Liberia: Macroeconomic Turnaround? How Realistic Is The Revised 2019/20 US$532M Nat’l Budget?
Monrovia – The Government of President George Manneh Weah, through the Ministry of Finance and Development Planning, has finally submitted the fiscal year 2019/20 National Budget to the Speaker of the House of Representatives, Bhofal Chambers. The Budget is being billed as the start of the macroeconomic turnaround and was prepared in consultation with a recent Mission of the International Monetary Fund, which visited Liberia to discuss the terms of a new IMF-supported program with Liberia.
Analysis by Rodney Sieh, [email protected]
What are the numbers?
The 2019/20 budget amounts to a total of USD 532,906, 966, which is a 7 percent or USD 37.2 million reduction over the FY2018/19 budget. This is the first time the MFDP has submitted a proposed budget with a total less than the total of the previous year’s budget. Analysts say this signals the beginning of real transformation, since Liberians are used to the budget being passed with a higher total than the previous year’s. However, the real test is in the national legislature keeping this number at USD 532.9 million. Last year, the MFDP submitted a budget of USD 563 million which was increased to USD 570 by the legislature.
Compensation of employees is put at USD 297 million, which is 6 percent reduction over the 317.1 million amount budgeted for compensation of employees in the 2018/19 budget. However, in terms actual amount spent on compensation of employees for the last budget year, this reduction in the wage bill is about 1 percent of GDP, which analysts say is significant.
This reduction has been achieved through what the government is calling a wage bill harmonization exercise. For several years, the Liberian wage bill has been extremely large, crowding out critical spending needed in health, education, infrastructure, agriculture and other vital areas. In 2013, the wage bill was about 12 percent of GDP, one of the highest West Africa. With the current 1 percent GDP reduction, the wage bill is now set at 9 percent of GDP and the goal according to government authorities is to move it to 7 percent of GDP in the medium term.
IMF Raises Red Flag
Last week, the International Monetary Fund (IMF) delegation to Liberia admonished the Government of Liberia to reduce its wage bill as the government embarks on a process of adopting a credible and executable budget for Fiscal Year 2019/2020 and beyond.
Ironically, many critics and the media took the administration to task when it took office last January over the wave of partisans of the ruling Coalition for Democratic Change hired to various government ministries and agencies.
At a joint press conference on Monday, June 24 with Minister Tweah and CBL Governor, Patray, the IMF’s head of delegation, Mika Saito noted that the IMF mission supports the government’s objectives of restoring macroeconomic balance in the near-term, addressing weakness in governance and institutions of the public sector, improving the business climate and putting Liberia on a fiscally sustainable and inclusive growth path.
Towards these arms, the mission noted that good progress was made in a number of important areas, including the contours of the FY2020 budget, the stance and modalities of monetary policy, and structural reform program that is consistent with the Government’s pro-Poor Agenda for Prosperity and Development (PAPD).
However, the IMF mission indicated while it welcomes the reforms being instituted by the government towards economic recovery and growth, success of the reform agenda is predicated on the adoption of a credible and executable budget for FY2020 and beyond.
Key to achieving this, Ms. Saito called for expenditure to be held to a level consistent with realistic estimates of the resource envelope so that budget execution in the coming year can proceed with predictability and efficiency. In addition, the measure is needed to support the provision of essential public services and avoid the accumulation of domestic arrears.
“Securing enough resources to fund an efficient government budget will require both additional revenue measures and reforms to allocate expenditure. The latter will require a reduction in the size of public sector wage bill, as it currently accounts for 65 percent of total budget expenditure and is effectively crowding out needed spending in other areas. Full implementation of a credible and equitable wage structuring program is essential to the success of the overall reform agenda,” Ms. Saito emphasized.
The new revised 2019/20 budget amounts to a total of USD 532,906, 966, which is a 7 percent or USD 37.2 million reduction over the FY2018/19 budget. The George Weah-led government says this is the first time the MFDP has submitted a proposed budget with a total less than the total of the previous year’s budget. Analysts say this signals the beginning of real transformation, since Liberians are used to the budget being passed with a higher total than the previous year’s. However, the real test is in the national legislature keeping this number at USD 532.9 million. Last year, the MFDP submitted a budget of USD 563 million which was increased to USD 570 by the legislature. How Does the bread and butter issues enter the equation and what it means for those languishing at the bottom of the economic ladder.
Wage Bill Key to Harmonization
An international diplomat speaking on condition of anonymity said the wage harmonization exercise undertaken by the Government of President Weah is the most significant public financial management reform he has seen in Liberia over the past 14 years. He said all international partners and experts have called on the Liberia Government in the past to reform the wage bill, but this went nowhere. Millions of dollars have been spent on programs to reform wage in Liberia. About several different reports have been written. He noted that that all development partners are truly amazed that the Government of President Weah is able to achieve a 1-GDP percentage point reduction in the wage bill in a matter of two months where all else failed over the past 10 or more years. “This provides confidence and assurance that budget support and external existence are not going to be used to pay lucrative salaries as was the case under the previous Government,” the diplomat added. It is real steps like these that can attract more resources to the country, but we like to see this harmonization exercise extended to the national legislature, where we believe wage creep has been rampant” he concluded.
According to authorities, the wage harmonization program entailed fitting all Government workers into a pay grade with seven steps. The grade covers all skillsets in Government as developed by the Civil Service Authority. The harmonization program abolished the Basic and General Allowance salary structures of the previous years, giving all government workers one pay. Where workers were previously paid with wide discrepancies, all workers under the harmonized bill will now be paid more equitably, with people of the same qualification and experience making about the same amount or in the same range. “This is revolutionary” says Finance and Development Planning Minister Samuel D. Tweah, Jr. in his wrap up press briefing with the recent IMF Mission.
Sources say some 14,000 Government workers, among them police, army and immigration folks, are getting a pay increase under the harmonization scheme. Some 27,000 workers will see no change in their compensation.
Other key components of the budget include Goods and services, non-financial assets and domestic and foreign liability. On goods and services, USD 72.2 million is proposed, down from USD 91.6 million. According to sources, the IMF mission believes this amount is too low since it falls below the USD 91 million budgeted in the previous fiscal year. Sources say the IMF thinks too low an amount of goods and services is also a risk to the budget. According to sources, the challenge to increase this number lies in where to source it from. About 33 million has already been slashed from the wag bill, so there appears to be no room there.
The budget category of Non-financial assets, which includes the Road Fund and Public Sector Investment Projects, is put at 43.1 million, down from the 74.3 million proposed in the previous budget. This means that this budget comes with less public sector investments than the previous budget, though roads and agriculture are two major areas that see investment in this budget.
One of the biggest changes under the new budget is in domestic liability, which has about USD 35 million budgeted. If the Government succeeds in paying USD 35 million of domestic liability, this will catalyze spending in the economy. Experts say the current squeeze in the Liberian economy has to do with the Government’s inability to pay vendors. The Government recently issued a USD 65 million bond to commercial banks, payment on which is included in this year’s budget. Payment on court judgements against the Government are also included. Analysts say the settlement of domestic arrears and a very clean profile on domestic obligations is a key pre-requisite for IMF. Noted one analyst: “it is important for the Government to stay on a path of debt sustainability through effective and efficient payment and clearance of domestic arrears. This path is programmed under this new budget and what remains is to follow a prudent course of debt credibility”
Show me the Money
The success of this budget depends on the amount of revenue the Government will collect. The amount of domestic revenue expected to be collected for last fiscal year (fiscal outturn) has been put at 480 million, though the possibility of realizing this exact amount is still in doubt. So it can clearly be seen that last year’s budget was far above revenue potential. Authorities say this year’s budget will be supported by a few new revenue measures which will be expected to rake in USD 22 million over and above the USD 480 million that should be collected. Sources and authorities say some of these measures included migrating to the Common External Tariff (CET) regime, which is expected to bring in some USD million dollars. Liberia is the only ECOWAS country that is NOT in compliance with the CET. More revenue will also be collected from state owned enterprises like National Port Authority and the Liberia Maritime authority. Implementation of the new excise law is expected to bring in some revenue as well, since the law mandates a move from ad valorem to specific rates. The Government also intends to significantly limit exemptions and investment incentives. The consensus over the past several years is that these have hurt the Liberian economy and today with a very weak private sector, authorities say they do not see the benefits of these giveaways. The Government is putting in place regimes to rationalize the use of exemptions and investment incentives that will see additional revenue.
Sources say these budgeted measures as only the tip of the iceberg as the LRA intends to seriously ramp up revenue enforcement to support the new budget. For example, revenue from real estate has been put at around USD 5.5 million, which is still too far below the true potential. Experts say tax audits is where the LRA needs to pay attention to rake in more. Says a diplomat: “This economy can bring in far more than USD 450 – 480 million in revenue. This is the amount Liberia has collected over the past six to seven years which I think is too flat. One reason for this is that Liberians have been too dependent on foreign assistance and have not pushed themselves too much to raise revenue. Another reason is that corruption is eating at the way of revenue. So the Government of President Weah has no other option but to increase the revenue envelop. Considering what I see he has done with wage reform, this man can raise revenue to another level. We shall see!”
Closing the Financing Gap and Tough Negotiations with the Legislature.
During his remarks at the IMF Mission press closeout, Finance Minister Tweah said the budget has been submitted with a finance gap of USD 7 million. This is actually a gap from the perspective of the IMF, which does not want the Government to borrow to fill this gap. Authorities say, if this gap is not closed with either risk-free revenue measures or expenditure cuts, getting into the IMF program will be difficult. The public financial management law allows the Government to borrow to finance a fiscal gap but the IMF frowns on borrowing since this complicates the situation in the medium term when past debt taken up by President Sirleaf will be coming due. The IMF will frown on any further cuts to goods and services, which they think is already low so this is a no-go zone. It will be interesting to see how the Executive and the Legislature work to close this gap to pave the way for a program.
Another difficult issue is adjustment in the salary of legislators as part of the salary harmonization exercise. Legislative sources say the $297 million compensation already include adjustment to legislative salary and if legislators do not agree the budget will be risked by that amount, threatening the commencement of the IMF program.
Many analysts believe legislators will participate in the adjustment since too much is at stake in terms of the IMF program, without which badly needed budget support from development partners is unlikely to come.
The coming weeks promise to be interesting at the national legislature as budget discussions commence.