policy framework would reduce the need for foreign exchange intervention. Acceptance of greater exchange rate flexibility would help preserve reserve stocks and help absorb external shocks. In addition, reducing the central bank’s operational deficit would be vital.” Regarding the investigative reports by the Presidential Investigative Team and by Kroll Associates, the mission stressed that the findings point point to a need for substantial improvements in operational policies, guidelines, and compliance. We encourage the Liberian authorities to take advantage of available support from the international community to make much-needed remedial actions in these areas. “The mission notes the need for significant action to improve the business climate and provide the enabling environment required for private sector-led growth. Removing administrative constraints on imports and prices to boost the level of competition, while ensuring quality and safety standards, should be prioritized. Liberia should step up efforts to strengthen governance and anti-corruption efforts as envisaged in the government’s pro-poor agenda, as it would create an environment conducive to private sector-led inclusive growth.”

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