Report No. 75049-LR Liberia Public Expenditure Review Options for Fiscal Space Enlargement May 2013 Africa Region Document of the World Bank GOVERNMENT FISCAL YEAR January 1 - December 1 CURRENCY EQUIVALENTS Currency Unit = Liberia Dollars (LD) US 1.00 = LD 73.00 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADB African Development Bank IFMIS Integrated Financial Management Information System AfT Agenda for Transformation ICT Information and Communication Technology CET Common External Tariff IMF International Monetary Fund CIP Corporate Income Tax LEITI Liberia Extractive Industries and Transparency Initiative CSA Civil Service Agency LRC Liberia Revenue Code CTA Consolidated Tax Amendments MAMS Maquette for MDG Simulations (MAMS) CWIQ Core Welfare Indicator Questionnaire MDG Millennium Development Goals DMC Debt Management Committee MOF Ministry of Finance DSA Debt Sustainability Analysis NPB ECF Extended Credit Facility PBTF Project Budget Task Force ECOWAS Economic Community of West African PER Public Expenditure Review States FDA Forestry Development Agency PFM Public Financial Management FDI Foreign Direct Investment PIT Personal Income Tax FTA Free Trade Agreement PRS Poverty Reduction Strategy GAP Government Account Payroll SES Senior Executive Services GEMS Governance and Economic Management SGS Société Générale de Surveillance Support GDP Gross Domestic Product SOE State-owned enterprise GEMAP Governance and Economic Management SWF Sovereign Wealth Fund Assistance Program GST General Sale Tax SUV Sport Utility Vehicles HIPC Heavily Indebted Poor Countries TMC Timber Management Contract HRMIS Human Resource Management UNMIL United Nations Mission in Liberia Information System KfW Kreditanstalt für Wiederaufbau VAT Value-added taxes ii Vice President: Makhtar Diop Country Director: Yusupha B. Crookes Sector Director: Marcelo Giugale Country Manager: Inguna Dobraja Sector Manager: Mark Roland Thomas Task Team Leader: Jariya Hoffman iii Liberia Options for Fiscal Space Enlargement Table of Contents ACKNOWLEDGEMENTS ................................................................................................................................vi EXECUTIVE SUMMARY ................................................................................................................................vii I. Introduction........................................................................................................................................... 1 II. Macroeconomic and Fiscal Developments ........................................................................................... 4 A. Recent economic performance.......................................................................................................... 4 B. Medium-term economic outlook....................................................................................................... 5 C. Emerging challenges......................................................................................................................... 6 III. Improving Efficiency of Expenditure ................................................................................................... 9 A. Trends and composition of public spending ..................................................................................... 9 B. Analysis of expenditures by economic classification ..................................................................... 11 (i) Compensation to employees ................................................................................................... 13 (ii) Goods and services.................................................................................................................. 17 (iii) Transfer to state-owned enterprises (SOEs)............................................................................ 20 (iv) Capital expenditure ................................................................................................................. 23 C. Analysis of expenditure by sector................................................................................................... 26 IV. Mobilizing External Grants................................................................................................................. 28 V. Revenue Mobilization......................................................................................................................... 31 A. Trends in government revenue........................................................................................................ 32 B. Sources of domestic revenue enhancement..................................................................................... 33 (i) Natural resource revenue ........................................................................................................ 33 (ii) Tax revenue............................................................................................................................. 36 (iii) Non-tax revenue...................................................................................................................... 40 VI. External Borrowing............................................................................................................................. 41 VII. Implications of Various Options to Enlarge Fiscal Space .................................................................. 43 VIII.Conclusions and Recommendations ................................................................................................... 50 A. Conclusions..................................................................................................................................... 50 B. Recommendations........................................................................................................................... 52 REFERENCES ............................................................................................................................................... 54 APPENDIX I............................................................................................................................................... 56 iv Tables: Table 1: Key macroeconomic indicators ...................................................................................................... 4 Table 2: Medium-term macroeconomic projections, 2012-16...................................................................... 6 Table 3: Current and capital expenditure...................................................................................................... 9 Table 4: Capital spending - Budget and Actual .......................................................................................... 11 Table 5: Public expenditures in 13 ECOWAS countries ............................................................................ 12 Table 6: Wages and salaries in 13 ECOWAS countries ............................................................................. 13 Table 7: Liberia’s Composition of wages, salaries and benefits................................................................. 14 Table 8: Movement of public sector employees ......................................................................................... 16 Table 9: Total transport costs...................................................................................................................... 17 Table 10: Travel related expenses............................................................................................................... 20 Table 11: Fiscal transfers and revenue by state-owned enterprises ............................................................ 22 Table 12: Public Sector Investment Program 2012/13-2014/15 ................................................................. 24 Table 13: Capital spending on transport and equipment............................................................................. 24 Table 14: Allocation of public expenditure by PRSP sectors ..................................................................... 27 Table 15: Estimated budget support grants................................................................................................. 29 Table 16: Planned off-budget external grant financing of investment projects, ......................................... 30 Table 17: Tax revenue to GDP ratios in 13 ECOWAS countries ............................................................... 32 Table 18: Government revenue, FY 2005/06 - FY2011/12 ........................................................................ 32 Table 19: Structure of the Liberian tax system ........................................................................................... 33 Table 20: Potential revenue from iron ore and palm oil projects................................................................ 36 Table 21: Estimated revenue impact of immediate transition to CET ........................................................ 38 Table 22: Estimated revenue impact of the migration to the CET during the three-year transition ........... 38 Table 23: CET agreed by ECOWAS countries as of December 2012........................................................ 39 Table 24: Real macro indicators in 2012 (constant US$ million) and growth 2013-2030 ......................... 47 Table 25: Summary of recommendations for fiscal space enlargement ..................................................... 52 Figures Figure 1: Capital budget execution rates (%).............................................................................................. 25 Figure 2: Trends in external grants, FY2004/05-FY2011/12...................................................................... 28 Figure 3: Government final demands in 2012 and average for 2020-2030 by simulation.......................... 48 Figure 4: Deviation from base growth for macro indicators (percentage points) ....................................... 48 Figure 5: Deviation from base in 2030 for MDG indicators (Percentage points)....................................... 49 Figure 6: Deviations from base GDP growth by sector .............................................................................. 49 v ACKNOWLEDGEMENTS This Public Expenditure Review Note on Options for Fiscal Space Enlargement was prepared by a team led by Jariya Hoffman (Senior Economist, AFTP3) and is comprised of Errol Graham (Senior Economist, AFTP3), Raymond Muhula (Public Sector Governance Specialist, AFPT3), Daniel Boayke (Economist, AFTP3), Hans Lofgren (Senior Economist, DECPG), and Collista Jean Harris (AFMLR). Miria Pigato (Sector Manager, AFTP4), Mark Roland Thomas (Sector Manager, AFTP3), Sebastien Dessus (Lead Economist, AFTP4), and Santiago Herera (Lead Economist, AFTP3) provided overall advice and guidance to the team. The newly appointed Minister of Finance that took office in early February 2012 requested to the Bank to carry out an analysis that will inform the new management team of options to enlarge fiscal space to support strong economic growth envisaged under the Agenda for Transformation. In carrying out this exercise, the team is gratitude to the government officials who devoted their time to discuss issues related to revenue, public expenditure and debt and facilitated and assisted the team in the compilation of budget statistics and information on relevant rules and regulations. The final draft of the note benefits from extensive discussions with senior government officials and policy analysts in the Ministry of Finance and Civil Service Agency as they have provided valuable insights to the analysis of revenues and expenditure policies that will increase fiscal space. It also benefits from the ongoing technical assistance on fleet management provided to the General Service Agency (GSA) under the Governance and Economic Management Support (GEMS) Program financed by the United State Agency for International Development (USAID). Finally, the team acknowledges cooperation from donor representatives at the African Development Bank and European Commission in sharing information on their planned budget support grant as well as from the IMF staffs working on Liberia as regards to a macroeconomic framework, debt sustainability analysis, and policy advice on tax policy and tax administration. vi EXECUTIVE SUMMARY Liberia’s post-conflict reconstruction and rehabilitation has been successful. Peace, stability and security gradually returned and provided an enabling environment for the rebuilding of this war-torn country. Over the past several years the economy has been growing moderately, key public infrastructure is being renewed and schools and health facilities have been repaired and are now providing basic social services to the population. With the return of peace and the resumption of economic activities, foreign investors are returning to benefit from the country’s rich natural resources in agriculture, forestry, mining and the possibility of petroleum within the next decade. Looking forward, the Government of Liberia aspires to middle income country status. The Agenda for Transformation (AfT), which lays out a medium-term economic development and growth strategy for the country, focuses on building infrastructure (energy and transport), increasing youth employment opportunities, strengthening human development and sustaining peace and security. To fulfill the vision, the total cost of the AfT is estimated at about US$3.36 billion over the five-year period (2013-2017), of which 65 percent is earmarked for infrastructure, agriculture, and private sector development. The government is seeking to enlarge fiscal space to accommodate its financing needs while committing to prudent macroeconomic policies. This note, which considers how to increase Liberia’s fiscal space, examines four options: improving the efficiency of public expenditure, increasing external grants, increasing domestic revenue, and increasing borrowing (domestic and/or external). While any increase in fiscal space gained from the first two options will not impose a burden in terms of debt or tax on the economy, the latter two will impose such burdens. The following summarize findings from the analysis of fiscal space from various options and provides the estimates of fiscal space gained from these measures when possible. In its examination of public expenditure by economic classification, this note finds that fiscal space in Liberia can be created by further improving the technical efficiency of current expenditure (wages and salaries, goods and services and transfers to state owned enterprises); however, the size of the fiscal space gained from these measures is difficult to pinpoint. Given a relatively high level of wages and salaries in Liberia compared to the 13 ECOWAS countries, the government could focus efforts on reducing payroll fraud, eliminating ghost workers, and rationalizing the pay structure to generate savings that could then be spent on other investment priorities. There also scope to improve the efficiency of spending on goods and services through strengthening fleet management, rationalizing gas coupon allocations and usage, reducing foreign travel cost, and reforming the state-owned enterprises (SOEs) to increase transparency and the economic viability of their operations. Finally, the reviews of public expenditures in the human development and security sectors show that allocative and technical efficiency in education, health and security can be further improved, to create fiscal space for priority programs in these sectors. Liberia receives on-budget and off-budget external grants. On-budget external grants, mostly for budget support and provided mainly by the African Development Bank and the European Commission, are expected to be moderate at about US$93 million during FY2012/13-2015/16. By contrast, off-budget external grants, provided by bilateral and multilateral donors to support public investment projects, are vii significantly larger: estimated at over US$300 million per annum. Integration of these grants into the budget would increase the efficiency of management and utilization and facilitate the creation of further fiscal space. Further, challenges created by relying on external grants to enlarge fiscal space include the predictability of grant inflows (they depend on donor countries’ economic and political circumstances) and the efficient management of such grants to maximize returns on investment. The downside of this option is limited citizen engagement in the management of public resources, which often as a result lacks their inputs, which could further enhance spending efficiency. Fiscal space can also be enlarged through mobilizing domestic revenue from the extraction of natural resources (agriculture, forestry, mining and petroleum sectors) and increasing domestic tax revenue. These natural resource sectors have attracted foreign companies to invest in the country through concession contracts. They are expected to generate significant tax and non-tax revenues now and over the coming years. For example, mining concessions are expected to generate about US$140 million in 2015. In addition, the implementation of a common external tariff (CET) over the three year period is expected to increase revenue from international trade taxes, which are estimated at about US$136 million over a three-year transition period. Finally, Liberia has the option of increasing fiscal space through contracting foreign debt at up to 4 percent of GDP in net present value terms without increasing the risk to debt distress, owing to the country’s low level of external debt after the HIPC debt relief. The contracting of foreign debt could be increased to about 5 percent of GDP assuming concessional terms similar to those of IDA. However, the external debt option has implications for the future tax burden, thereby affecting future investment and consumption. In general, it is important to ensure that public investments yield maximum returns in terms of future growth and government revenues; this is particularly important when such investments are financed by external debt. To develop a better sense of the impacts of different fiscal space alternatives, this note conducted a simulation exercise using the Maquette for MDG Simulations (MAMS) applied to Liberia to examine trade-offs among the different options. The main findings are that, among the sources of fiscal space that are considered, foreign grants generate the best development outcomes followed by improvements in government allocative efficiency. Taxes (on domestic households and firms) involve trade-offs since they make less resources available for private consumption and investment, both of which contribute to stronger economic performance and human development. However, if taxes were designed to avoid these drawbacks and if the uses of additional resources were to have high payoffs, then these tradeoffs may be manageable. Foreign borrowing is a less attractive source of fiscal space: in order to make a substantial difference, the amounts borrowed would quickly add to the foreign debt, making the macro economy more prone to future crisis and reducing its flexibility. Striking the right balance between different uses of fiscal space is difficult as it depends on the marginal payoffs of different government functions; typically, they are not known and they may only appear with a considerable lag. Nevertheless, under the parameters used in the model simulations, determined in light of fragmentary evidence, the outcomes were marginally stronger under a balanced approach with scaling up of both infrastructure and human development services. Balanced expansion may also be conducive to higher efficiency and easier to undertake for political-economy reasons. Finally, sensitive analysis indicates that the marginal effects of creating additional fiscal space from different sources are very similar irrespective of the level of mining export prices; given this, it is possible to consider different steps toward increasing fiscal space in viii isolation from the mining sector. At the same time, as confirmed by model simulations, a lower level of mining export prices would reduce the space for priority spending and have a negative impact on overall economic and human development. Summary of options to enlarge fiscal space Potential areas Issues Recommendations 1. Improve efficiency of public expenditure (a) Current A relatively high level of x Complete biometric registration for all civil servants Expenditures: compensation to employees as a share x Strengthen payroll control through regularly Wages and salaries of GDP and in total expenditure reconciling the CSA personal database with MOF compared to 13 ECOWAS countries; payroll using HRMIS module in the IFMIS weak payroll control, large number of x Implement the medium-term wage reform strategy to ghost workers and redundancies improve transparency and ensure medium-term sustainability of wage bill x Implement the functional review recommendations to reduce duplication of functions and redundancies in civil servants (b) Goods and services High transport costs due to fuel x Rationalize the number of manufacturers and models – Transport allowances and a lack of policy on for all government cars to lower the cost of newly expenses government vehicle fleet purchased vehicles and for repair and maintenance x Rationalize the number of vehicles for each ministry and agency based on operation needs; x Set a clear amount of fuel coupon allowances or entitlements to various official functions across ministries/agencies x Estimate the cost of the fleet management policy covering all fleets to inform policy makers of the budgetary impacts as compared to the current fleet management before implementation x In absence of a new fleet management policy, begin recording the value of fuel coupons as allowances or entitlements to staffs under compensation to employees and record the value of fuel coupons intended for operations as non-wage recurrent expenditure. The separate statistics could be a basis for further rationalization of fuel coupons (c) Goods and services Increasing cost of foreign travel x Rationalize the number of government delegations; – Foreign travel x Improve the cost effectiveness of air transport by reimbursing the expenses for business travel only; x Review travel allowance policy and incidental allowances; x Enforce the rule that require official travelers to submit their statement of expenditures together with air tickets and receipts for hotels and other expenses. (d) Transfers Transfer to autonomous agencies and x Assess the sustainability of regulatory SOES based on SOEs has increased of regulatory fees and reasonable operating costs; x Based on the assessment, adjust fees or reduce SOEs operating costs within a specific time-frame x Eliminate budgetary transfers to commercial SOEs, or where justified convert such transfers to loans with specific and transparent tenure and rates; x Establish a clear dividend policy for all commercial SOEs, using best practice benchmarks where possible x Asses the mandate of developmental SOEs and close all SOEs with unclear or overlapping mandates and set specific efficiency and effectiveness targets to be achieved x Require regular financial reporting for all SOEs. ix (e) Capital expenditure Low execution rate leading to x Integrate donor-funded investment project into the transfers of capital budget to recurrent consolidated budget budget during mid-year x Improve public procurement planning x Carry out a rapid assessment of implementation capacity in the low execution ministries x Build capacity of engineers x Carry out mid-term review of budget execution 2. External Grants Unpredictable flows x Strengthen donor coordination and harmonization to increase funding predictability 3. Revenue Mobilization (a) Tax Revenue Revenue from natural resources x Develop a mechanism for management of revenue from natural resources to ensure transparency and efficient use of revenue and to mitigate adverse impacts of commodity price volatilities Economic and social impacts of x Finalize an agreement with ECOWAS on the tax rates increased tariffs through CET for Type B List, the fifth band for a list of products for industrialization, and the transition period. x Adopt timetable for implementation Replace cascading GST with VAT to x Design and formulate VAT policy harmonize the tax system with x Analyze impacts of VAT introduction ECOWAS member countries x Draft VAT legislation x Develop an implementation plan with a clear timetable (b) Non-tax revenue Lack of reporting on non-tax revenue x Enforce compliance with the PFM Act by some autonomous agencies 4. External borrowing Low risk to debt distress x Increase borrowing to finance high return investments, such as infrastructure taking into account of long-term external and fiscal sustainability x PUBLIC EXPENDITURE REVIEW NOTE OPTIONS FOR FISCAL SPACE ENLARGEMENT I. Introduction 1. Liberia has made remarkable progress with its post-conflict recovery after the end of the civil war in 2003. The gradual return of security eventually led to the free and fair legislative and presidential elections of November 2005, which resulted in the inauguration of Africa’s first democratically elected female president. The new government began reconstructing physical infrastructure, rebuilding institutional capacity as well as reconciling the various factions within the society. Peace and security enabled a return to near-normal living conditions for the population, the resumption of economic activities and foreign direct investment. 2. The country’s first poverty reduction strategy (PRS-1, 2008-2011), Lift Liberia, which reflected a broad vision of a peaceful, secure, and prosperous Liberia, was adopted and successfully implemented. The economy recovered and growth was sustained, especially in the urban areas. This was supported by enhanced macroeconomic stability characterized by declining inflation, essentially balanced budgets, and a significant reduction in external debt as well as strong inflows of foreign direct investment to the agriculture and mining sectors. The financial sector expanded in size and in the range of services offered, and banks’ balance sheets improved. Rebuilding of physical infrastructure began, and coverage of health and education services expanded by most measures. Governance improved in some areas and instances of poverty declined. 3. At this juncture, the country aspires to become a middle income country by 2030. The government developed the National Vision: Liberia Rising 2030 that aims to achieve middle income status by 2030 by means of peaceful and inclusive politics, a diversified economy, stable institutions, and a healthy, capable citizenry. To achieve this goal, it formulated a medium-term development strategy for 2013-17: Agenda for Transformation .that will ensure an increase in per capita income as well as improvements in living standards and a better quality of life for a greater proportion of Liberians. Towards this end, the Agenda for Transformation will tackle the key binding constraints to sustainable and inclusive growth: infrastructure (power/energy, roads); human capital (youth skills development & employment, reconciliation, health, education and social safety net); and institutions (security, private sector development and public institutions). 4. Such an agenda requires a significant increase in public spending in response to the country’s next-phase development needs. Liberia faced a vast security and reconstruction challenge for which significant resources were needed at the end of its civil conflict. Although a number of initiatives were launched in collaboration with development partners in the aftermath of the peace accord signed in 1 2003, a considerable number of reconstruction tasks remain. Not only will additional resources be required to complete the ongoing rehabilitation, but, so too, will assistance for building the critical foundations for the country’s long-term development agenda. The government estimates that the cost of the AfT will be at about US$3.4 billion during 2012/13-2016/17. 1 5. Looking ahead, the government needs to ascertain adequate fiscal space to accommodate the country’s massive investment needs. The government is committed to investing in physical infrastructure (power/energy, roads, rails, ports, and airports), a key binding constraint to growth and poverty reduction. Infrastructure services are deemed inadequate in energy, transport, port, water and sanitation, and information and communications technology (ICT). To fully develop and reach middle income status, Liberia must invest in its people and institutions. An educated (and skilled) and healthy labor force is critical not only for the efficient operation and maintenance of physical infrastructure but also to productively perform in the public and private sectors and to meet the millennium development goals (MDGs). Expenditure on social protection will need to increase if social equity is to be promoted and ensure the inclusiveness of the growth process. And finally, Liberia faces a vast challenge for which significant resources will be needed to build institutions, especially in the security sector as the next phase of the UNMIL drawdown begins after September 2012. 6. This Public Expenditure Review (PER) aims to explore various options for fiscal space enlargement. Given the large amount of additional resources required, it is critical that all options are examined to accommodate these expenditures. Based on the definition advanced by Heller, 2 this Note will focus on: (a) improving the efficiency of public expenditure; (b) increasing the amount of external grants; (c) mobilizing greater revenue from taxes, non-tax revenue and natural resources; and (d) public sector borrowing. The findings from the analysis will inform the government of the various avenues to pursue in order to mobilize the resources required for the country’s transformation agenda. 7. This Note is organized into eight sections including the Introduction. Section Two provides an overview of macroeconomic and fiscal developments, discusses the government’s medium-term economic development strategy, Agenda for Transformation (AfT) and the medium-term expenditure framework, and highlights emerging challenges in fiscal policy management. Section Three analyzes public expenditure trends and composition with a view to identify the scope and measures to further improve efficiency of public spending and thereby enlarge fiscal space. Section Four examines options to increase on-budget and off-budget external grants that the government will likely mobilize from bilateral and multilateral development partners for budget support and public investment projects. Section Five identifies options to increase government revenue from taxes and non-tax revenue. Section Six estimates the maximum amount of external borrowing that the government can contract from creditors under various scenarios taking into account external debt sustainability over the medium-term. Section Seven presents the simulation results of various scenarios related to the use of the fiscal space gained from increased tax, improved expenditure efficiency, increased foreign grant, and increased public debt to priority spending (infrastructure and human development). These results, generated by the Maquette for MDG Simulations (MAMS) developed for Liberia, inform the trade-offs among various fiscal space 1 Government of Liberia, Ministry of Planning and Economic Affairs, Agenda for Transformation, January 2013. 2 Heller, Peter S.(2005). Understanding Fiscal Space. IMF Policy Discussion Paper, Washington, D.C., USA. 2 options with regards to macroeconomic stability, poverty, income distribution, and millennium development goals (MDGs). The final section concludes and offer recommendations for the way forward. 3 II. Macroeconomic and Fiscal Developments A. Recent economic performance 8. Liberia’s macroeconomic performance significantly improved and remained satisfactory during 2006-2011 (Table 1). Despite the severe global economic crisis during 2008-09, the economy grew by an average of 7 percent per annum and is currently on a path to strong recovery and further expansion. Inflation declined to single digits; however, price levels bounced back in 2011 due to higher prices for food and oil, both of which Liberia heavily imports. As the exchange rate stabilized, public confidence and demand for the national currency increased (Liberian dollar). The government endorsed the Governance and Economic Management Assistance Program (GEMAP) to improve governance and build capacity. It took control over the management of its own public finances through a cash balanced budget and zero borrowing during the period up to the Heavily Indebted Poor Countries (HIPC) completion point. As a result, the overall fiscal deficit declined to a very low level as revenue steadily increased in line with public spending. Public sector debt fell sharply following a series of debt relief initiatives granted by the HIPC and Paris Club creditors as well as commercial debt buy-backs. 3 Monetary policy remains ineffective due to the limited number of monetary policy instruments, weak capacity and a shallow financial market. Nevertheless, the banking sector expanded and private sector credit grew substantially. On the external front, exports began to recover (especially for traditional commodities such as rubber, timber, diamonds), while imports grew significantly due to post-war reconstruction, mining investment, and strong consumption. The current account balance registered a large deficit and it was financed by official transfers and foreign direct investment (FDI) to the agriculture, forestry and mining sectors. The stock of foreign reserves stood at US$416 million in 2011. Table 1: Key macroeconomic indicators 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 Real GDP growth (%) 7.9% 12.7% 7.8% 6.2% 6.1% 8.2% Inflation (annual average) 7.2% 13.7% 17.5% 7.4% 7.3% 8.5% Fiscal Account (Percent of GDP) Total Revenue and Grants 12.3% 17.9% 20.4% 20.8% 23.5% 26.4% Total Expenditure 8.8% 14.8% 19.4% 22.1% 23.0% 27.0% Overall Fiscal Balance 3.5% 3.1% 1.0% -1.2% 0.5% -0.6% Total Public External Debt 646.6% 473.7% 291.1% 145.4% 8.8% 10.7% Monetary and Credit M2/GDP 23% 20% 24% 27.9% 33.3% 37.0% Credit to Private Sector (% change) 41.7% 39.2% 44.1% 31.5% 40.1% 32.4% Balance of Payments (% of GDP) Exports, f.o.b. 22.1% 22.4% 23.1% 13.3% 16.6% 24.6% Imports, f.o.b. 60.3% 53.7% 64.4% 49.7% 52.1% 65.4% Current Account Balance -11.4% -22.9% -44.3% -28.8% -32.8% -34.1% Gross Official Reserves (US$ million) 46.2 85.3 129.4 312.2 391.4 415.8 Memo: GDP (in Million US$) 604 928.7 1,100.5 1,155.9 1,292.7 1,545.4 Sources: IMF 3 Liberia benefited from debt relief under the HIPC initiatives at the decision point and completion point. This triggered additional relief from the Paris Club creditors. It also carried out two operations of debt buy-backs from commercial creditors. As a result, its public external debt fell by US$4.5 billion (from US$4.6 billion in FY2004/05 to US$115 million in FY2010/11). 4 9. The government maintained prudent macroeconomic management to stabilize the economy. The overall fiscal deficit declined steadily owing to expenditure restraints and increased revenue collection. Expenditure policy was anchored in the maintenance of a cash balance budget with a zero external borrowing policy until reaching the HIPC Completion Point. An expenditure commitment control system was put in place to keep spending within the available resource envelope. In 2009, the government adopted a risk management plan that set up a program of expenditure cuts in response to unanticipated shortfalls in budget revenues. Revenue has steadily increased due to improved tax policy and administration, and increased economic activities. The strict fiscal policy has kept the fiscal balance in check during this period. After the completion point, public external debt was significantly reduced (by means of a number of debt relief operations) and as a result Liberia’s risk to debt distress is low. The government adopted a debt management strategy that committed itself to a ceiling of external borrowing not exceeding 4 percent of GDP in net present value (NPV) terms. B. Medium-term economic outlook 10. Liberia’s macroeconomic outlook is favorable but remains vulnerable to the volatility of commodity prices of exports and imports. The economy is expected to grow by 7 percent on average during 2012/13-2014/15 reflecting an increase in iron ore production by a single mining company (Arcelor Mittal). Inflation is projected to decline and stabilize at around 5 percent of GDP reflecting lowered international food and fuel prices associated with the global slowdown. Despite an increase in government revenue boosted by an increase in iron ore exports, the fiscal deficit is projected to increase gradually from an estimate of 1.6 percent in 2011/12 to more than 6 percent of GDP in 2014/15 due to an increase in public borrowing to finance physical infrastructure investment identified as one of the binding constraints to inclusive growth. The deficit is expected to be financed by domestic borrowing and foreign credits in concessional terms. On the external side, exports should see a boost by an increase in iron ore exports and to some extent timber once infrastructure bottlenecks are removed. Imports are projected to accelerate reflecting an increase in the capital goods necessary to support the phased expansion of mining and infrastructure projects, thus further amplifying the current account deficit (Table 2). 5 Table 2: Medium-term macroeconomic projections, 2012-16 Estimated Projections 2012 2013 2014 2015 Real GDP growth (%) 8.3% 7.5% 5.3% 7.5% Inflation (annual average) 6.8% 6.4% 5.0% 5.0% Fiscal Account (Percent of GDP) Total Revenue and Grants 28.0% 28.3% 27.3% 26.5% Total Expenditure 30.9% 31.2% 31.1% 31.8% Overall Fiscal Balance -2.9% -2.8% -3.8% -5.3% Total Public External Debt 12.3% 11.1% 17.3% 20.4% Monetary and Credit (% change) M2 4.8% 16.3% 6.8% 12.9% Credit to Private Sector 11.2% 13.1% -24.5% Balance of Payments (% of GDP) Exports, f.o.b. 27.6% 29.4% 32.3% 44.4% Imports, f.o.b. 63.2% 72.3% 75.6% 68.1% Current Account Balance -36.7% -51.3% -57.0% -38.0% Gross Official Reserves (US$ million) 385.7 431.2 463.1 492.2 Memo: GDP (in Million US$) 1735.0 1963.0 2094.0 2403.0 Sources: IMF C. Emerging challenges 11. The volatile external environment has the potential to increase national economic and social vulnerabilities and adversely impact the country’s recovery efforts. The volatilities could likely originate from a global economic downturn in developed countries and variations in international commodity prices that will be transmitted to the domestic economy through various channels. The economic downturn in developed countries will lower demand for key exports, reduce foreign transfers and foreign direct investment to the country. Given Liberia’s heavy dependence on imports of food and fuel, the variation in international commodity prices will push up the domestic prices of these goods and lead to inflationary pressures, thereby adversely affecting the more vulnerable segments of the population. As for exports, a decline in international prices for Liberian products will negatively affect government revenue and income in local communities. Because exports are concentrated in primary commodities (rubber, timber, iron ore, and gold), a shock to international prices in this area will have a significant impact for the country: domestic demand will fall as will the overall level of economic activities. The volatile external situation, coupled with the Liberia’s vulnerabilities and limited ability to respond to price changes will require an adept and active fiscal policy supported by a more accommodating fiscal space. 12. Managing the revenue from natural resources will be a challenge. Liberia is a small, natural resource led-growth economy emerging from an extended period of civil conflict. It’s a country vulnerable to external price volatility, currency appreciation, lack of intergenerational savings, corruption and political temptation to misuse newfound wealth. In order to manage the related macroeconomic and fiscal issues resulting from potentially significant sources of natural resource revenue, the government is 6 considering establishing a sovereign wealth fund (SWF) 4 that will address the adverse impact of commodity price shocks, smooth spending to avoid boom and bust cycles, and channel natural revenue to finance high priority investment projects. However, the effectiveness of this instrument to stabilize the economy depends on the size of the buffers: these are determined by the capacity to collect rents and channel them into the budget, the speed required to reach an optimal level of savings, 5 the opportunity cost to save in good times, and the quality of governance to manage these funds. Complementing the stabilization funds are other mechanisms that can be deployed, such as hedging mechanisms (as in Ghana), cost recovery mechanisms for utilities (to transfer energy price volatility risks to wealthy customers), and contingent foreign currency reserves and debt management accounting for new trade composition and partners. 6 Overtime, the diversification of the economy through large investments in non-mineral sectors will also contribute to strengthening the stabilization mechanisms. These considerations pose significant challenges to the government given limited capacity to manage the SWF (including collecting rent, savings, and investing) and strong political pressures to spend natural resource wealth now rather than later. 13. The government’s Agenda for Transformation (AfT) calls for substantial investment in the infrastructure, social, and security sectors. Although total expenditure has expanded in recent years, the current level remains well below what is required to meet the country’s substantial reconstruction and development program 7 and maintaining peace and security. 8 The total cost of the Agenda for Transformation, steps towards achieving middle income status by 2030, is estimated at about US$3.2 billion during 2013-15. Investments in infrastructure (energy and transport), social and security sectors account for about 65, 18, and 10 percent of total cost of the AfT.9 14. While not exhaustive, these key challenges – external price volatility, managing revenue from natural resources, and financing the country’s increasingly complex and demanding development agenda – point to the need for greater fiscal space. Maintenance of a stable macroeconomic situation requires an adequate fiscal space to help mitigate a number of risks and help shield the poor from their adverse impacts. Prudent management of natural resource revenue could provide ample fiscal space for productive investment that will generate growth, income and employment, 4 There are three types of SWFs relevant to West Africa including a stabilization fund, a development fund, and a savings fund according to Dixon et al (2011), “What Role for Sovereign Wealth Funds in Africa’s Development,” Oil to Cash Initiative Background Paper, Center for Global Development, Washington, D.C. 5 In Ghana, US$54.8 million were saved in the stabilization fund in 2011 out of a total of US$444 million accruing to the government. As such, the stabilization fund is able to cover for a 13 standard variation in oil prices, which could be considered insufficient given the observed standard deviation around the mean 27% over the period 2008- 2011. 6 See IMF and World Bank (2011), “Managing Volatility in Low-Income Countries: The Role and Potential for Contingent Financial Instruments,” October, Washington D.C. 7 The World Bank (2010), Liberia’s Infrastructure: A Continent Perspective, Washington, D.C., USA. Total spending requirement for public infrastructure in Liberia (roads, bridges, ports, power, ICT, and water) is estimated at about US$350-US$600 million per year. 8 The World Bank (2012), Liberia: Public Expenditure Review - Meeting the Challenges of the UNMIL Security Transition, Washington, D.C. USA. The total cost of the security sector is estimated at US$700 million during 2012- 19 including the cost of undertaking the security functions currently performed by UNMIL. 9 Government of Liberia, Ministry of Planning and Economic Affairs, “Executive Summary: Costing of Agenda for Transformation”, December 15, 2012. 7 and economic stabilization. The following sections identify a number of options for the government to consider in its effort to enlarge fiscal space. They include rationalization of public expenditure, mobilizing additional revenue, increasing external grants, and higher levels of external borrowing. 8 III. Improving Efficiency of Expenditure 15. Efficiency of public expenditure can be considered from allocative and technical perspectives. Allocative efficiency implies that scarce resources are spent on the highest priorities to achieve government objectives, thus implying reallocations across sectors (inter-sector reallocation) and within the sector (intra-sectoral). For example, resources should be reallocated from a low spending priority sector (administration) to a high priority sector (such as infrastructure and human development) that would contribute to sustained economic growth and achieving the Millennium Development Goals (MDGs). Technical efficiency implies that the government will run operations at least cost, i.e., getting the same output with fewer resources. This will require a focus on increased value for money in public procurement, reduced wasteful spending, minimized cost of public service provisioning, and reduced fraud and corruption. An analysis of the trends and composition of public expenditure is a starting point for understanding the efficiency of public expenditure. A. Trends and composition of public spending 16. During FY2005/06 – FY2012/13, public spending increased by nearly three times supported by a steady increase in revenue. Spending rose from 9 percent of GDP in FY2005/06 to 33 percent of GDP in 2012/13. This was driven by rising personnel costs, goods and services, and transfers. Capital expenditure has risen from a very low level of 0.5 percent to reach 7.8 percent of GDP in FY2012/13 (Table 3). Spending in 2011/12 rose sharply reflecting an increase in current expenditure associated with the presidential and legislative elections. However, the approved 2012/13 budget shows reversing expenditure trends as current expenditure declines while capital expenditure significantly increases. Table 3: Current and capital expenditure (Percent of GDP) 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13* Total revenue and grants 12.3% 17.9% 20.4% 20.8% 23.5% 26.4% 28.2% 28.3% Revenue 12.1% 17.7% 19.8% 18.7% 22.5% 23.6% 26.4% 26.6% Tax Revenue 11.6% 16.8% 16.6% 16.8% 17.0% 19.0% 21.8% 19.6% Non-tax 0.5% 0.8% 3.2% 1.9% 5.5% 4.6% 4.6% 7.0% Grants 0.1% 0.2% 0.6% 2.1% 1.1% 2.8% 1.7% 1.8% Expenditures and net lending 8.8% 14.8% 19.4% 22.1% 23.0% 27.0% 31.0% 31.1% Current expenditures 8.3% 12.8% 17.1% 19.1% 20.5% 21.8% 26.8% 24.9% Wages and salaries 4.5% 4.9% 6.7% 8.1% 9.3% 9.8% 11.1% 10.8% Goods and services 2.2% 5.6% 6.0% 6.7% 6.3% 6.1% 7.0% 6.8% Subsides and transfers 1.4% 2.3% 3.6% 3.6% 4.5% 5.7% 8.4% 7.0% Interest 0.2% 0.1% 0.7% 0.7% 0.3% 0.3% 0.3% 0.3% Capital expenditure 0.5% 2.0% 2.4% 3.0% 2.6% 5.2% 4.2% 6.2% * Projected Source: IMF 9 17. Total personnel costs (compensation of employees) have grown in size and share. Personal costs include base salary, allowances, contractual employees, training stipends, overtime, social contribution (social security and pension), and other employee costs (medical and death benefits, and severance payments). Total personal costs doubled reflecting an increase in public sector wages, regularization of education and health workers, and recruitment of teachers, doctors, security officers, and other skills. The government increased the minimum salary for a civil servant (from US$15 to US$100 per month), for a teacher with a Bachelor’s degree (from US$150 to US$350 per month) to attract qualified and experienced teachers to public schools, and for doctors (from US$225 to US$400 per month). The share of compensation of employees accounted for about 36 percent of total expenditures in FY2011/12 (or about 40 percent of total revenue excluding grants). However, the 2012/13 approved budget saw a decline in the share to 33 percent reflecting an effort to cut down personnel costs to generate savings to finance capital investment. 18. Expenditures on goods and services tripled during FY05/06- FY12/13, from 2 to 7.6 percent of GDP. These include travel, operating costs (basic utilities, rental and leases, fuel and lubricants, repair and maintenance), office supplies and consumable services, specialized material and services, education and training expenses, insurance and licenses charges, and other expenses. Expenditure on goods and services increased by three times during FY05/06 and FY08/09. The increase was significant in the areas of transport expenses (purchases of vehicles, repair and maintenance, insurance, and fuel), travel-related expenditure, both domestic and foreign (plane tickets, lodging and other travel costs), and special materials and services related to security operations. However, it fluctuated during FY2008/09 to 6.1 percent of GDP in FY10/11), reflecting reallocation to other types of expenditure, notably wages and salaries as well as transfers to SOEs and autonomous agencies and capital expenditure. In 2011/12, spending on goods and services spiked sharply to 8.1 percent of GDP reflecting spending related to presidential elections and subsequently declined in 2012/13 to accommodate an increase in capital investment. 19. Transfers to SOEs and autonomous agencies quadrupled (from 1.4 percent in FY05/06 to 7.3 percent of GDP in FY11/12) but declined in 2012/13. The transfers are made as line item expenditure to SOEs and autonomous agencies. 10 However, fiduciary controls are ineffective as they report neither detailed spending nor receipts as required by the Public Financial Management Act. There are currently 39 state-owned enterprises (SOEs) 11 either independently or across a number of portfolio ministries that are involved in various activities spanning the range from commercial, regulatory, financial, and development activities to the provision of basic social services. 12 Similarly, there are 10 According to the Mid-year Performance Budget Report, there are 320 Grants/Subsidies Expenditure types targeting 380 expenditure accounts. 11 Republic of Liberia (June 2011), A Definition of State Owned Enterprises (SOEs) in Liberia (Draft), Monrovia, Liberia. 12 Commercial SOEs should be guided by the efficiency and profit motive as well as the community or public service motive, and all their operating costs should be financed from own revenues. Capital investments for commercial SOEs should be financed by their own retained earnings (from profits) or from commercial borrowings (secured by their own assets or by a guarantee from the government with the requisite risk provisions). Regulatory SOEs should be fully financed by fees levied on the sector being regulated. The fees levied should also ensure the sustainability of the SOEs in terms of the necessary capital investment required. Finance and insurance SOEs are essentially commercial in nature and should also be self-financing. Where they are used by government to deliver 10 numerous autonomous agencies receiving budget transfers from the government, the number of which has grown significantly. Subsidies and transfers declined in the approved budget for 2012/13. 20. Overall, capital spending was broadly aligned with the development priorities of government. About 58 percent of total capital spending was allocated to the economic services sector, largely for the construction of roads and bridges (Table 4). The average shares of expenditure allocation to the public administration and public safety sectors were 23 percent and 10 percent, respectively. Capital spending allocated to these sectors was dominated by the purchase of vehicles and related equipment for the judiciary and security services. The share of capital spending to the social services sector was the least, accounting for 8.6 percent of total capital spending for the period. This was largely spent on the purchase of transport and related equipment for the Ministries of Education and Health. Table 4: Capital spending - Budget and Actual (Millions of US$) FY2009/10 FY2010/11 Average share Budget Actual Budget Actual Actual Public Administration $8.1 $6.3 $8.4 $9.1 23.4% Rule of Law and Public Safety $5.7 $2.8 $6.1 $3.6 9.8% Social Services $10.0 $1.7 $11.5 $3.9 8.4% Economic Services $39.4 $18.9 $34.8 $18.9 58.4% Total Capital Spending $63.2 $29.7 $60.8 $35.5 100.0% Total Budget $346.4 $249.4 $408.3 $337.0 % of Total Budget 18% 12% 15% 11% Source: Budget Documents, Ministry of Finance B. Analysis of expenditures by economic classification 21. Despite a growing trend, total expenditure was just below the average for 13 ECOWAS countries (Table 5). On average, total expenditure during 2008-2010 in Liberia accounted for 24 percent of GDP, compared to 25 percent for the ECOWAS countries. Current expenditure on average accounted for 85 percent of total expenditure, compared to an average of 75 percent of the total budget for the ECOWAS group. Average capital expenditure in Liberia was 15 percent of total expenditure or 50 percent below the average for ECOWAS. It ranked the second lowest among these countries due to off- budget investment spending financed by donors. welfare-related services, these services should be paid for on the basis of costs. Development SOEs are a special case and should have a clear development mandate. 11 Table 5: Public expenditures in 13 ECOWAS countries (Average 2009-2011) Benin Cape Cote'd Gambia Ghana Guinea Guinea Mali Niger Senegal Sierra Togo Liberia Min Max Avg Verde Ivoire Bissau Leone Percent of GDP Total Expenditure 23.2 37.0 22.9 23.5 22.0 25.8 20.9 24.4 24.4 27.6 25.7 23.3 24.0 20.9 37.0 25.0 Current Expenditure 15.4 20.4 19.7 15.3 14.9 17.7 12.2 22.5 22.5 27.4 16.4 15.9 20.5 12.2 27.4 18.5 Wage and Salaries 8.7 1.9 8.8 5.5 7.2 5.4 5.2 13.3 13.3 16.5 6.7 5.8 9.1 1.9 16.5 8.2 Goods and Services 2.9 3.7 4.5 5.3 1.8 7.0 1.9 4.6 3.5 3.5 4.9 4.1 6.4 1.8 7.0 4.2 Transfer and subsidies 3.4 1.5 2.7 2.2 2.1 3.3 2.7 3.2 4.7 4.7 2.6 4.9 4.6 1.5 4.9 3.3 Interest payments 0.5 1.7 1.9 3.1 3.0 2.0 0.3 0.4 0.3 1.0 2.1 0.9 0.4 0.3 3.1 1.3 Capital Expenditure 7.3 16.7 3.2 8.2 7.1 8.1 8.7 9.2 10.5 10.9 9.3 7.4 3.6 3.2 16.7 8.5 Percent of total expenditure Total Expenditure 100 100 100 100 100 100 100 100 100 100 100 100 100 100.0 100.0 100.0 Current Expenditure 67 55 86 65 68 69 58 92 92 99 64 68 85 55.0 99.3 74.5 Wage and Salaries 37 5 38 23 33 21 25 55 55 60 26 25 38 5.0 59.9 33.8 Goods and Services 13 10 20 22 8 27 9 19 14 13 19 18 26 8.0 27.3 16.8 Transfer and subsidies 15 4 12 9 10 13 13 13 19 17 10 21 19 4.0 21.1 13.5 Interest payments 2 5 8 13 14 8 1 2 1 4 8 4 2 1.1 13.8 5.5 Capital Expenditure 31 45 14 35 32 31 42 38 43 39 36 32 15 14.0 45.0 33.4 Source: IMF, Country Report 2008-2011 22. Current expenditure in Liberia as a share of total expenditure and GDP remained high relative to the averages for their comparators (Table 6). The spending accounted for 85 percent of total expenditure and 21 percent of GDP; the averages for the selected ECOWAS countries were 75 percent of total expenditure and 19 percent of GDP. The differences are mostly due to higher spending on wages and salaries, goods and services and transfers and subsidies. 13 By contrast, interest payments in Liberia were the second lowest accounting for 2 percent of total expenditure and 0.4 percent of GDP due to significant debt relief related to the HIPC program. 23. Given the relatively high level of current expenditure, efforts to reduce non-discretionary expenditures 14and improve the efficiency of discretionary spending could free up fiscal space for the country’s priorities. Because current expenditure has more than doubled during the past six years (driven by increases in the wage bill, goods and services, and transfers), public spending should warrant a thorough analysis to determine the extent to which the government can rationalize these expenditures to meet national priorities. Initiatives to address this spending trend should aim at improving efficiency of expenditure to achieve results that will support the national agenda. An increase in non-discretionary expenditure, especially for wages and salaries, has two implications: it crowds out other productive spending (such as capital expenditure) and undermines fiscal sustainability by increasing the liability of the government in the future from social insurance. Similarly, increased discretionary spending on goods and services should be rationalized to improve efficiency of public spending. Finally, realignment of the state’s role versus the private sector as an element of national strategic priority can reduce the 14 Non-discretionary expenditures include statutory outlays including wages and salaries (basic salary for civil servants including military, and paramilitary), social security contributions and pensions, and interest payments accounting for about one-third of total current expenditure during FY09-FY11. The remaining two-thirds of total current expenditure is discretionary spending, with an increasing share of transfers to autonomous agencies and state-owned enterprises. 12 government’s excessive involvement in economic activities, and thus free up resources for desired expenditure programs. The following sections analyzed these expenditures in detail with a view to identify scope for improving efficiency of public spending. (i) Compensation to employees 24. Liberia’s wages and salaries as measured by all ratios during 2009-2011 were higher than the average for 13 ECOWAS countries (Table 6). These include the ratios of wages and salaries to GDP, total revenue, tax revenue, total expenditure, and current expenditure. Wages and salaries increased steadily as a share of GDP (from 8 percent in 2009 to 10 percent in 2011) and as a share of current expenditure. In 2011, Liberia’s wages and salaries ranked second highest (share of GDP) after Cape Verde; the fourth in terms of total revenue after Ghana, Sierra Leone, and Cape Verde; and the third in terms of tax revenue after Cape Verde and Guinea Bissau. Its share in total expenditure was the highest, while its share of current expenditure ranked only third after Benin, Ghana and Cape Verde. Table 6: Wages and salaries in 13 ECOWAS countries 2009 2010 2011 % of % of % of tax % of % of % of % of % of % of % of % of % of % of % of % of GDP total revenue total current GDP total tax total current GDP total tax total current revenue s expendti expendit revenu revenu expendt expendi revenu revenu expendt expendi s ure ure es es iure ture es es iure ture Benin 7% 39% 45% 29% 46% 7% 39% 45% 35% 47% 7% 42% 48% 34% 49% Cape Verde 12% 50% 58% 33% 56% 12% 54% 61% 30% 59% 12% 51% 58% 31% 57% Cote'd Ivoire 7% 36% 41% 33% 38% 7% 37% 42% 33% 38% 8% 42% 48% 32% 37% Gambia 5% 31% 34% 22% 33% 6% 38% 43% 23% 37% 6% 40% 45% 25% 37% Ghana 7% 50% 55% 33% 51% 7% 48% 52% 31% 46% 8% 44% 48% 35% 49% Guinea 5% 31% 39% 21% 30% 6% 37% 50% 19% 28% 5% 31% 41% 22% 34% Guinea Bissau 5% 58% 76% 25% 43% 5% 46% 63% 24% 42% 5% 50% 63% 25% 42% Mali 5% 32% 34% 21% 38% 5% 32% 34% 24% 39% 5% 35% 37% 23% 38% Niger 4% 26% 28% 16% 34% 4% 27% 29% 19% 31% 5% 29% 30% 18% 33% Senegal 6% 32% 33% 22% 36% 6% 32% 33% 23% 40% 6% 30% 32% 22% 35% Sierra Leone 6% 45% 50% 28% 40% 7% 53% 59% 26% 42% 7% 46% 33% 23% 35% Togo 6% 37% 41% 30% 40% 5% 28% 33% 23% 35% 6% 31% 37% 22% 34% Liberia 8% 43% 48% 37% 42% 9% 41% 55% 40% 45% 10% 42% 52% 36% 45% Max 12% 58% 76% 37% 56% 12% 54% 63% 40% 59% 12% 51% 63% 36% 57% Min 4% 26% 28% 16% 30% 4% 27% 29% 19% 28% 5% 29% 30% 18% 33% Average 6% 39% 45% 27% 41% 7% 39% 46% 27% 41% 7% 39% 44% 27% 40% Source: IMF Country reports, 2011-12 25. Wages and salaries were fairly consistent with the target ratio set out by the government’s medium-term pay strategy approved in 2009. The strategy targeted a decline in the ratio of wage bill to total revenue by one percent per annum (from 43 percent in 2010/11 to reach 40 percent in 2012/13). The share of wages 15 in total revenue during 2009/11 was in line with the targeted ratio of wages to total revenue. It fell from 43 percent in 2009 to 41 percent in 2010 due to strong revenue growth, climbed back up to 42 percent in 2011 as revenue growth slowed, and then fell to 40 percent in 2012/13 due to the 15 The Government Financial Statistics Manual (GFSM) 2001 defines compensation of employees as the remuneration, in cash or in kind, payable to an employee in return for work done. It comprises wage and salaries and social insurance contributions made by a general government unit on behalf of its employees. Amounts payable to contractors, self-employed outworkers, and other workers who are not employees of general government units and should be recorded as goods and services; however, the Liberia budget records as compensation to employees. 13 government measures to contain the wage bill in order to create fiscal space for infrastructure investment. 16 The uncertainty of government revenue associated with non-tax revenue will affect the sustainability of the wage bill over the medium and long-term. 26. Total cash compensations of public sector employees include basic salary and cash allowances (Table 7). Basic salary for civil servants accounts for about 60-65 percent of total wages and salaries payments and is paid in local currency. Cash allowances include general and special accounting for about 55-66 percent of basic salary during FY2009/10-FY2012/13. General allowances are monthly lump sum cash paid in local currency to all staff, while special allowances are monthly lump sum cash paid in US dollars to those holding appointed positions as well as those designated by the ministers (or equivalent) to receive such allowances. Social contribution is small and account for between 3-5 percent of total compensation to employees. 27. In addition to base pay and cash allowances, civil servants also receive other allowances. They include payments for uniforms (police, customs and immigration officers), food and transport reimbursement. 17 In addition, the government also provided in-kind allowances (fuel, telephone, and internet access) to civil servants, though they are recorded as goods and services. Fuel coupons are denominated both in US dollars and in quantity (gallons) of fuel and their values are significant, especially at the executive level. The scratch cards for mobile phones are denominated in US dollars only. Table 7: Liberia’s Composition of wages, salaries and benefits Actual Actual Actual Budge t 2009/10 2010/11 2011/12 2012/13 in Millions of US$ Total compensation of employees 101.2 125.1 164.7 173.1 Wages and Salaries 97.3 118.4 158.1 167.5 Basic Salary 58.6 75.7 102.1 104.6 Cash Allowance (general and special) 38.7 42.8 56.0 62.8 Social Contributions 3.9 6.6 6.6 5.7 Professional and non-professional service 5.3 6.5 7.8 2.4 Wage s , s alarie s , and be ne fits 118.8 136.9 181.5 194.2 Percent of Total Total compensation of employees 85% 91% 91% 89% Wages and Salaries 82% 86% 87% 86% Basic Salary 49% 55% 56% 54% Cash Allowance (general and special) 33% 31% 31% 32% Social Contributions 3% 5% 4% 3% Professional and non-professional service 4% 5% 4% 1% Wage s , s alarie s , and be ne fits 100% 100% 100% 100% Source: Miistry of Finance, Liberia 16 The FY 2012/13 budget limits the share of the budget allocated to personnel costs to no more than 34 percent of the budget. In addition, it has no salary increases and minimizes net new hires, while cleaning up the payroll to eliminate duplication and ghost workers. 17 These are lump sum payments (as per approved ordinances) made to officials or other government employees who use their own vehicle, cash or otherwise in transporting themselves on official engagements. 14 28. The public sector’s pay system is fragmented due to multiple pay arrangements in the civil service. The civil service’s pay structure has ten grade levels with three job categories: technical administrative support staff positions, professional positions, and executive or senior management positions. The foreign services have a separate salary structure with an enhanced package as a base; however, annual incremental percentages are the same as those for comparable grades in the new civil service and super structures. A new job classification and grade levels that will be the primary basis for determining pay equity and job comparability across the civil service has been developed. Further, an enhanced pay structure was created to attract targeted skills that are in short supply in the economy. For example, the Senior Executive Services’ (SSEs) annual salaries range from US$12,000 to US$36,000 depending on their assignments. 18 At the end of their contractual period, it is anticipated that these professionals will be merged into the regular civil service. Similarly, graduates of the Financial Management Training School at the Ministry of Finance (a two-year program), recruited competitively and bonded to the Civil Service Agency (CSA), are compensated differently from regular civil servants when they are placed in the civil service. An annual salary for a civil servant recruited from the school begins at $9,600 per annum. 29. The civil service pension regime is governed by a confusing legal environment that incorporates about seven to nine laws. These provisions are incomplete and do not provide adequate protection for pensioners. The pensions cover only retirement and survivors, but not those who are disabled or die during active service. Moreover, the pension does not cover full compensation and thus do not reflect the pre-retirement wages they are intended to replace. More importantly, current pensions are based on the value of the Liberian dollar when it was at par with the US dollar several years ago. This has not only devalued the already meager pensions, but continues to impoverish pensioners. The government has recently developed a pension reform strategy that includes the introduction of a contributory pension scheme. 30. Total public sector employment has grown despite ongoing government efforts to eliminate ghost workers, unqualified employees, and redundancies due to duplication of functions in ministries and agencies. The number of public sector employees rose by 21 percent (from 28,756 at end FY2009/10 to 34,734 employees at end FY2010/11) as shown in Table 8. A net reduction of about 4,000 employees in FY2009/10 was achieved mostly in the Ministry of Education and Internal Affairs through the audit of payroll and civil servants. However, the employment trend was reversed in FY2010/11 because of new recruitments (Education, Health, Justice, Public Work and Finance) and reinstatements (mostly in Education). The ongoing payroll audit in the Ministry of Education indicates that significant redundancies remain, largely in the form of ghost workers, double counting, errors and under-qualified staff. 18 Three tiers of SESs include: Tier I recruits were assigned policy-related roles at directorate levels, while Tier II and Tier III recruits were assigned strategic junior and middle executive type roles and responsibilities, respectively. 15 Table 8: Movement of public sector employees FY2009/10 FY2010/11 FY2011/12* Number of Public Employees at the beginning of the year 32,840 28,756 34,734 Changes during the year (4,084) 5,978 943 Addition 2,084 6,272 1,423 Re-instate 171 2,182 75 Delete 6,339 2,476 555 Number of Public Employees at end-year 28,756 34,734 35,677 * July 2011 - December 2011 Source: Ministry of Finance 31. Payroll controls are ineffective and pose significant risk of fraud. The 2012 PEFA Assessment concluded that there is no improvement in the effectiveness of payroll controls.19 It found several inherent weaknesses in the payroll control system. An incomplete personnel database and personnel records and a lack of periodic reconciliation between payroll and the personnel database undermine payroll integrity. Further, the CSA personal database and the MOF government accounting payroll (GAP) are not linked. The risk of payroll abuse and fraud are high because: (a) top-up allowances as well as the salaries of certain government agencies, both of which are paid in US dollars, are processed outside the Government Accounting Payroll (GAP) system, thus making it difficult to apply standard controls and audit trails to all government payroll processing; (b) direct manipulation of payroll lists is done outside the rudimentary GAP and without subsequent reconciliation to the GAP system and the CSA; (c) control of changes to records outside the GAP system are deficient and facilitate payment errors and/or fraud; and (d) payroll audit undertaken by GAC is partial and the national biometric registration of civil servants has not yet been completed. 32. Measures to strengthen payroll control have been taken but progress has been slow. A biometric registration of civil servants has been introduced to verify and register civil servants. To date, the government completed the registration and verification of civil servants working in 24 out of 29 ministries. The registration of civil servants in 5 ministries and agencies (Education, Health, Internal Affairs, Justice, and Legislature) is still ongoing. Unfortunately, they account for 85 percent of the total civil service work force. The clean civil service database from the biometric exercise will become critical inputs for the Human Resource Management Information System (HRMIS) that links to the integrated public financial management information system. 33. The government has initiated steps to address the above issues but implementation progress lags behind. A Medium-term Pay Reform Strategy 20 that focuses on three principles (competitiveness, transparency, and affordability) was developed and adopted by the government. The strategy calls for the integration of some allowances into base pay, development of a new grade and pay structure consistent 19 Africa Development Bank, International Monetary Fund, European Commission, Swedish International Development Agency, and World Bank (April 2012). Liberia - Public Expenditure and Financial Accountability (PEFA) Assessment. 20 Government of Liberia, Civil Service Agency, A Medium-term Pay Strategy, December, 2010. 16 with job classification, and establishing the strategic basis for wage bill development to ensure sustainability of the wage bill over the medium and long-term. Unfortunately, progress in these areas has been very limited. 34. A functional review process to reduce duplication of functions was launched, yet remains incomplete. As of May 2012, the functional review of sixteen ministries and agencies has been completed. The review made a number of recommendations including the merger of some departments as well as elimination of others (the Ministry of Finance and the Ministry of Planning and Economic Affairs are expected to be merged). However, implementation of the recommended restructuring and reorganization has been delayed because a bill that authorizes the President to restructure the executive branch has not yet been approved by the legislature. The government intends to fast track the restructuring of nine ministries once authorization is granted; however, the estimated cost of this restructuring has not yet been carried out. (ii) Goods and services a. Transport costs 35. Transport costs are high and rising. Total government transport expenditure (capital, and operating and maintenance costs) rose by 42 percent over the past three years (Table 9), with recurrent costs accounting for about 70 percent of the total. During this period, recurrent items grew by 53 percent while capital costs increased by 21 percent. The largest component of recurrent costs was fuel, accounting for more than 70 percent of the total. Efforts to curb overall transport costs will undoubtedly require a comprehensive review of fleet usage across ministries and agencies as well as a strategic reduction in the number of public vehicles. In 2012/13, the government has begun to rationalize transport costs by cutting down the acquisition of new vehicles, fuel and lubricants and repair and maintenance to create fiscal space for major infrastructure investment projects. Table 9: Total transport costs 2009/10 2010/11 2011/12 2012/13 Actual Actual Actual Budget TOTAL VEHICLE COST 23.00 28.69 35.59 27.90 Recurrent Cost 15.1 19.2 25.0 22.6 Wage and Salaries for Drivers - - - Fuel & Lubricants 10.9 14.4 19.6 17.9 Repairs & Maintenance 3.8 4.8 5.2 4.6 Insurance 0.4 0.0 0.2 0.0 Fixed Cost 7.9 9.5 10.6 5.3 As % of Total Goods and Services 28% 28% 28% 22% Source: MOF Budget Data 36. The government’s vehicle fleet is poorly managed and is not cost effective. According to available data, the vehicle fleet increased from 2,119 vehicles in FY2009/10 to around 3,000 vehicles in 17 FY2011/12. 21 The fleet consisted of around 143 different models, supplied by 48 manufacturers, with an average vehicle age of two years. 22 Among the vehicle types were ambulance, bus, motorcycle, pick-up, sedan, sport utility, van, tractor, truck and heavy equipment. This increases the complexity of the fleet and poses serious challenges to its monitoring and maintenance. The current procurement practices that allow fuel, vehicles, and repair and maintenance services to be handled independently by ministries and agencies inhibit cost effectiveness. 37. The current fuel coupon system is arbitrary, inefficient and prone to corruption. Coupons (both expressed in gallons and US$) are allocated to individual employees (regardless of car ownership) as transport allowances. There is no unified policy in terms of who the actual beneficiaries should be. The head of each ministry/agency set their own criteria for allowances. Each ministry/agency procures its own fuel and lubricant from suppliers, which in turn issues fuel coupons for the purchase of either gasoline or diesel. Coupon holders obtain gasoline/diesel at private gas stations that do not record the quantity of fuel filled, the vehicle’s identification, or odometer readings. Nor do these stations guarantee the availability of fuel for the government fleet. These coupons are redeemed through a voucher system. As the coupons are transferable and redeemable anywhere, they can be monetized at any private gas station at a discounted price. 38. The government has recently approved a fleet management policy in October 2012.23 The policy developed by the General Service Agency (GSA) is expected to provide a strategic framework for reducing capital, maintenance and recurrent cost of vehicle fleet while ensuring mobility and operational efficiency to government employees 24 and is expected to benefit public sector employees as well as private sector. The policy distinguishes the government vehicle fleet into three types: (a) operational fleet, 25 (b) devolved fleet, 26 and (c) project fleet. 27 It calls for the development of a fleet management 21 About 2,600 vehicles designated to executive branch, 226 vehicles to legislative, and 74 to judiciary. 22 Government of Liberia, General Service Agency (2009), Projected Fuel Budget Savings, Monrovia, Liberia. 23 General Services Agency, Government of Liberia, “Fleet Management Policy,” Draft, October 2012. 24 In this context, the policy will: (a) create a fleet management structure and allocate responsibilities for effective monitoring and implementation of the policy: (b) establish a uniform practices for the use of government vehicles (including project vehicles, rental and lease vehicles) as well as vehicle procurement and disposal; (c) establish standards that will provide safety, reliable and cost effective vehicles to meet the government needs; (d) optimize fleet utilization practices to right-size government vehicle fleet and ensure proper allocation and use of resources; and (d) establish a framework for vehicle leasing. 25 The operational fleet will provide vehicles for designates essential operational purposes and includes at a minimum vehicles for five key positions (President, Vice President, Chief Justice, Speaker of the House, and President Pro-Temp of the Senate) and qualified agencies. The fleet will also include outsourcing of government transport requirement for administrative and non-essential operation purposes through rental, leasing, etc. 26 The devolved fleet aims to promote ownership of vehicles by eligible civil and public employees (mostly appointed public officials) to facilitate their travel. The eligibility will be determined by a committee (comprising GSA, Office of President, CSA and MOF) and GSA will liaise with banks, insurance companies, dealers, suppliers and other to develop effective management and implementation of the Devolved Fleet Policy. Under this policy, the government and an eligible public official will share the cost of a purchased vehicle and maintenance. The new procurement of vehicle is subject to competitive process, mandatory comprehensive insurance, and driven by drivers to be contracted on an annual basis. Ownership of the vehicle will be transferred to the civil servant at the end of the fourth year. 18 system to monitor policy implementation and overall operation strategies and to include the management of devolved fleet loan scheme. GSA will be responsible for coordination and management of the fleet system, development of best business practices to ensure competitive fleet services, and an assessment of transport needs by government employees for different functions in order to determine appropriate transport system for various categories of employees. The fleet management policy will be implemented in two phases: preparation for implementation (October 2012-June 2013) and implementation policy (July 2013). The GSA is currently developing an implementation Framework approach for the fleet management policy. 39. Unfortunately, the cost-benefit analysis of the proposed fleet management policy is absent. To better understand budgetary impact as well as operational impacts, i.e. public service delivery, there is need to carefully analyze the fleet policy to assess the budgetary impacts as well as implications for public services delivery as well as the economy before implementation. To gauge the impacts of the proposed vehicle fleet policy, the cost-benefit of the proposed policy should be carried out. The cost of the policy will focus on the estimated cost of each fleet and projected expenditure over time. This will facilitate cash flow planning (especially for the devolved fleet) as well as the calculation of estimated savings associated with implementation of the new fleet policy. The analysis should also include the impacts on the proposed vehicle fleet policy on the delivery of public services, private sector activities (insurances, rental and leasing, etc.), and on governance. Such an analysis will inform the government whether the policy is affordable over time and whether the perceived cost is outweighed by the perceived benefits. As the existing gas coupon is considered transport expenses, the proposed policy should also address the coupon system. 40. The current gas coupon system should be rationalized in the medium-term and abolished eventually. The gas coupon as allowances or entitlements to staffs should be separated from fuel coupons to meet operational needs for transport. Gas coupon as entitlements should be monetized and integrated into the base pay as stated in the 2009 Civil Service Pay Reform Strategy. The payments should be based on a clear guidance with regards to public servants eligible for transport allowances and the amount of allowances to improve transparency and reduce administrative burden as well as corruption. The gas coupons to meet operational needs should be based on the projected fuel consumption of the vehicle. Over the medium-term, the fuel coupon system should be eliminated as it creates administrative burdens and benefits private gas stations. b. Travel expenses 41. The government’s travel expenses have more than doubled over the past two years. Travel related costs have increased from US$7.6 million in FY2009/10 to US$10.5 million in FY2012/13, of which more than two-thirds are foreign travel (Table 10). The cost of foreign travel includes transport, daily subsistence allowance (lodging, meal, and expenses) and incidentals (fees and tips for porters, baggage handlers and other personal services). It has increased significantly in recent years largely due to 27 The project fleet includes vehicles financed by donors in support of development initiatives and for emergency purposes. Operating cost of this fleet (driver, fuel, repair and maintenance and insurance) will be financed by the budget through the annual budget planning process. 19 increased incidental expenditure for foreign travel; however, the travel budget for 2012/13 saw a slight decline. 42. The government has implemented a travel policy and regulations; however, enforcement has been weak. The policy establishes regulations related to class of foreign travel for government officials, daily subsistence allowances for foreign travel to various countries/cities, and travel incidentals eligible to government officials at various levels. The policy includes procedures for acquisition of transport services (based on quotations from 3 travel agencies), budget allotment, and travel authorization. It also requires that travelers submit statements of expenses and receipts to ensure all public funds are accounted for. Table 10: Travel related expenses 2009/10 2010/11 2011/12 2012/13 Actual Actual Actual Budget In Million US$ Travel 7.6 10.8 11.3 10.5 Foreign Travel 4.6 7.1 7.4 7.0 Domestic Travel 2.5 3.7 3.3 3.2 Travel- Others 0.5 0.0 0.6 0.4 % of Total Travel Expenses Travel 100% 100% 100% 100% Foreign Travel 60% 68% 72% 75% Domestic Travel 33% 34% 29% 30% Travel- Others 7% 0% 5% 3% Source: Ministry of Finance, Republic of Liberia 43. Foreign travel costs can be curbed through strengthening travel management and reinforcement of travelers’ accountability. This could entail rationalizing the number of government delegations, improving the cost effectiveness of air transport by restricting travel expenses for business travel only, and reviewing travel allowance policy and incidental costs. Strengthening accountability of civil servants on business travel will also help curb expenditure. Official travelers should be required to submit a statement of expenditures together with air tickets and receipts for hotels and other expenses. The report of the Auditor General revealed that a number of public officials neither submitted travel disbursement/settlement reports and related travel documents to account for travel advances nor receipts to account for incidental allowances or extra expenses incurred. Further, the audit found no evidence that any actions were undertaken to recover travel advances not supported by receipts or reports.28 Regular travel audits will reinforce accountability. (iii) Transfer to state-owned enterprises (SOEs) 44. It is difficult to determine whether and to what extent the government is getting value for its substantial transfers to SOEs. As many of them do not produce regular financial reports, it is not clear 28 Republic of Liberia, General Auditing Commission (February 2012), Report of the Auditor General on the Fiscal Outturns for the Fiscal Years 2008/09-2009-10, (pp. 21-22 and Annex 4), Monrovia, Liberia. 20 what amounts the commercial SOEs provide as revenue to the budget. Indeed, it is not even clear if there is a dividend policy in place, which would provide the framework for the commercial SOE to remit to the Consolidated Fund agreed dividends on the basis of profits (allowances for necessary retained earnings to ensure sustainability of the SOE). 45. These agencies are financed from the budget and their operations should be guided by very clear and transparent efficiency metrics to ensure that Liberian tax-payers receive value for money. More than two-thirds of the SOEs are either directly or indirectly dependent on the budget and all autonomous agencies are financed by the budget. A large number of SOEs currently appear to be outside the effective fiduciary control of the Ministry of Finance or even the Bureau of State Enterprise. This lack of control and oversight makes them potential sources of contingent liability and corruption. For example, one efficiency metric could be operating cost as a share of value delivered. That is, the SOE operating costs should not be more than 25 percent of the value of service delivered. In cases where it is difficult to value the services delivered (in monetary terms), the metric could be the share of operating cost in the total budget of the SOE including the capital budget. In principle, only developmental SOEs should be on the budget, while commercial, regulatory and finance and insurance SOEs should all be self-financing. 46. There are generally only a few good economic rationales for providing budgetary transfers to commercial SOEs, particularly in an economy where fiscal space is limited and there are overwhelming needs in key social sectors. If transfers were provided to the SOEs for needed start-up capital following the erosion of both physical and human capital by the 14-year conflict, then these transfers should be considered as loans with very specific repayment terms. There is no basis for providing a transfer to a commercial entity such as the Liberia Electricity Corporation (LEC) that currently provides largely services to the non-poor. This is essentially a subsidy to the more well-off and urban dwellers. Data from the 2010 Core Welfare Indicator Survey (CWIQ) show that only 2.8 percent of Liberians and less than 1 percent of rural residents use electricity for lighting. It is also interesting to note that from the same 2010 CWIQ survey, when Liberians were asked what measures government should take to improve household living standards, 55 percent said “create employment” while only 0.5 percent said “improve access to electricity.” The transfers from the budgets should therefore at first approximation reflect this priority. While the case of LEC is only illustrative, the principle is applicable to all commercial SOEs. 47. Actual expenditure for FY2009/10 and the budget for FY2011/12 suggest that budgetary transfers to SOEs will increase nearly four-fold over the period, from US$12.5 million to US$47 million, respectively. As a share of the total budget, these transfers will increase from 5.4 percent to 9.1 percent over the same period (Table 11). What is even more striking is that the commercial and regulatory SOEs accounted for more than 90 percent of transfers from the budget while the developmental SOEs only accounted for 7 percent of total transfers in the FY2011/12 budget. 21 Table 11: Fiscal transfers and revenue by state-owned enterprises Fiscal Transfers Revenue FY2009/10 FY2010/11 FY2011/12 FY2012/13 FY2009/10 FY2010/11 FY2011/12 FY2012/13 State-Owned Enterprises Actual Actual Actual Budget Actual Actual Actual Budget Developmental Function $1,535,957 $2,367,602 $3,035,399 $3,398,852 Agriculture and Industrial Training Bureau $183,761.00 $219,956 $296,524 $346,897 Liberia Industrial Free Zone Authority $48,436 437,436.47 $54,890 $54,890 Liberia Produce Marketing Corporation $315,026 389,770.11 $700,000 $700,000 Liberia Water and Sewer Corporation $448,969 $518,332 $1,229,945 $1,230,000 National Food Assistance Agency $90,567 $86,814 $92,756 $89,734 National Housing Authority $449,198 $715,294 $661,284 $977,331 Regulatory Function $6,219,455 $8,573,632 $28,439,286 $27,003,382 Bureau of Maritime Affairs $1,736,919 23,300.67 $13,956,320 $12,760,267 $16,299,000 $18,442,000 $18,564,000 $20,168,000 Bureau of State Enterprise $83,343 $86,288 $199,825 $205,070 Forestry Development Authority $2,075,586 4,941,913.76 $5,988,881 $5,402,800 Liberia Airport Authority $N/A 113,571.96 $1,109,181 $1,120,727 Liberia Rubber Development Authority $77,806 184,422.58 $325,014 $340,000 Liberia Telecommunications Corporation $1,312,391 549,577.73 $2,287,428 $3,829,540 Monrovia City Corporation $919,665 $1,277,056 $3,313,935 $1,054,978 National Transit Authority $13,745 1,397,501.82 $1,258,703 $2,290,000 Commercial $4,489,077 $11,648,605 $14,842,826 $12,506,333 Liberia Broadcasting System $441,911 1,197,041.82 1,753,668.27 1,599,529.00 Liberia Electricity Corporation $2,107,765 1,631,157.97 $3,363,564 $967,367 Liberia Petroleum Refinery Corporation - - - - $2,250,000 Liberian-Libyan Holding Company $718,750 178,510.67 $200,000 $200,000 Monrovia Transit Authority $1,207,125 161,418.55 $1,485,028 $1,698,437 National Lottery $13,526 8,480,476.14 $40,566 $41,000 National Oil Company of Liberia - - - - $10,000,000 National Port Authority $N/A $N/A $8,000,000 $8,000,000 Finance and Insureance $283,896 $195,547 $318,816 $336,005 National Housing and Savings Bank $222,031 195,546.52 $179,167 $195,000 National Insurance Corporation $61,865 $0 $139,649 $141,005 TOTAL SOEs $12,528,385 $22,785,386 $46,636,327 $43,244,572 Memo items: Total Budget $233,895,204 $488,206,562 $386,047,672 $516,430,000 SOE as % of Total Budget 5.4% 4.7% 12.1% 8.4% Source: Government of Liberia 48. Government’s transfers/subsidies to regulatory SOEs outside of establishment costs may be symptomatic of too low regulatory fees, or too high operating costs. As indicated above, regulatory agencies are expected to be self-financing from regulatory fees. Furthermore, the size of the agency should be matched with the regulatory burden. If regulatory SOEs have to depend on the budget for core resources this may suggest that the regulatory fees are too low and/or the operating costs of the entity are too high and these symptoms should be investigated and the root causes addressed. 49. Considerable fiscal space could be gained through rationalization of the transfers to state- owned enterprises. The government could consider the following measures to rationalize transfers: (a) Undertake a rapid assessment of regulatory SOEs to assess their sustainability on the basis of regulatory fees and reasonable operating costs. On the basis of the assessment, take measures to adjust fees or mandate the SOEs to reduce operating costs within a specific time-frame and reduce the SOE transfers from the budget on a sliding scale to zero accordingly; (b) Eliminate budgetary transfers to commercial SOEs, or where justified convert such transfers to loans with specific and transparent tenure and rates. Such loans should only be given where the SOEs have no access to private commercial capital markets; (c) Establish a clear dividend policy for all commercial SOEs, using best practice benchmarks where possible; (d) Conduct a rapid assessment of the mandate of developmental SOEs and close all SOEs with 22 unclear or overlapping mandates and set specific efficiency and effectiveness targets to be achieved; and (e) Require regular financial reporting for all SOEs. For those that are partially or wholly on the fiscal budget, quarterly financial reports should be required. For SOEs off the budget, half-yearly or annual financial reports should be required. In the longer term, there is need to address the issues of mandate, corporate governance and monitoring of the SOEs in a more systematic way. However, the above suggested measures will help to create more fiscal space for priority spending by beginning the reforms with those SOEs that have a more direct impact on the fiscal budget. (iv) Capital expenditure 50. Public Investment Planning. Liberia’s public sector investment program (PSIP) comprises investment projects financed by the budget (project budget) and projects financed by donors (donor-financed projects). The project budget is prepared by ministries and agencies based on their sector strategies and submitted to the Ministry of Planning and Economic Affairs for approval. Subsequently, they will be included in the PSIP to be funded by the annual budget. Donor-financed investment projects are financed by external sources and thus the funding allocations are decided independently of the budget process. Typically, they are based on agreements between the government and donor agencies based on respective donors’ country strategies. These donor-financed projects are not subject to review or scrutiny by the MPEA; however, projected disbursements for donor-funded projects are included in an annex of the National Budget Book. 51. The government PSIP amounts to US$2.0 billion during FY2012/13 - FY2014/15. The program includes priority investment projects at the national level financed by GOL, investment projects at the sector level and donor-funded projects, accounting for respectively 34, 23, and 43 percent of total public investment program during FY2012/13-FY2014/15. The government has identified the national priority public investment projects with high economic and social returns in the amount of US$678 million to be financed by the national budget emanated from government owned- revenue and borrowing. These projects are prioritized as follows: (a) Priority 1 (P1): Ports, Energy, Transport, Technology, and Decentralization; (b) Priority 2 (P2): Investment in Youth; (c) Priority 3 (P3): Capacity Development; and (d) Priority 4 (P4): Reconciliation. To improve effectiveness of public service delivery, ministries and agencies identified sectoral investment projects in the amount of US$450 million to be financed by the annual budget earmarked to the sector in addition to their operational budgets. The selection criteria for sectoral investment projects include: (a) their consistency with the objectives of the AfT; (b) their economic and social returns on investment, such as the impact on job creation, revenue generation and support to disadvantaged groups; and (c) project appraisal based on the contribution to sector goals and objectives consistent with the AfT, geographical distribution of investment; and project readiness. Implementation and delivery of the approved projects will be responsible by ministries and agencies and progress will be tracked through project-level output indicators. Finally, it is estimated that investment projects in the amount of US$862 million will be financed by donors during the three-year period (Table 12). 23 Table 12: Public Sector Investment Program 2012/13-2014/15 (Millions of US$) FY2012/13 FY2013/14 FY2014/15 TOTAL National GOL- Donor- Total National GOL- Donor- Total National GOL- Donor- Total National GOL- Donor- Total Priority funded funded PSIP Priority funded funded PSIP Priority funded funded PSIP Priority funded funded PSIP Sector Investme sector projects Investme sector projects Investme sector projects Investme sector projects nt projects nt projects nt projects nt projects Public Administration 15.0 17.8 32.2 65.0 15.0 27.8 33.7 76.5 15.0 19.4 20.2 54.6 45.0 65.0 86.1 196.1 Municipal Government 0.0 1.7 7.0 8.7 0.0 0.9 4.3 5.2 0.0 0.9 2.3 3.2 0.0 3.5 13.6 17.1 Transparency and Accountability 0.0 4.2 1.3 5.5 0.0 13.2 0.8 14.0 0.0 34.1 0.0 34.1 0.0 51.5 2.2 53.7 Security and the Rule of Law 0.0 9.1 11.4 20.5 0.0 12.5 8.1 20.6 0.0 7.9 4.6 12.5 0.0 29.5 24.0 53.5 Health 14.0 11.1 29.3 54.4 0.0 46.0 22.2 68.2 0.0 23.5 11.0 34.5 14.0 80.6 62.5 157.1 Social Development Services 7.5 1.7 29.7 38.9 7.5 3.0 20.9 31.4 7.5 3.5 8.8 19.8 22.5 8.2 59.5 90.2 Education 2.5 8.6 19.2 30.3 2.5 22.5 26.1 51.1 2.5 20.7 20.2 43.4 7.5 51.8 65.5 124.8 Energy and Environment 45.3 7.5 56.6 109.3 136.3 10.9 71.6 218.8 120.6 10.4 54.6 185.6 302.2 28.8 182.8 513.7 Agriculture 3.5 10.5 33.7 47.7 3.5 39.1 19.1 61.7 3.5 34.8 13.8 52.1 10.5 84.4 66.5 161.4 Infrastructure and Basic Services 55.5 15.7 91.0 162.2 77.6 5.2 113.9 196.7 88.7 4.0 76.3 168.9 221.8 24.9 281.2 527.8 Industry and Commerce 15.0 3.6 5.3 23.9 32.5 13.4 7.6 53.5 6.8 4.5 5.3 16.6 54.3 21.5 18.2 94.0 GRAND TOTAL 158.3 91.5 316.7 566.5 274.9 194.5 328.3 797.7 244.6 163.7 217.0 625.3 677.8 449.7 862.0 1989.5 Source: Government of Liberia, Public Sector Investment Plan (PSIP), FY2012/13-FY2014/15 52. Trends and composition. Capital spending under the project budget is dominated by fixed investment on transport and equipment in all sectors except economic services. A snapshot of expenditures in FY2009/10 indicates that the public administration, rule of law and public safety, and social services sectors spent more than 70 percent of their capital budget on transport and equipment (Table 13). Of this amount 70 percent represented purchases of new transport and equipment as opposed to maintenance costs. The rest of the capital budget was spent on ICT infrastructure and equipment. The economic sector that has the largest share in the capital budget spent less on vehicles and machinery. 53. As expected, the decomposition of capital spending by the economic services sector is dominated by infrastructure spending. About 70 percent of capital spending was dedicated to roads and bridges, followed by the purchase of vehicles and machinery, which accounted for 10 percent and 8 percent of capital budget allocations, respectively. The Public Works Ministry, which is the main executor of the infrastructure budget, spent 85 percent of its capital expenditure on roads and bridges. This is aligned with the government agenda of rebuilding the country’s infrastructure that was significantly destroyed during the war. Table 13: Capital spending on transport and equipment (Percent of total capital spending) FY2009/10 FY2010/11* Public Administration 76.6 39.9 Rule of law & Public safety 72.2 75.2 Social Services 70.2 63.5 Economic Services 18.8 7.5 Total Capital Spending 33.7 27.3 Source: Budget Documents, Ministry of Finance 24 54. The execution rates for the capital budgets in all sectors improved; however, the average execution rate remained below 60 percent (Figure 1). The overall execution rate for the capital budget was 58 percent in FY2010/11 (up from 47 percent in FY2009/10). The public administration sector had the highest execution rate (77 percent and 108 percent in FY2009/10 and FY 2010/11, respectively), followed by the rule of law and public safety, and economic services sectors. The lowest execution rate was in the social services sector (34 percent in FY1010/ 11). The improved capital budget execution in FY2010/11 was a result of government mid-year intervention to accelerate the budget execution. A high- level Project Budget Task Force (PBTF),29 chaired by the Ministry of Planning and Economic Affairs, was set up and convened regularly to address delays in capital budget execution to reduce procurement processing time. Due to the poor execution rate of the capital budget, the fund was reallocated from the capital budget to the recurrent budget. Given that revenues were largely on target, the shortfall in capital spending was attributable to capacity constraints within the public sector. The limited number of procurement professionals, the bureaucracy associated with procurement processes, and poor coordination of capital spending may account for the slow disbursing trends in capital expenditure. On the supply side, this could be due to the limited number of private contractors that participate in the bids for capital projects. Figure 1: Capital budget execution rates (%) 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Public Admin Rule of law & Social Economic Total Capital Public safety Services Services Spending FY2009/10 FY2010/11 55. Purchases of transport and equipment items crowded out civil works contracts for all sectors except economic services. The highest share of the capital budget was allocated to the economic services sector (58 percent) reflecting high spending on transport and equipment. This seems rational as this sector invested mostly in roads and bridges thereby increasing infrastructure assets and enhancing the productive capacity of the country. However, a high share of capital spending on transport and equipment in other sectors raises concerns about the effectiveness of capital spending. Due to the low execution rate for the capital budget (60 percent on average and only 34 percent in the social sector), it implies that only a small amount of the capital budget was spent on procurement of civil works (hospitals, schools and equipment) to enhance the productivity of the health and education workers. 29 Members include the Head of the Public Procurement and Concessions Commission (PPCC), the deputy minister of expenditure in the Ministry of Finance (MoF), and representatives from the Ministry of Justice (MoJ) and all ministries and agencies experiencing execution difficulties. 25 56. Public procurement planning needs to be further improved to increase the execution rate of the capital budget. This will entail advancing the preparation of annual procurement plans to support the capital budget execution so that the plans are ready by the time the budget is approved. The plan should include timelines for the various stages in the procurement process and should take into account the capacity for project implementation within the public sector. To fast track the procurement process, ministries and agencies could also continue preparing ahead of time other procurement documents such as bidding documents, requests for quotation, etc. 57. Additionally, capacity constraints related to technical staff (engineers and skilled workers) is also a major issue. There is need to build capacity so that proper and timely development of technical specifications to feed into procurement documents is carried out to ensure good quality works are defined in the bidding documents. The lack of technical capacity leads to poor contract management after award, leading to low spending even when the contract is awarded. 58. There is need to carry out a rapid assessment of implementation capacity in the low execution ministries and regular and timely mid-year reviews of the execution. This will help government identify and address the relevant bottlenecks. Most ministries have Procurement Committees and staff, in line with the requirements of the Public Procurement and Concessions Act, but do not have the skills to carry out their work effectively. This leads to either delays in procurement processes or procurement of sub-standard suppliers and contractors. The rapid assessment should also be extended to technical capacity that complements procurement management. Identified capacity gaps should be addressed using short-term in-service training interventions available at centers such as Liberia Institute of Public Administration. Lastly, there should be regular and timely mid-year reviews of capital budget execution. The reviews will identify agencies that under-execute their budget, and thus facilitate transfers of the capital budget from underperforming ministries and agencies to higher performing ones. C. Analysis of expenditure by sector 59. Total spending by sectors was generally consistent with the priorities articulated in the first Poverty Reduction Strategy (PRS); however, there is scope to further improve allocative efficiency. Spending by two PRS sectors, namely economic services (infrastructure) and social and community services steadily increased between 2008/09 and 2011/12, reflecting a renewed focus on some PRS priority sectors (Table 14). However, spending on the public administration services, the rule of law and public safety sector declined steadily during 2009/10 – 2011/12 reflecting in part the sector’s weak budget execution capacity. As a result, the budget appropriated for the sector was reallocated to other sectors, especially public and administration services, during the mid-term review. 26 Table 14: Allocation of public expenditure by PRSP sectors Sector 2008/09 2009/10 2010/11 2011/12 Public and Administration Services 1/ 49.2 45.9 43.2 40.0 Social and Community Services 21.2 23.0 24.8 26.5 Economic Services 17.3 15.9 17.7 19.8 Rule of Law and Public Safety 12.3 15.1 14.4 13.7 TOTAL 100.0 100.0 100.0 100.0 Source: Fiscal Year Budget Books and Outturns, Ministry of Finance, Liberia 1/ Include general claims and debt service 60. The Public Expenditure Review of the social sector (education, health and social protection) indicates there remains scope to improve allocative efficiency in the social sector.30 Intra-sectoral allocations within the human development sector during the past three years were not sufficiently pro- poor. Public spending on primary education (with 79 percent of total enrollment) accounted for 33 percent compared to the recommended benchmark of 50 percent by the Global Partnership for Education (GPE). By contrast, public spending on tertiary education (with close to 5 percent total enrollment) accounted for 34 percent of total expenditure compared to a maximum of 20 percent. An incidence analysis indicated that the richest household quintile benefited from public spending on education. In the health sector, the government spent relatively little on primary health care as the Health Sector Pool Funds (a grouping of donor contributions) have been spent principally to support the implementation of the Basic Package of Health Services (BPHS). Public spending on health is biased towards the richest household quintile as evidenced by public investments on higher-level facilities (such as secondary and tertiary institutions) and subsidies to inpatient services. Public spending on social protection (pensions, public works, nutritional support, and cash transfers) favors pension support (accounting for about 75 percent of total social protection spending) and thus benefits civil servants that are mostly in urban areas. By contrast, spending on social protection programs (such as the Cash for Work Temporary Employment Program) that support the poor and vulnerable populations is limited. 61. Similarly, the review indicated there remains scope to improve technical efficiency in the education sector. Efforts at improving the efficiency of government spending on education should be focused on the effective development, deployment, and performance management of teachers to address overstaffing and the lack of skills and on reducing payroll irregularities in the education sector. 62. The review of public spending on the security and the rule of law sector shows that technical efficiency could be further improved. 31 The efficiency of the ongoing security services can be further improved through various measures. These include rationalizing the deployment of the limited manpower and resources to core security agencies and strategic border posts; strengthening management of security assets (vehicles and buildings) through sharing infrastructure among key security agencies; and eliminating duplication of functions performed by multiple security agencies that result in inter- agency rivalry and inefficiencies with regard to cost, training and service delivery implications. 30 The World Bank (2012). Public Expenditure Review – Human Development Sector. Washington, D.C., USA. 31 The World Bank (2012). Public Expenditure Review – Meeting the UNMIL Security Transition Challenges. Washington, D.C., U.S.A. 27 IV. Mobilizing External Grants 63. Liberia receives both on-budget and off-budget external grants to support government operations. On-budget external grants provided by the African Development Bank (ADB), European Commission (EC) and the World Bank have been channeled through the government budget to finance eligible expenditures. Off-budget grants are tied to financing of investment projects in various sectors and they are reported as an annex on foreign aid flows in the budget document. Their implementation is independent of the government’s financial systems and processes. Nevertheless, their disbursements are somewhat unpredictable owing to weak implementation capacity of the government as well as deficiencies in the private sector. Their disbursement depends on project cycles and the government’s implementation capacity. Additionally, donors also provide off-budget humanitarian assistance in the form of cash and in-kind payments directly to beneficiaries, both state and non-state actors as well as the local population. The estimated amount of off-budget grants is unreliable as their flows are not systematically monitored and tracked. In the future, these grants are expected to decline because Liberia is no longer eligible to receive grants from IDA (since July 2011) after reaching the HIPC completion point (ADB will restrict its grants beginning 2014). 64. The available historical data shows that on-budget support grants fluctuated significantly. On-budget grants fluctuated during FY2005/06-FY2012/13, reflecting the uncertainty of donor disbursement and weak harmonization with the budget cycles. It peaked in FY 2010/11 (from 0.1 percent in 2005/06 to 2.7 percent of GDP in FY2010/11) and subsequently declined to 1.7 percent in FY2011/12 (Figure 2). This indicates that the scope for increased budget support grants may be limited by the current global economic downturn that may likely constrain transfers, a situation further aggravated by increasing opposition from financially-strapped taxpayers in the developed countries. Further, the priority for donor assistance will likely shift elsewhere as the gravity of Liberia’s post-conflict situation fades. Figure 2: Trends in external grants, FY2004/05-FY2011/12 Mill. US$ % of GDP 45.0 3.0% 40.0 2.5% 35.0 30.0 2.0% 25.0 1.5% 20.0 15.0 1.0% 10.0 0.5% 5.0 0.0 0.0% 65. Additional fiscal space generated from external budget support grants to Liberia is expected to be moderate. Key development partners providing budget support grants to Liberia include the African Development Bank (ADB) and European Union. The European Commission plans to provide 28 general budget support in the amount of US$24.2 million and US$19.5 million during the next two years. 32 In addition, the EC will provide to the health sector a budget support grant in the amount of Euro 50 million during FY2012/13-FY2015/16 (Table 15). Based on the available information, total budget support grants are expected to decline from US$35.4 million in FY2012/13 to US$13 million in FY 2015/16. Table 15: Estimated budget support grants (Millions of US$) 2012/13 2013/14 2014/15 2015/16 African Development Bank $12.2 $12.2 $23.0 European Union $24.2 $19.5 $13.0 $13.0 General Budget support $11.2 $6.5 Health Sector Budget support $13.0 $13.0 $13.0 $13.0 Total $35.4 $31.5 $13.0 $13.0 Sources: European Commission and African Development Bank 66. The government has also attracted external grants from donors to finance some public investment projects identified as a priority for Liberia. For example, the government has named the rehabilitation of Mt. Coffee hydropower as a national emergency to be completed by 2015, with the objective of increasing access to electricity for a greater number of Liberian citizens. The estimated cost of the project is about US$250 million, for which Kreditanstalt für Wiederaufbau (KfW) of Germany and the Norwegian Agency for Development Cooperation (NORAD) have provided grants to support its rehabilitation in the amount US$32.5 million and US$97.5 million, respectively. The remaining is covered by concessional credit from the European Investment Bank (EIB). 33 In addition, the government projected that off-budget financing of ongoing investment projects in grants and credits during FY2012/13-FY2014/15 will range from US$200 million to US$328 million (Table 16). Over 50 percent of the total off-budget grant is planned for energy and transport infrastructure basic services. 32 This is based on the exchange rate of US$1.3 per Euro. 33 The government signed a credit agreement in the amount of US$65 million in January 2013. The credit carries an interest of 1.42 percent, 20 year maturity, and four years grace period. 29 Table 16: Planned off-budget external grant financing of investment projects, FY2012/13-FY2014/15 Se ctor FY2012/13 FY2013/14 FY2014/15 Public Administration 32.2 10% 33.7 10% 20.2 9% Municipal Government 7.0 2% 4.3 1% 2.3 1% Transparency and Accountability 1.3 0% 0.8 0% 0% Security and the Rule of Law 11.4 4% 8.1 2% 4.6 2% Health 29.3 9% 22.2 7% 11.0 5% Social Development Services 29.7 9% 20.9 6% 8.8 4% Education 19.2 6% 26.1 8% 20.2 9% Energy and Environment 56.6 18% 71.6 22% 54.6 25% Agriculture 33.7 11% 19.1 6% 13.8 6% Infrastructure and Basic Services 91.0 29% 113.9 35% 76.3 35% Industry and Commerce 5.3 2% 7.6 2% 5.3 2% GRAND TOTAL 316.7 100% 328.3 100% 217.0 100% Source: Government of Liberia, Public Sector Inves tment Plan (PSIP), FY2012/13-FY2014/15 67. However, scaling up external grants should not be viewed as a substitution for mobilizing domestic revenues. There is a concern that scaling up external aids will induce aid dependency, weaken a government’s capacity to generate domestic revenue, and undermine the democratic process (Bevan, 2005). A high aid inflow relative to the domestic economy reduces the pressure on the government to mobilize domestic taxes. This will increase aid dependency and weaken government’s capacity to generate domestic resources. When citizens pay fewer taxes, it is unlikely that they will closely monitor government’s actions and enforce external accountability. Thus, scaling up external aids should go hand-in-hand with strengthening domestic revenue effort as well as encouraging private saving and investment. 30 V. Revenue Mobilization 68. Tax revenue includes income tax, general sales tax (GST), excise tax and customs tariffs. Income tax is levied on companies, partnerships and individuals at a 25 percent top marginal PIT and CIT rate. GST is applied to sales of manufactured and imported goods, as well as selected services at 7, 10 and 15 percent 34 (these services include electricity, telecommunications, water supply, hotel accommodations and restaurants, gambling, sale of tickets by international transport services (air, sea, and land), services of travel agencies, and sporting services). Excises are levied on imports and domestic products at varying ad valorem rates. For imports, the excise tax rate is applied to the duty inclusive price.35 Tobacco and alcoholic beverages account for about 32 percent of total excise taxes. Sales tax is levied on petroleum at specific rates. Customs tariffs currently levied on imports has 15 bands for 15 different categories of commodities and the effective import tariff rate is estimated at about 2.9 percent. Other taxes on goods and services are levied on property (movable and non-movable) and on transactions related to property. 69. Liberia has a high ratio of tax revenue to GDP compared to the average for the 13 ECOWAS countries (Table 17). Liberia’s average tax revenue to GDP for 2009-11 (17.6 percent) ranks third after Senegal (18.6 percent) and Cape Verde (19.7 percent). It remained above the averages for 13 ECOWAS countries during the past three years. It is the highest among Manu River Union members comprising Cote d’Ivoire, Guinea, Liberia, and Sierra Leone. Liberia’s high tax revenue to GDP ratio reflects increased tax capacity associated with continued post-conflict recovery and strengthened tax effort due to the ongoing reform of tax and customs administration. The majority of tax revenue is currently generated from non-mining sectors (about 90 percent of total revenue) as the mining sector activities only became active in 2011. 34 Exemptions are applied to transportation, public hospitals, education services, the construction sector, and financial institutions. GST exemptions: registered manufacturers are exempt from tax on their purchases of inputs and capital equipment through a ring system enabling them to buy inputs and capital goods tax free. Some goods are explicitly exempt—foodstuffs; educational materials including books; goods supplied for humanitarian emergencies; medicine; medical equipment for individuals; inputs used in manufacturing, mining, and forestry; and capital goods used by these industries. 35 Alcoholic beverages, tobacco products, syrups and monosodium glutamate have different rates for imported and domestic products (although these will be harmonized with the effect of the LRC amendments). 31 Table 17: Tax revenue to GDP ratios in 13 ECOWAS countries 2009 2010 2011 Average Benin 16.1 16.2 15.5 15.9 Cape Verde 20.2 19.1 19.8 19.7 Cote'd Ivoire 16.5 17.0 17.5 17.0 Gambia 14.1 13.3 13.2 13.5 Ghana 12.3 13.2 16.7 14.1 Guinea 12.9 11.5 13.2 12.5 Guinea Bissau 6.8 8.0 8.4 7.7 Mali 14.8 14.6 14.3 14.6 Niger 13.8 13.5 14.9 14.1 Senegal 18.0 18.8 19.0 18.6 Sierra Leone 12.7 12.1 13.7 12.8 Togo 15.4 15.7 15.8 15.6 Liberia 16.8 17.0 19.0 17.6 Max 20.2 19.1 19.8 19.7 Min 6.8 8.0 8.4 7.7 Average 14.6 14.6 15.5 14.9 Source: IMF Country Reports, 2010-12. A. Trends in government revenue 70. Total revenue in Liberia steadily increased. Government revenue including grants increased from 12 percent of GDP in FY2005/06 to 28 percent of GDP in FY2011/12, reflecting an increase in tax revenue, nontax revenues and official grants. Tax revenue nearly doubled during this period (from 12 percent to 22 percent of GDP) as a result of continued economic recovery and improved tax administration. Non-tax revenue increased but was volatile due mainly to the uncertainty of one-time payments from concession contracts (agriculture, forestry and mining sectors). Similarly, official grants increased to reach 2.8 percent of GDP in FY2010/11 and subsequently declined to 1.7 percent in FY2011/12 due to the global downturn that constrained transfers from donor countries (Table 18). Table 18: Government revenue, FY 2005/06 - FY2011/12 (Percent of GDP) FY2005/06 FY2006/07 FY2007/08 FY2008/09 FY2009/10 FY2010/11 FY2011/12 FY2012/13 Total revenue and grants 12.3% 17.9% 20.4% 20.8% 23.5% 26.4% 27.8% 27.3% Total revenue 12.1% 17.7% 19.8% 18.7% 22.5% 23.6% 26.1% 24.9% Tax revenue 11.6% 16.8% 16.6% 16.8% 17.0% 19.0% 21.6% 19.7% Taxes on Income and Profit 5.1% 8.4% 7.8% 7.8% 7.5% 7.4% 8.8% 7.1% Taxes on Goods and Services 3.6% 5.2% 5.3% 5.8% 5.7% 7.8% 3.2% 3.3% Taxes on international trade and transactions 2.9% 3.1% 3.3% 3.0% 3.2% 3.4% 9.0% 8.8% Other taxes on domestic goods and services 0.0% 0.2% 0.2% 0.2% 0.5% 0.3% 0.5% 0.5% Non-Tax Revenue 0.5% 0.8% 3.2% 1.9% 5.5% 4.6% 4.6% 5.2% Grants 0.1% 0.2% 0.6% 2.1% 1.1% 2.8% 1.7% 2.4% Memorandum items: GDP (Million US$) 697.2 830.3 1014.6 1128.2 1223.5 1418.7 1656.4 1850.9 Sources: IMF and Ministry of Finance, Liberia 32 71. Non-tax revenues fluctuated significantly during the period due to the uncertainty of revenue collected from concessions, mostly in the mining sector. Non-tax revenue includes administrative fees and charges, concession revenues from the forestry sector (stumpage fees, land rental, export tax on logs, etc.) and from the agriculture, mining and oil sectors (royalties, one-time payments, community development funds withholding taxes). The revenue climbed up to 5.5 percent of GDP in FY 2009/10 and subsequently fell to 4.6 percent of GDP during the last two years due to delayed startup of the mining exploration. B. Sources of domestic revenue enhancement 72. The potential sources of domestic revenue that can be mobilized include revenues from natural resource concessions, changes in tax policy and improved tax administration. Natural resource extraction exhibits the greatest revenue potential as production of concessions in forestry and mining have been signed and production has begun. Additional tax revenue can be gained from changes in tax policy, notably the transition to the ECOWAS Common External Tariff (CET) and replacement of the General Sales Tax (GST) with Value Added Tax (VAT) over the medium-term. The identification of these sources of tax revenue benefits from the findings of ongoing technical assistance on tax policy supported by the IMF Fiscal Affairs Department during the past 5 years. (i) Natural resource revenue 73. A fiscal regime for extraction natural resource (agriculture, renewable resources, mining and petroleum) through concession contracts is described in the 2012 Liberia Revenue Code (LRC) Section 17. Renewable resources include uncultivated forest, cultivated trees (for example, rubber or palm), other growing plants (including food and tree crops), the raising and subsequent harvesting of fish or livestock, the sea, the sun, wind, rivers, and other similar resources. These projects and concession contracts are subject to income tax and non-tax revenue. Table 19: Structure of the Liberian tax system Tax Tax Base Tax Rate Remarks Income taxes Personal income tax Individual Income (salary or 5% for LD70,001-200,000 Monthly; withheld by employer commercial activity) 15% for LD200,001-800,000 as final tax 25% above LD800,001 Social tax Wages 3% Monthly; 3% is also levied on employees Corporate income Profits 25% Paid by legal entities; Quarterly tax installments of tax Sales taxes General sales tax Sales of manufactured and 7%, 10%, and 15% Monthly imported goods, as well as selected services Petroleum sale tax Specific rate International trade tax Customs Duty CIF Liberian Port or Customs Several rates Time of import entry value Property tax Land Tax Land area Several rates Quarterly payment by 33 landholders Property Tax Assessed property value 1.5% for commercial and Appraisal carried forward for 5 industrial building years; the appraisal cost incurred 1/12% for residential by taxpayers is deductible from 1/3% farm in urban areas gross income tax ¼% farm in rural areas Special tax regime for SMEs and petty traders Presumptive tax for Annual turnover 4% A small taxpayer is a legal or small taxpayers natural person carrying on a trade or business with turnover of less than $3,000,000 per year. Petty Trader Tax Structure and roof of business Fixed amounts: Those with gross income of less and location $2,400 with a fixed structure than $200,000 with a roof and walls; $1,200 with a fixed, open structure with a roof; $480 other than the above, $240 outside Montserrado Revenue from forestry Area fees Types of contract $2.50/ha for a forest Established by FDA regulation management contracts (FMC) $1.25/ha for a Timber Sales Contracts (TMC) Land rental bid Average $9.9/ha (FMC) and The land rental bid premium premium $9.2/ha for TMC (paid annually) was converted into a one-time payment in 2010. Stumpage fees FOB values for category A 10%, 5%, and 2.5% species, category B, and category C, respectively. Export fees Same rate as stumpage fees Revenue from agriculture and renewable resources Income tax Taxable income 25% for extraction renewable resource except rice that is subject to 15% Surface rent Land irrespective of the value $2 per acre for developed land Rent subject to inflationary of assets $1 per acre for undeveloped adjustment using GDP deflator, land effective January 1 each year Royalty Value of carbon credit 10% Fees Payment to a community or Vary by concession agreement industry development funds Tax Tax Base Tax Rate Remarks Revenue from mining and petroleum Income tax Taxable income 30% Royalties Based on fair market 3% on value of gold; A royalty is due and payable at value FOB price of shipments 4.5% on value of iron ore; the time of each shipment. 5% on value of commercial diamond; 10% on gross production of petroleum before deductions of any costs; Surface rent Land $0.2 per acre of land within a Surface rent amounts will be mineral exploration license area inflationary adjusted in $5 and $10 per acre of land accordance with the GDP within a mining license areas Implicit Price Deflator during year 1-10 and year 11- 25, respectively; Equity participation Applied to oil exploration As determined by the concession contract Petroleum Law Source: Government of Liberia, the Consolidated Tax Amendments Act of 2011, November 2011. 34 74. In the near future, there is significant potential for increased revenue stemming from Liberia’s natural resource sector. The country’s rich natural resource endowment, which includes agriculture (rubber, palm oil, etc.), forestry, and mining (gold, diamond, iron ore, etc.), has attracted keen interest and a sizeable amount of direct foreign investment from the outside. Since the end of the civil war, the government has already signed 35 concessional contracts with international companies to operate in various sectors. Under these contracts, the government stands to benefit from increased tax revenue over the medium- and long-term that will include royalties, withholding tax, bonus and social contributions, indirect tax, income tax and nontax revenue. 75. Forestry concessions are expected to generate some revenues in the near future. Forestry revenues are generated from commercial logging managed through an auction-based concession system granted to companies by Forestry Development Agency (FDA) under commercial forestry licenses – Forest Management Contract (FMC) and Timber Management Contract (TMC). 36 However, weaknesses in the concession system have shifted the focus of commercial licenses from FMC and TMC to Private Use Permits (PUP). 37 The revenues collected include area fees, land rental bid premium, stumpage fees, and export fees that are collected by Société Générale de Surveillance (SGS), which acts as a fiscal agent for the government by collecting fees and charges. In addition, forestry companies are subject to income tax on any profits under the Liberia Revenue Code (LRC). To date, revenue from forestry concessions has been disappointing because timber exports have been delayed by infrastructure bottlenecks, primarily due to the lack of budgetary resources for the rehabilitation of roads and ports. The government has made effort to improve access to roads and ports in order to increase timber exports and thereby revenue from forestry concessions. However, the government decision to place moratorium on timber felling and exports activities under PUPs is expected to delayed revenue generated from forestry concessions.38 76. Palm oil concessions will not generate revenue until after 2020. By contrast, revenues from palm oil concessions (mostly from Sime Darby-Malaysia and Golden Veroleum-Indonesia) will only begin to emerge after 2020. It requires a five- to six-year period to grow palm oil trees and a long period for the operators to expand the area of the concession under cultivation. The IMF estimated that revenue from palm oil will be slow in coming, beginning from US$1 million in 2012 to reach US$17 million in 2020 and subsequently triple the amount by 2015, peaking by 2030 (Table 20). 36 The FDA is authorized to grant under Section 5.6(d) of the 2006 National Forestry Reform Law. 37 PUPs do not requiring a bidding process or land rental fees. In cases where the social agreement requires a land rental fee, that fee is significantly lower than what operators would have paid under the concession system. Additionally, the royalty fee paid to the landowner is significantly lower, ranging from $1.50 to $3.00 per cubic meter. 38 A Special Independent Investigating Body (SIIB) was established by the President in August 2012, to conduct a comprehensive review of the issuance of PUPs. Its findings reveal that there have been massive fraud, misrepresentations, abuses and violations of the National Forestry Reform Law in the issuance of PUPs to the extent that this inter-generational asset has been severely threatened. The February 2012 moratorium on PUPs was placed on logging activities under PUP contracts; however, operators still continued to conduct felling activities and shipment of logs during the moratorium. Subsequent to the SIIB findings, the government announced a moratorium PUPs (Executive Order No. 44, on Protecting Liberian Forests by a Temporary Moratorium on Private Use Permits (PUPs) that immediately suspends activities involving or related to the felling or export of logs under any PUPs granted, authorized or approved by the Forestry Development Authority on January 4, 2012. 35 77. Of all concession contracts, Liberia stands to benefit most from those signed with foreign investors in the iron ore sector. There are large iron ore deposits available for exploitation and the five largest investors are Arcelor Mittal, China Union, BHP Billiton, Putu and Western Cluster. However, only the first two will contribute to iron ore production and exports during 2012-15. Only Arcelor Mittal now exports iron ore beginning in the last quarter of 2011 while production by the remaining mining concession contracts has not yet begun. Arcelor Mittal plans to increase its iron ore export from 0.5 million tons in 2011 to 4 million tons per year over the next three years to reach 15 million tons from 2016 onwards. Iron ore export by China Union (Bong Mines) is projected to increase from about 1 million tons in 2013/14 to 10 million tons per year from 2014 onwards. Putu has recently completes its exploration phase and now enters into development phase; and production of iron ore is expected to begin in 2017. 78. Under the current mining concession agreements, revenues from iron ore including income tax, import duties, withholding tax on dividend, royalties, surface rent, and community development funds are estimated to be significant. According to the Liberia Extractive Industries Transparency Initiative (LEITI) report (2012), the mining sector’s total contribution to government revenue in 2009/10 fiscal year was US$38 million, or about 4 percent of GDP. About 90 percent of the mining sector’s payments were upfront payments made by the major iron ore companies. With the commencement of large iron ore projects (Arcelor Mittal in September 2011), the IMF estimated that government revenue from the mining sector could amount to US$142 million in 2015 (5.7 percent of projected GDP) and increase to US$443 million by 2020, assuming full compliance with the fiscal and regulatory regimes. 39 Most revenue will be back-loaded due to the time it takes for projects to reach full capacity, from a five-year investment phase for two of the projects prior to the start of production in 2017, and also from the short depreciation period (5 years) assumed in all but the baseline scenario. The back- loading of revenue is also due to the waiving of withholding tax on dividends for 12 or more years for all but one of the concessions. Payment of royalties and surface rent, however, begins with production in all cases. Table 20: Potential revenue from iron ore and palm oil projects (Millions of US$) 2011 2012 2013 2014 2015 2020 2025 2030 Total 53.7 47.7 91.1 128.7 145.3 443.4 783.3 1364.6 Iron ore 53 46.6 89.1 126.2 142.3 426.5 740.2 1080.1 Palm oil 0.7 1.1 2 2.5 3 16.9 43.1 284.5 Source: IMF, Liberia - Medium-term Fiscal Issues, background paper for Article IV Consultation and Fifth Review of the ECF, 2010 (ii) Tax revenue 79. Fiscal space can be enlarged through additional tax revenue mobilized from implementation of some tax policy initiatives. As a member of ECOWAS, the government is committed to the transition to the Common External Tariff (CET) and the introduction of value-added tax (VAT), both of which are expected to increase tax revenue. The transition to the CET requires that 39 IMF (2011), Seventh Review Under the Extended Credit Facility Arrangement, IMF Country Report No. 11/345, Washington, D.C., USA. 36 Liberia adopt a common tariff and nomenclature so that customs procedures are transparent and delays at border crossings are reduced, thus harmonizing and strengthening its common market. The switching from general sales tax (GST) to value added tax will also bring additional revenue due to the broadening of the VAT tax base. a. Migration to the ECOWAS Common External Tariff 80. As a member of ECOWAS, Liberia is committed to the common external tariff (CET). 40 A three-year transition plan for implementing the CET has been prepared and the technical work underpinning the transitional plan is still being finalized. The current 12 tariff bands (for 12 different commodity categories) in Liberia will be mapped out with the five CET bands according to product types; as a result, tariffs for some commodities will fall while others will increase. The government is considering a gradual migration to a Type A List 41 to the CET over the three-year period to reduce the negative impact on the items that Liberians import heavily and to reduce revenue loss on imports whose tariffs are higher than the CET. Products whose transition will not have any material revenue or social impact on the poor – e.g., high end foods – will be immediately migrated to the CET. In parallel, Liberia is seeking certain transitional provisions for a Type B List42 that contains sensitive goods to be exempt from the CET given the country’s post-conflict status. 81. The migration to the CET is expected to increase revenue. This is because the tariff for goods that Liberia heavily imports will be increased while tariffs on goods that Liberia imports lesser will be lowered. The revenue impact analysis carried out by the Tax Policy Unit in the Ministry of Finance shows that immediate alignment of the existing customs tariff with the CET is expected to increase revenue collection by US$57.6 million (Table 21). This will sharply increase an effective tariff rate to 6.3 percent from 3.0 percent. 40 CET is composed of five tariff bands, or rates of customs duty: 0 percent on essential social goods, 5 percent on goods of primary necessity, raw materials and specific inputs, 10 percent on intermediate goods, 20 percent on final consumption goods, and 35 percent on finished products with adequate local production capacity. Tariffs are lower for essential goods and raw materials, and higher for finished goods to protect consumers and producers. About 13 countries are applying the 5 tariff bands, 5 of which are progressively harmonizing duty rates. 41 These are products whose rates are below the CET rate and need to be increased and products whose rates are above the CET rate and require lowering tariff. 42 The list includes various agricultural inputs (seeds, fertilizers, and some tools), certain food items (rice, sugar, some fish), and specific goods used in education and health. 37 Table 21: Estimated revenue impact of immediate transition to CET (Millions of US$, Based on 2010 and 2011 ASUCUDA Data) 2011 (US$) % CIF Import Value $1,740.2 Curre nt LBR Tariff Rate Total Import Duty Collected (ASCUDA) $51.8 52% Total import Duty Losses (ASCUDA) $47.2 48% Effective Tariff Rate 3.0% Imme diate Trans tion to CET - Full alignme nt Estimated Duty Collected $209.1 Total Import Duty Collected 1/ $109.4 Total import Duty Losses 2/ $99.7 Effective Tariff Rate 6.3% Revenue Impact as a result of the CET transition $57.6 Source: Tax Policy Unit, Ministry of Finance, Liberia Notes: 1. Estimated import duty collected is based on the duty rate that will be changed immediately. 2. Estimaed import duty loss is revenue foregone due to duty free privileges (i.e. concession agreements, executive orders, etc) and the rate differential between the CET and the Lberia tariff. 82. However, the gradual migration to the CET based on the transition plan will gradually increase customs revenue and the effective tariff rate. Revenue is estimated to rise from US$23.6 million in the first year, to US$47.7 million in the second year and US$64.7 million in the third year (Table 22). The average effective tariff rate would increase more modestly from 4.3 percent in the first year of migration to the CET to 6.7 percent in the last year of the transition. The revenue increase will be partially offset by the duty free privileges (concession agreements, executive order, etc) as well as from the rate differential between CET and Liberia tariff. Table 22: Estimated revenue impact of the migration to the CET during the three-year transition (Millions of US$) 2011 2012 2013 2014 Import Growth 2.1% 4.6% 6.5% Imports, CIF $1,740.2 $1,776.7 $1,858.4 $1,979.2 Total Import Duty Collected based on Liberia's Current Tariff $51.8 Estimated Import Duty (CET 3-year Transition), 2011 Import Value $141.2 $181.9 $209.1 Estimated Import Duty based on Import Growth $144.1 $190.3 $222.7 Total Import Duty Collected (ASYCUDA) 1/ $75.4 $99.6 $116.5 Total Import Losses (ASYCUDA) 2/ $68.7 $90.7 $106.2 Revenue Impact as a result of CET Migration $23.6 $47.7 $64.7 Effective Tariff Rate 4.3% 5.7% 6.7% Source: Tax Policy Unit, Ministry of Finance, Liberia Notes: 1. Estimated import duty collected is based on the duty rate that will be changed during a three year migration. 2. Estimaed import duty loss is revenue foregone due to duty free privileges (i.e. concession agreements, executive orders, etc) and due to the rate differential between the CET and the Lberia tariff 83. The specific timetable for migration to the CET has been planned for January 2014. Member countries have agreed on the CET rates and number of tariff lines in December 2012 (Table 23). About 135 products with potential for industrialization were included into the fifth band of 35 percent in 38 order to protect locally manufactured products 43 for “specific goods for economic development” in December 2012. This led to re-categorization of approximately 1,000 product lines, of which approximately 700 are treated and approximately 300 remain. These rates will be reviewed and adopted by various levels of ECOWAS committees and eventually approved by ECOWAS Heads of State before ratifying by the ECOWAS national governments. Table 23: CET agreed by ECOWAS countries as of December 2012 Band Commodity items Number of tariff lines 0% Essential social goods 85 5% Goods of primary necessity, raw 2,146 materials and specific inputs 10% Intermediate goods 1,373 20% Final consumption goods 2,165 35% Finished products with adequate local 130 production capacity Total 5,899 Source: Ministry of Finance, Liberia b. Replacing General Sales Tax (GST) with Value-added Tax (VAT) 84. GST accounted for about 18 percent of total tax revenues in FY2009/10. It is applied on both goods and services. GST on goods is applied to imports and locally manufactured goods;44 however, it has a narrow base due to many exemptions including through concessions, investment incentives, special decrees and the Consolidated Tax Amendments Act (CTA).45 GST on services is applied to electricity, telecommunications, the provision of water for a fee, hotel services, gambling, international transport of personal services by travel agents and by sports and games organizers, restaurant services and other services. The standard GST rate is 7 percent, while the rate of 10 percent is levied on alcoholic beverages, airline and hotel services and a 15 percent GST rate is levied on telecommunication. Real property remains largely untaxed under the GST, as many construction materials are exempt, construction and maintenance services are not taxed and transfers of real property, whether by way of sale or lease, remain untaxed. Distribution and retail sectors are also untaxed. 85. The government is committed to switch from GST to VAT to harmonize the tax systems with other ECOWAS member countries; however, there is no specific timetable for switching. GST is cascading because it has no tax credit for inputs and no refund mechanism. When taxable goods are produced using taxed inputs, cascading occurs. Service providers or producers cannot offset the tax they pay on their inputs against the tax on their sales (even if registered for GST purposes), thus the cost is passed on to their customers. As a result, GST introduces inequalities due to the unfair distribution of the tax burden across businesses. Currently there are two ECOWAS countries (Liberia and Guinea) that have 43 A fifth band implies including a new tariff category to cover certain products with the argument to protect infant industries. 44 Exempt items include all locally produced foodstuffs for human consumption (unless when supplied by restaurants or hotels), relief goods, pharmaceuticals, medical aids and textbooks. 45 They are for medical and educational equipment and for supplies to renewable resource contractors, mining producers and petroleum producers. 39 not introduced VAT. The government is committed to switch to VAT in the near future to promote neutrality and uniformity of the tax burden and increase incentives for improving productivity and industrialization in the countries. However, a decision on the design and formulation of VAT policy need to be undertaken, 46 the revenue impacts of the VAT implementation need to be analyzed, and draft VAT legislation together with an implementation plan need to be developed. 86. Experience in other countries implementing VAT indicates that the revenue impact of the VAT is expected to be positive. VAT is closely linked to consumption, which increases overtime along with economic growth, and thus an important source of government revenue. In the 11 ECOWAS countries that already implemented VAT, revenue averaged about 5 percent of GDP.47 The experience of countries using VAT has indeed been positive as revenue increased more than the estimated sale taxes (Tait, 1988). VAT is intended to be applied to all sales and the tax burden will fall on final consumption through providing credit for VAT on inputs paid by registered firms. VAT generates revenue collections through a broadening of the tax base, thus increasing revenue and efficiency gains and reducing distortions to the economy, if well designed. (iii) Non-tax revenue 87. Autonomous public agencies have not been compliant with the PFM Act. While these agencies were created by specific legislation to achieve certain objectives, they are not subject to civil service regulations in terms of remuneration and compensation for their employees, administrative regulations and governance arrangements. Some of the legislation also empowers the agencies to collect administrative fees and to retain revenue to finance their operations. Although the PFM Act requires that they submit financial statements to the Ministry of Finance (MOF), some ministries and agencies have neither transferred monies to the central government account nor reported to the MOF. 88. Strengthening compliance with the PFM law could improve transparency and increase public revenue flows to the central treasury account. The government needs to enforce the Public Financial Management Act that mandates submissions of financial statements by autonomous agencies and SOEs to the Ministry of Finance on a regular basis. The statements should report both revenue received and expenditures. Such enforcement will bring non-tax revenue into the government consolidated revenue account to be allocated through the budget process. Non-tax revenues include all administrative fees and fines collected by ministries and autonomous agencies, revenue from the concession sector (forestry, agriculture, and mining sectors) and transfers from profit making state-owned enterprises. At present, a number of public agencies continue to collect fees for services and use these proceeds to finance expenditure, such as allowances and incentives for public employees and recurrent expenditures. Consolidation of these revenues into the budget would increase fiscal space. 46 There are numerous design considerations for switching from GST to VAT. They include VAT rates, threshold, input tax credits and refunds, exemptions and zero rating, merit goods, agricultural and food products, supplies by way of sale and lease of immovable property, treatment of government and NGOs, lotteries and gambling, other services (electricity, water, telecommunications, transportation, financial services and insurance, and distribution considerations. The IMF has offered some recommendations to the government on the treatments of these issues in the VAT design. See details in Baunsgaard, et al. (2012). 47 Non-VAT countries included Liberia, Guinea, Guinea-Bissau, and The Gambia. 40 VI. External Borrowing 89. In 2010, Liberia attained its HIPC completion point and benefited from a significant reduction in the country’s foreign debt. At the end of the civil war in 2003, Liberia inherited a significant debt burden from previous governments. In June 2007, its public external debt totaled US$4.9 billion, equivalent to 657 percent of GDP and over 2,000 percent of exports. Constrained by its excessive foreign obligations, the new government took deliberate steps to reduce its debt and clear arrears with the World Bank, IMF and ADB. It pursued a zero external borrowing policy through maintenance of a cash balance budget. In March 2008, Liberia reached the HIPC decision point, which led to a reduction of its foreign commercial debts through a buy-back scheme, and in June 2010 the country attained the HIPC completion point. Subsequently, Liberia received debt cancellation from Paris-club creditors and extinguished the remaining commercial debt through a second buy-back. Liberia’s external debt stock has now fallen sharply to about US$87 million (about 10.7 percent of GDP at the end of 2010). The country’s risk of debt distress is considered low. 90. The government is committed to prudent borrowing to ensure that Liberia does not fall back into a debt trap. At the end of the HIPC completion, the government adopted a Debt Management Strategy approved by the government in 2010 limiting external borrowing to only concessional credit and establishing an annual flow of external borrowing at 3 percent of GDP in net present value (NPV) terms; net domestic borrowing is limited at 1 percent of GDP to finance infrastructure development. According to the Debt Management Strategy, new borrowing will be contracted only in response to urgent development financing needs and will have to be sustainable. A Debt Management Committee (DMC), created in accordance with the PFM law, is responsible for approving all loans and guarantees contracted by government entities. Central government borrowing is limited to three percent of previous year GDP in present value terms with a maximum of one percent of GDP to be raised from domestic sources. The stock of outstanding public debt, including government and state-owned enterprise (SOE) debt, is limited to 60 percent of GDP. 91. Under a new program, the IMF has increased the limit of external debt borrowing to enable the government to scale up investment. The government plans to increase external borrowing to finance high return investment projects as identified by the AfT. These initiatives are expected to include infrastructure and energy projects that are desperately in need of rehabilitation and designed to remove binding constraints to growth with equity. The debt sustainability analysis (DSA) conducted by the IMF suggests that a higher level of financing in coming years could still be consistent with the country’s low debt posture. It proposes that the size of maximum sustainable annual borrowing could be increased to 4 percent of GDP (NPV terms) without increasing vulnerability to external debt distress. 92. Liberia can achieve greater fiscal space by contracting highly concessional credit. As noted above, the DSA shows that Liberia should restrict external borrowing equivalent to 4 to 5 percent of GDP in NPV terms to avoid future debt distress. What is also important is the nature of the debt: the more concessional the credit, the more that can be borrowed. As access to concessional credit is limited, Liberia could opt to mix the terms of its credit portfolio from medium concessional to non-concessional, similar to that of commercial loans. However, in the latter case, the terms would reduce the fiscal space available 41 to Liberia compared to that made possible by more concessional terms. Annex A shows that borrowing fully on IDA terms will create fiscal space between $450 and $593 million during 2012-2015; mixed borrowing based on IDA terms and medium concessional terms will create lesser fiscal space over the same period (between $418 to $498 million); and mixed borrowing based on IDA terms and non- concessional terms will create the least fiscal space (between $393 and $448 million). 42 VII. Implications of Various Options to Enlarge Fiscal Space 93. This section explores the effects of fiscal space measures aimed at increasing the room for spending on infrastructure and human development, the priority areas identified in Liberia’s “Agenda for Transformation” (AfT) for the period 2013-2017. 48 Such measures should also contribute to bringing Liberia closer to the achievement of middle-income status, as indicated by macroeconomic stability, solvency, economic growth, poverty, and Millennium Development Goals (MDGs). The Maquette for MDG Simulations (MAMS) developed for Liberia (Dessus, et al. 2011) simulates the impact on macroeconomic indicators, poverty and MDGs with the aim of informing policy makers about the trade- offs among fiscal space options for the period 2013-2030. The simulations include a base scenario, a set of policy scenarios, and an export price shock scenario. The base scenario is designed to represent a central case for the evolution of Liberia’s economy up to 2030 to which the other scenarios can be compared. The policy scenarios are designed to address the consequences of adding to fiscal space from alternative sources (taxes, foreign grants, foreign debt, or government efficiency) and putting this fiscal space to alternative uses (infrastructure, human development or a combination of the two). In order to facilitate comparisons across simulations, all fiscal space measures are designed to raise and use the same amount of fiscal space as measured by a share of GDP. The export price shock scenario explores the impact of a decline in the price of mining exports on Liberia’s development up to 2030 and how they may impinge on efforts to increase fiscal space for priority spending. This section, including Table 23 and Figures 3-6 summarizes the findings of the analysis in Lofgren (2013); for more detail, see this paper. A. Base Scenario 94. The base case scenario reflects the expectation that, during the AfT period (2013-2017), the Liberian economy will be driven by high levels of foreign direct investment in mining, which will permit strong expansion in mining production and in government revenues from mining, as well as by the near- elimination of UNMIL transfers, which dampens import growth and domestic consumption. By contrast, the economy during the post-AfT period (2018-2030) is characterized by more uniform growth across sectors and macro aggregates. Under the base scenario, export grows strongly relative to imports and absorption, in part due to the rapid contraction of UNMIL transfers. Throughout the projection period, private investment other than mining grows most rapidly followed by government and household consumption, while mining investment grows rapidly for a few years before declining to close to zero. The fact that UNMIL is able to exit without any major repercussions for the government and the households demonstrates its economic position as an enclave vis-à-vis the national economy. 49 On the revenue side, the government becomes less reliant on foreign transfers and more reliant on direct taxes, mainly from the mining sector. During the AfT period, the foreign debt to GDP ratio increases in line with IMF projections whereas, during the post-AfT period, it stays in the range of 25-30 percent of GDP. Increases in government spending are assumed to be slightly stronger in priority areas. During the AfT 48 Years refer to fiscal years. For example, 2013 refers to the period July 1, 2012 – June 30, 2013. 49 This statement refers to the economic effects of the UNMIL exit, assuming that it takes place without any major negative effects on security and that any needed increases in national spending on security is adequately covered by government (on- and off-budget) spending – under the base scenario, the budget item that includes security spending, “other government”, has an average annual real growth rate of 6.7 percent for the period 2013-2030. 43 period, the balance of payments sees a strong decline in non-competitive imports but an increase in mining profit remittances, both expressed as shares of GDP. Foreign exchange inflows from mining exports increase drastically whereas, as noted, UNMIL transfers and, to a lesser extent, official transfers decline. During the post-AfT period, outflows related to various imports become more important where mining profit remittances shrink. Among the sources of foreign exchange, mining exports and FDI decline whereas agricultural and service exports expand strongly. Among the sectors of production, agriculture continues to be the largest sector, followed by private sector services, government services and mining, with the latter being larger than government services during part of the simulation period. Other industry remains less important. Mining is projected to grow very fast for a few years after which it stagnates while other sectors grow at a steadier pace benefiting from the real exchange rate depreciation. The MDG indicators (poverty, under-five mortality, water access, and sanitation access) also progress at fairly even and uniform rates with the exception of water access, where Liberia starts out at a higher level of achievement. The poverty projection is based on the assumption of unchanged and relatively high inequality with a Gini coefficient of 52.6.50 B. Alternative policy scenarios 95. If additional fiscal space, used for infrastructure and human development spending, is created from increased taxes, the impact on GDP and absorption is small (the scenario infhd+tx). For this scenario, domestic (non-trade) taxes, excluding taxes on mining profits, are gradually raised by 1 percent of GDP per year during the period 2014-2017 (i.e. in 2019 by 6 percent of GDP). The increased revenues are used to scale up government spending in the areas of infrastructure (energy, roads and other infrastructure) and human development (education, health and water-sanitation). The results show that the impact on GDP and absorption growth is very small (increases by around 0.1 percentage points), while household consumption growth declines by 0.3 percentage points, leading to a higher poverty rate. Other MDG indicators improve due to increased government services. These moderate and partly negative impacts reflect the opportunity cost of taxes. Higher taxes lessen the resources available for household and private sector for consumption and investment. 51 This has negative repercussions, not only for poverty reduction but also for other MDGs, savings, investment, capital accumulation, and production growth. The fact that increased government services in infrastructure and human development has positive impacts on MDGs and productivity explains why, nevertheless, some indicators register minor improvements. 96. If, instead, additional fiscal space is gained from improving allocative efficiency, then the effects on most indicators are more positive (the scenario infhd+eff). Here, the government switches spending from non-priority services (which do not has a positive impact on productivity or MDG), to infrastructure and human development. The overall size of the government (expressed as a share of GDP) is not affected. Compared to the preceding scenario, the economy gains more in terms of growth and 50 In the model database, initial data for non-poverty MDGs and inequality is from World Bank (2010b and 2012) whereas poverty data is from Backiny-Yetna (no date, p. 8). 51 On the other hand, mobilization of tax revenues may contribute to state building and citizens’ monitoring of public spending, thereby contributing to higher public spending effectiveness (Bevan, 2005 and Gupta, Powell and Yang 2005). Given that it is difficult to assess the strength of any such effects in the Liberian context, this is not considered in this simulation analysis. 44 improved MDG indicators. Annual growth increases by around 0.1-0.2 percentage points are recorded for absorption, GDP and household consumption. In the production sphere, aggregate government service growth is unchanged (while the growth rates of different parts of government services change significantly) whereas private non-mining sectors enjoy slightly more rapid growth. All MDG indicators improve more strongly than under the tax scenario; for example, in 2030, the poverty rate is more than 3 percentage points lower. 97. Mobilizing foreign grants to finance an increase in investment in infrastructure and human development generates stronger impacts on growth, poverty reduction, and MDGs (the scenario infhd+fg). Instead of financing this increase in fiscal space with higher taxes or improved efficiency, it is here financed by an increase in foreign grants. Thanks to reliance on foreign grants instead of domestic taxes, the trade deficit expands, permitting stronger growth in absorption (domestic consumption and investment, including household consumption) and GDP than the two preceding scenarios. All MDG indicators also show stronger progress than for any preceding scenario. Real GDP growth for government services is similar to the tax scenario but, non-government sectors grow faster than under the previous scenarios. If the government instead of mobilizing foreign grants, borrowed abroad (at levels that go beyond what is consistent with an unchanging foreign debt to GDP ratio, the impact would be the same except for that by 2030, Liberia’s foreign debt in 2030 would be much higher (at 106 percent of GDP as opposed to 28-30 for the other scenarios. The fact that foreign borrowing raises the prices of targeted government services (and non-tradables in general, a case of real appreciation) raises the level of borrowing and debt accumulation that is required to finance required increases in real government demands. 98. It may be easier to generate any given increase in fiscal space if, instead of relying on a single sources (as in the preceding scenarios), Liberia would rely on multiple sources (the scenarios infhd+mix, inf+mix, and hd+mix). The three scenarios are constructed to test the sensitivity of the findings to alternative combinations of fiscal space sources as well as alternative spending priorities. Mixed fiscal space sources (taxes, efficiency gains, and foreign grants, with each contributing around 2 percent of GDP) are used to increase fiscal space to finance spending on both infrastructure and human development (infhd+mix), only infrastructure (inf+mix), or only human development (hd+mix). 99. The simulation results from allocating the added space to both infrastructure and human development (infhd+mix) generates macro and MDG results similar to the scenario that relies on improving allocative efficiency. If it is only allocated to infrastructure (inf+mix) then the results are stronger in terms of macro indicators (including growth in absorption, GDP and household consumption) and poverty reduction; however, gains in other MDG indicators are weaker. Finally, if the fiscal space is used for human development only (hd+mix), then outcomes are weaker for most macro aggregates and poverty reduction. Production growth slows down among the private sectors. Non-poverty MDGs show stronger performance compared to the infrastructure only option. On the other hand, according to all indicators, the mixed spending scenario (infhd+mix) does better or as well as the human-development focused scenario (hd+mix). 52 52 In additional simulations, we tested the impact of using financing from a single source (taxes, foreign grants or efficiency) for expanding spending on either only HD or only infra. The findings were similar to what emerged from the comparison when financing came from a mix of sources (infhd+mix, inf+mix, and hd+mix)– infrastructure does 45 C. The mining sector and fiscal space 100. A permanently lower mining export price has a significant negative impact on most key indicators compared to the base case (scenario pwemin-sd). This scenario is identical to base case except for that real mining export prices are 29.6 percent lower starting from 2014, representing a reduction in price of one standard deviation (computed on the basis of real world prices 2007-2013). GDP growth slows down by 0.4 percentage points due to a slowdown in capital accumulation and productivity growth (ultimately also due to slower capital accumulation since, in the model, the endogenous productivity component largely depends on growth in government capital stocks, especially in the infrastructure area). The decline in domestic absorption growth is stronger (a loss of 0.6 percentage points) due to the loss in terms-of-trade. Liberia is forced to reduce its trade deficit via some combination of larger real exports and smaller real imports, induced by additional depreciation of the real exchange rate. Household consumption growth declines by around 0.5 percentage points. The loss in final demand growth is particularly strong for the government (declines of around 1 percentage point both for consumption and investment) due to slower revenue growth, especially for revenue from the mining sector. This is echoed in sectoral GDP growth rates, which slow down more strongly for the different parts of government services (by 0.9-1.1 percentage points) than for other sectors (which lose 0.3-0.5 percentage points). The 2030 poverty rate is almost 3 percentage points higher than under base. As a result of worse performance for their different determinants, progress for non-poverty MDGs also slows down substantially. 101. However, the level of mining export prices has virtually no influence from the perspective of the preceding fiscal-space analysis. A rerun of all the fiscal space scenarios with the same decline in mining export prices as under the pwemin-sd scenario led to near identical changes in macro aggregates and MDG indicators. To exemplify: irrespective of whether mining export prices are higher or lower, an increase in priority spending on infrastructure and human development financed by improved government efficiency leads to an increase in household consumption growth of around 0.15 percentage points; the only difference is that, both with and without the fiscal space gain, household consumption grows more slowly if mining export prices are lower. This means that it is possible to explore measures to increase fiscal space in isolation from questions related to the volatility of mining prices; it is preferable to explore the latter topic, which is very important, in a separate analysis. better in terms of growth and poverty reduction but less well in terms of other MDG indicators; the scenarios that spread the spending increase over both HD and infrastructure generate intermediate results. 46 Table 24: Real macro indicators in 2012 (constant US$ million) and growth 2013-2030 by simulation (% per year) 2012 base infhd+tx infhd+e ff infhd+fg infhd+mix inf+mix hd+mix pwe min-sd Absorption 2,652.4 3.8 3.9 3.9 4.4 4.0 4.1 4.0 3.1 Consumption - household 1,206.6 5.1 4.8 5.2 5.5 5.2 5.2 5.1 4.7 Consumption - UNMIL 469.8 -29.7 -29.6 -29.7 -29.7 -29.7 -29.7 -29.7 -29.6 Consumption - government 374.6 6.9 7.8 6.8 7.8 7.5 7.3 7.6 5.8 Fixed investment - private 362.2 3.0 2.5 3.0 3.4 3.0 3.0 2.9 2.5 Fixed investment - government 239.2 2.2 3.5 3.0 3.5 3.4 3.9 2.9 1.2 Exports 590.7 9.1 9.3 9.4 9.3 9.4 9.4 9.2 9.0 Imports 1,649.9 3.9 4.0 4.1 4.4 4.2 4.2 4.1 3.4 GDP at market prices 1,593.3 6.2 6.4 6.4 6.6 6.5 6.5 6.4 5.8 GDP at factor cost 1,430.2 6.5 6.6 6.6 6.9 6.7 6.8 6.6 6.1 Total factor employment (index) 100.0 3.9 4.0 4.0 4.1 4.0 4.1 4.0 3.6 Total factor productivity (index) 100.0 2.6 2.6 2.7 2.7 2.7 2.7 2.7 2.5 GNI 1,410.0 6.5 6.6 6.7 6.9 6.8 6.8 6.7 6.2 GNDI 2,355.5 4.3 4.4 4.5 4.9 4.6 4.7 4.6 4.1 GNI per capita (2009 US$) 0.4 4.2 4.3 4.3 4.6 4.4 4.5 4.3 3.9 GNDI per capita (2009 US$) 0.6 2.0 2.2 2.2 2.6 2.4 2.4 2.3 1.8 Real exchange rate (index) 100.0 2.0 2.1 2.1 2.0 2.1 2.1 2.0 2.1 Unemployment rate (%) 14.7 11.0 11.5 10.9 10.3 10.8 10.9 10.9 12.0 MDG 1 -- poverty rate (%) 60.2 41.8 44.1 41.0 39.1 41.3 41.0 41.8 44.8 MDG 4 -- U5MR (per 1000) 83.4 58.7 58.1 56.8 56.1 56.8 57.2 57.0 61.4 MDG 7 -- Water access (%) 73.3 85.5 86.8 88.2 89.1 88.2 87.4 88.2 82.7 MDG 7 -- Sanitation access (%) 17.8 26.3 27.4 28.7 29.5 28.7 27.9 28.7 24.2 Source: Lofgren (2013) Notes: Base: Base case scenario based on the IMF (2012) Infhd+tax: Allocating fiscal space gained from tax increases to infrastructure and human development Infhd+eff : Allocating fiscal space gained from government efficiency to infrastructure and human development Infhd+foreign grant: Allocating fiscal space gained form foreign grant to infrastructure and human development Infhd+mix: Allocating fiscal space gained mixed options (tax+ efficiency+foreign grants) to infrastructure and human development Inf+mix: Allocating fiscal space gained mixed options (tax+ efficiency+foreign grants) to infrastructure only hd+mix: Allocating fiscal space gained mixed options (tax+ efficiency+foreign grants) to human development only pwe min+sd: Impact of declined iron ore prices as compared to the base scenario 47 Figure 3: Government final demands in 2012 and average for 2020-2030 by simulation 45 40 35 30 HD % of GDP 25 Infra 20 Other 15 Total 10 5 0 2012 base infhd+tx infhd+eff Figure 4: Deviation from base growth for macro indicators (percentage points) 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 infhd+tx infhd+eff infhd+fg infhd+mix inf+mix hd+mix pwemin-sd Absorption Consumption - household GDP at factor cost 48 Figure 5: Deviation from base in 2030 for MDG indicators (Percentage points) 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 infhd+tx infhd+eff infhd+fg infhd+mix inf+mix hd+mix pwemin-sd Poverty U5MR (‰) Lack of water access Lack of sanitation access Figure 6: Deviations from base GDP growth by sector pwemin-sd Other government services hd+mix Infrastructure services Human development inf+mix services Private services infhd+mix Non-mining industry Agriculture infhd+fg infhd+eff infhd+tx -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Percentage points 49 VIII. Conclusions and Recommendations A. Conclusions 102. The foregoing analysis identifies four options for increased fiscal space in Liberia. Based on Heller’s definition of fiscal space, this Note identifies a number of viable options that the government can pursue. These include improving the efficiency of expenditures, increasing external grants, mobilizing domestic revenue, and contracting external debt. The first two options can generate additional fiscal space with limited implication as to higher levels of tax or debt, while the last two options have consequences in terms of levels of taxes and debt and therefore have economic and social impacts. 103. 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 counter-cyclical fiscal policy. The analysis shows that current expenditure for both wages and some goods and services were particularly high. Rationalizing wages and public sector employment will increase transparency and improve efficiency of public expenditure. However, they may not increase fiscal space in the near terms. The pay reform that integrates allowances into base pay could increase the future wage bill unless the government undertakes restructuring of ministries and agencies to eliminate duplication of functions and thereby reducing public sector employment. The latter could entail an increase in severance pays to eliminate redundancies and the cost of retraining of redundant workers to develop skills that are employable. Reducing expenditure on goods and services associated with the use of government vehicles could potentially increase overall spending, especially the devolved fleet that include a loan scheme to eligible civil servants and the operation fleet. Further, implementation of the recently approved Fleet Management Policy should be accompanied by measures to rationalize the government fuel coupon system to ensure the desirable impact on fiscal space. 104. 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 ADB and EC. Off-budget external grants that support ongoing investment projects are projected to be significant in the near term, ranging from US$200 million to US$300 million between 2012/13 and 2014/15. Further, Liberia also benefits from external grants in the amount of about US$130 million from Norway and Germany to finance the national priority investment project, Mount Coffee Hydropower Rehabilitation. 105. Mobilization of domestic revenue could significantly augment fiscal space; however, this will be gradual 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 (CET and replacing GST with VAT). Fiscal space from natural resource revenues has the clear potential to expand: at least one company has already begun extracting and exporting iron ore. Revenue from the sector has already begun flowing into the budget and is projected to peak by 2015 once iron production reaches its full capacity. The implementation of the CET in compliance with ECOWAS also has the potential to increase revenue as Liberia is expected to gradually increase tariffs on certain imports that are deemed necessities and on products considered important to protective industries. 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 50 rate of VAT, the extent of VAT exemptions, and the tax effort. However, implementation of VAT will be held up until government completes its deliberations on the issue. 106. Finally, Liberia could increase external borrowing up to 4 percent of GDP to meet the large investment required by its ambitious Agenda for Transformation. Liberia has a low level of external debt due to reaching the HIPC completion point in 2010. The debt sustainability analysis under the current baseline macroeconomic projections (Appendix 1) shows that the country can maximize external borrowing up to 4 percent of GDP in NPV terms while maintaining debt sustainability over the medium and long-term. This is equivalent to external borrowing of between $300-400 million over the three year period (2012-2015). The amount of borrowing that can obtained will largely depend on the terms of the obligations. The higher the concessional terms, the more that fiscal space can be enlarged through borrowing, and vice versa. Besides, the average borrowing target over a three-year horizon provides increased flexibility to accommodate lumpy investments during the period, while maintaining low debt vulnerabilities. On the other hand, external borrowing could be considered on case by case basis for enclave public investment programs or projects that have the potential impact on exports, fiscal revenues and economic growth. 107. The simulation results of allocating fiscal space gained from various sources to invest on priority areas show that foreign grants provide the most favorable development outcomes. This is followed by improvements in government allocative efficiency. Taxes (on domestic households and firms) are likely to involve trade-offs since they make less resources available for consumption and investment, both of which contribute to stronger macro and MDG performance. However, the strengths of these trade-offs would depend on the details of tax design and the strength of the payoffs from increased spending. 53 Foreign borrowing is a less attractive source of fiscal space: in order to make a substantial difference, the amounts borrowed could quickly add to the foreign debt, making the macro economy more prone to future crisis and reducing its flexibility. 108. Any decisions on policy options for fiscal space enlargement must be accompanied by institutional strengthening. 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 and accurate fiscal accounts that cover both on- and off-budget spending. The absence of such information is a major impediment to analysis of fiscal space and strategic prioritization as well as monitoring and evaluation. 53 If taxes can be designed to be relatively non-distortionary (if possible mitigating negative externalities), how low administrative costs, and if the uses to which additional resources are put have high payoffs, then these trade-offs may be avoidable, i.e. also tax-financed increases in priority spending could lead to improvements without any major trade-offs. 51 B. Recommendations 109. Table 23 below summarizes recommended measures to enlarge fiscal space for the government to consider. Table 25: Summary of recommendations for fiscal space enlargement Potential areas Issues Recommendations 5. Improve efficiency of public expenditure (f) Current Expenditures: A relatively high level of x Complete biometric registration for all civil Wages and salaries compensation to employees as a share servants of GDP and in total expenditure x Strengthen payroll control through regularly compared to 13 ECOWAS countries; reconciling the CSA personal database with MOF weak payroll control, large number of payroll using HRMIS module in the IFMIS ghost workers and redundancies x Implement the medium-term wage reform strategy to improve transparency and ensure medium-term sustainability of wage bill x Implement the functional review recommendations to reduce duplication of functions and redundancies in civil servants (g) Goods and services – High transport costs due to fuel x Rationalize the number of manufacturers and Transport expenses allowances and a lack of policy on models for all government cars to lower the cost of government vehicle fleet newly purchased vehicles and for repair and maintenance x Rationalize the number of vehicles for each ministry and agency based on operation needs; x Set a clear amount of fuel coupon allowances or entitlements to various official functions across ministries/agencies x Estimate the cost of the fleet management policy covering all fleets to inform policy makers of the budgetary impacts as compared to the current fleet management before implementation x In absence of a new fleet management policy, begin recording the value of fuel coupons as allowances or entitlements to staffs under compensation to employees and record the value of fuel coupons intended for operations as non-wage recurrent expenditure. The separate statistics could be a basis for further rationalization of fuel coupons (h) Goods and services – Increasing cost of foreign travel x Rationalize the number of government delegations; Foreign travel x Improve the cost effectiveness of air transport by reimbursing the expenses for business travel only; x Review travel allowance policy and incidental allowances; x Enforce the rule that require official travelers to submit their statement of expenditures together with air tickets and receipts for hotels and other expenses. 52 Potential areas Issues Recommendations (i) Transfers Transfer to autonomous agencies and x Undertake a rapid assessment of regulatory SOEs SOEs has increased to assess their sustainability on the basis of regulatory fees and reasonable operating costs; x Take measures to adjust fees or mandate the SOEs to reduce operating costs within a specific time- frame based on the assessment report x Eliminate budgetary transfers to commercial SOEs, or where justified convert such transfers to loans with specific and transparent tenure and rates; x Establish a clear dividend policy for all commercial SOEs, using best practice benchmarks where possible x Carry out a rapid assessment of the mandate of developmental SOEs and close all SOEs with unclear or overlapping mandates and set specific efficiency and effectiveness targets to be achieved x Require regular financial reporting for all SOEs. (j) Capital expenditure Low execution rate leading to x Integrate donor-funded investment project into the transfers of capital budget to recurrent consolidated budget budget during mid-year x Improve public procurement planning x Carry out a rapid assessment of implementation capacity in the low execution ministries x Build capacity of engineers x Carry out mid-term review of budget execution 6. External Grants Unpredictable flows x Strengthen donor coordination and harmonization to increase funding predictability 7. Revenue Mobilization (c) Tax Revenue Revenue from natural resources x Develop a mechanism for management of revenue from natural resources to ensure transparency and efficient use of revenue and to mitigate adverse impacts of commodity price volatilities Economic and social impacts of x Finalize an agreement with ECOWAS on the tax increased tariffs through CET rates for Type B List, the fifth band for a list of products for industrialization, and the transition period. x Adopt timetable for implementation Replace cascading GST with VAT to x Design and formulate VAT policy harmonize the tax system with x Analyze impacts of VAT introduction ECOWAS member countries x Draft VAT legislation x Develop an implementation plan with a clear timetable (d) Non-tax revenue Lack of reporting on non-tax revenue x Enforce compliance with the PFM Act by some autonomous agencies 8. 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An Analytical Overview of Aid Absorption: Recognizing and Avoiding Macroeconomic Hazards, A paper presented at IMF Seminar on Foreign Aid and Macroeconomic Management, Maputo, Mozambique, March 14-15. 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. Development Committee, Boards of Governors of the Bank and the Fund (April 2006), Fiscal Policy for Growth and Development – An Interim Report, Washington, D.C. DC2006-0003. _____________________________ (2007), Fiscal Policy for Growth and Development – Further Analysis and Lessons from Country Case Studies, Washington, DC, USA. (DC2007-004). Government of Liberia, Ministry of Finance (2013), Mid-year Budget Performance Report, Monrovia, Liberia. Government of Liberia, Ministry of Finance (2013), Annual Fiscal Outturn 2011/12 (Monrovia, Liberia0. 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International Monetary Fund (January 2011), Selected Tax Policy Issues: Petroleum, Mining, Forestry, and Indirect Tax Reforms, IMF mission report, Washington, D.C., USA. _______________________ (January 2012), Tax Policy Reforms – the Next Steps, IMF mission report, Washington, DC, USA. _______________________ (2010), Article IV Consultation – Selected Medium-term Fiscal Issues, Washington, D.C., USA. 54 International Monetary Fund and World Bank (October 2011), Managing Volatility in Low income Countries: The Role and Potential for Contingent Financial Instruments, Washington, DC, USA. Lofgren, Hans (2013). Creating and Using Fiscal Space for Accelerated Development in Liberia. Background paper. World Bank. Tait, A. (1988), Value Added Tax – International Practice and Problems, Washington, DC, USA. World Bank (2010), Liberia’s Infrastructure: A Continental Perspective, Washington, DC, USA, World Bank Policy Research Working Paper Number 5597. World Bank (2010), Liberia: Inclusive Growth Diagnostic, Washington, DC, USA. World Bank (2010b). World Development Indicators. September. World Bank (2012). World Development Indicators. December. World Bank (2012). Liberia: Public Expenditure Review – Meeting the UNMIL Security Transition Challenges. Washington, D.C., USA. World Bank (2012). Liberia: Public Expenditure Review – Human Development Sector. Washington, D.C., USA. Geopolicity (2012). Liberia: Public Expenditure Review and Need Assessment in the Security Sector. report prepared for World Bank and UNMIL. 55 APPENDIX I Liberia: External Debt Sustainability Analysis 54 Liberia’s risk of debt distress is currently low, thanks to the debt relief under the HIPC and the MDRI in June 2010. This gives the Government of Liberia, some head room to borrow externally to scale up public investments, while aiming at becoming a middle income country by 2030. Given the huge infrastructure and human development needs in Liberia, the public investment program under the PRS2, estimates a funding gap of $2 billion over the period 2012-2017, representing a gap $400 million per annum. However, the projected external funding gap of the MTEF budget (2012-2014), is $80 million per annum. This section evaluates the potential for borrowing externally while maintaining low risk of debt distress. Based on assumed macroeconomic framework (see Box A-1), alternative scenarios have been calibrated to provide policy options for borrowing. These are; (i) 100 percent borrowing on IDA concessional terms (40-year maturity, a 10-year grace period, and 0.75 percent commitment fee) at 4 percent and 5 percent of GDP in NPV terms, (ii) Combining baseline IDA concession 55 and non concessional borrowing (20-year maturity, a 5-year grace period and 2 percent interest rate per annum) 56 at 4 percent and 5 percent of GDP in NPV terms and (iii) Baseline IDA concession plus pure commercial terms (15 years maturity, I year grace and 8 percent interest rate) borrowing at 4 percent and 5 percent of GDP in NPV terms. 54 This DSA was conducted by the World Bank staff using the debt sustainability framework for low-income countries. 55 The Baseline IDA concession assumes 100% external borrowing on IDA terms at 3% of GDP in NPV terms. 56 This is the terms that Export-Import Bank of China extended the credits in the amount of 1003.5 million) to Tajikistan in 2007; it has a grant element of 40 percent. See IMF (April 2007), Republic of Tajikistan: 2006 Article IV Consultation—Staff Report, Country Report No. 07/144, Washington, D.C., USA. 56 Box A-1. Key Baseline Macroeconomic Assumptions Real GDP growth in the non-mining sector is assumed to accelerate in the next few years, supported by the public investment program and services sector. Real annual growth including the mining sector is expected to average 7 percent between 2012/13 and 2015/16 as production capacity in the mining sector increases. Growth then fluctuates around an average rate of 6 percent, ending at 5.5 percent at the end of the projection period. There are potential upsides to the growth projection if additional iron ore concessions begin production, ongoing petroleum exploration identifies commercially viable oil deposits, and the government succeeds in securing financing for the more ambitious development program. Inflation in local currency (GDP deflator index) is expected to be 6 percent on average in 2012/13 and then averages 5 percent from 2014 onwards. The merchandise trade deficit widens sharply over the next four years due to a strong increase mining-related imports. However, the strong pick-up in iron ore production in 2015 supports a gradual decline in the trade deficit. Export growth in the near term is lower than in the previous DSA, due to lower commodity prices, particularly for rubber and iron ore. From 2012/13 to FY2014/15 export growth accelerates to a peak of 23 percent due to the initiation of iron ore exports. Exports of goods and services then slow, growing at an average of 4 percent from 2016/17 to 2029/30. Import growth, largely driven by imports of capital goods related to the iron ore sector, is partially offset by lower imports by UNMIL as a result of the expected drawdown. Between 2012/13 and 2015/16 import growth in goods is 13 percent, while services imports fall by average of 10 percent. From 2018/19 onwards these effects are phased out and the average annual growth in goods and services is expected to be 5 percent. The current account deficit of the balance of payments widens to 64 percent of GDP in 2013/14 in line with investment in the iron ore sector. Following this, the current account deficit narrows rapidly to 32 percent of GDP in 2015/16. Beyond this the current account narrows averaging 15 percent of GDP. Tax revenues are projected to remain stable at around 19.5 percent of GDP during the projection period. The external borrowing policy: The Government’s Agenda for Transformation (PRS2) places emphasis on addressing the large infrastructure needs, particularly in the energy and transportation sectors. Part of this investment is expected to be financed through external borrowing raising external debt to GDP from 8 percent of GDP in 2011/12 to 22 percent of GDP in 2014/15. Beyond this, borrowing is expected to gradually stabilize at 2 percent of GDP in 2022/23. All new external borrowing is assumed to be on concessional (IDA) terms. Domestic borrowing, supplied through a planned Treasury bill market, is assumed constant at 1 percent of GDP per year beginning in 2016/17. External grants (excluding UNMIL) are expected to progressively decline from 21 percent of GDP in 2012/13 to about 17 percent in 2015/16. Beyond this, grants are projected to decline to 10 percent of GDP by the end of the projection period. Alternative Borrowing Scenarios Table A-1 shows the results of calibrating the alternative borrowing scenarios using the IMF- World Bank DSA template. In effect the government has flexibility in choosing different combinations of financing options ranging from 100% concessional loans (IDA terms) to non- concessional loans (pure commercial loans). 57 Table A1-1: Gross New Borrowing (Million US$) Loan Structure 2012/13 2013/14 2014/15 Total Baseline 3% NPV 80 90 100 270 4% NPV _ IDA terms 127 158 166 450 5% NPV _ IDA terms 178 202 217 593 4% NPV _ IDA + Less Concession 123 143 153 418 5% NPV _ IDA + Less Concession 143 173 183 498 4% NPV _ IDA + Non Concession 118 133 143 393 5% NPV _ IDA + Non Concession 132 152 162 448 (i) Borrowing Scenario (1) – 100% Concessional Financing on IDA terms. Where government borrows fully on IDA terms, the amount borrowed could range between $450 million and $593 million over the medium term (2012-2015), representing external borrowing equivalent to 4% and 5% of GDP in NPV terms. The sources of concessional credits are largely from multilateral organizations such as the World Bank (WB), Africa Development Bank (AFDB) and the Arab Bank for Economic Development of Africa (BADEA). (ii) Borrowing Scenario (2) – Baseline IDA Concession plus less Concession terms. The second borrowing option combines baseline IDA concessional credit (3 percent in NPV terms) with borrowing from bilateral creditors under less concessional terms than that of IDA. This becomes necessary where projects are linked to the bilateral financing sources. The DSA calibration shows that government could borrow between $418 million to $498 million over the medium term, representing 4 percent to 5 percent of GDP in NPV terms. The sources of less concessional credits are from bilateral partners include Non- Paris club members such as China, South Korea, and Kuwait. (iii) Borrowing Scenario (3) – Baseline IDA Concession plus Commercial loan terms. The third borrowing option combines baseline IDA concessional credit with commercial loans. This becomes necessary where enclave projects are economically viable and are self financing. The DSA calibration shows that government could borrow between $393 million to $448 million over the medium term, representing 4 percent to 5 percent of GDP in NPV terms. The sources of credits in commercial terms include sovereign bonds, international commercial banks and International investment funds. Conclusion Government’s debt strategy needs to be guided by the medium term external debt sustainability analysis because the Liberian economy is highly vulnerable to external shocks (commodity price shocks and global economic downturns). To mitigate the risk, the government is recommend to restrict its external borrowing within the limits of 4 -5 percent of GDP in NPV terms. The government also has the option of borrowing using different financing mixes depending on the viability on public investments as well as the nature of the project. 58 Figure A1-1: IDA at 4% NPV of GDP a. Debt Accumulation b.PV of debt - to GDP ratio 8 53 35 7 52 30 6 51 50 25 5 49 20 4 48 3 15 47 2 46 10 1 45 5 0 44 2013 2018 2023 2028 0 Rate of Debt Accumulation 2013 2018 2023 2028 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt - to - exports ratio d.PV of debt - to - revenue ratio 120 250 100 200 80 150 60 100 40 50 20 0 0 2013 2018 2023 2028 2013 2018 2023 2028 e.Debt service -to - exports ratio f.Debt service - to - revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2013 2018 2023 2028 2013 2018 2023 2028 aselin Baseline rical scenario Historical Most extreme shock 1/ Threshold a Sources: Country authorities; taff estimates and pr and staff projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. In each figure it corresponds to a terms shock where public sector loans are on less favourable terms. 59 Table 1.: External Debt Sustainability Framework, Baseline Scenario, 2010-2033 1/ (In percent of GDP, unless otherwise indicated) 6/ 6/ Actual Historical Standard Projections Average Deviation 2013-2018 2019-2033 2010 2011 2012 2013 2014 2015 2016 2017 2018 Average 2023 2033 Average External debt (nominal) 1/ 140.4 8.1 10.2 15.8 22.2 27.1 30.8 34.2 35.4 32.1 25.0 o/w public and publicly guaranteed (PPG) 140.4 8.1 10.2 15.8 22.2 27.1 30.8 34.2 35.4 32.1 25.0 Change in external debt -131.2 -132.3 2.1 5.6 6.4 4.9 3.7 3.4 1.2 -0.9 -1.3 Identified net debt-creating flows -17.7 -22.1 1.5 3.4 3.9 4.1 3.6 3.0 1.5 -0.6 -2.8 Non-interest current account deficit 30.9 33.4 43.8 28.0 10.2 57.5 64.0 51.4 31.6 24.1 20.6 11.9 13.2 13.8 Deficit in balance of goods and services 99.0 94.9 91.6 90.2 86.5 63.7 39.0 30.7 27.5 19.5 17.8 Exports 41.5 44.7 45.5 44.0 42.8 47.3 50.7 47.9 45.7 38.5 28.1 Imports 140.5 139.6 137.2 134.2 129.3 111.0 89.6 78.6 73.1 58.0 45.9 Net current transfers (negative = inflow) -82.2 -74.1 -60.5 -92.4 39.6 -48.5 -40.5 -31.5 -25.2 -22.5 -20.5 -16.3 -10.1 -14.6 o/w official -28.5 -28.3 -24.6 -21.2 -20.0 -18.5 -17.3 -16.8 -15.9 -12.5 -7.6 Other current account flows (negative = net inflow) 14.1 12.6 12.7 15.8 18.1 19.3 17.8 15.9 13.6 8.8 5.5 Net FDI (negative = inflow) 2/ -29.1 -36.3 -41.2 -24.8 11.9 -53.5 -59.2 -46.2 -26.8 -19.8 -17.1 -11.0 -14.9 -13.2 Endogenous debt dynamics 3/ -19.5 -19.2 -1.1 -0.6 -0.8 -1.1 -1.3 -1.4 -2.0 -1.5 -1.1 Denominator: 1+g+r+gr 1.1 1.2 1.2 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 Contribution from nominal interest rate 0.0 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.2 0.2 Contribution from real GDP growth -14.4 -8.7 -0.6 -0.8 -1.0 -1.3 -1.5 -1.6 -2.2 -1.8 -1.3 Contribution from price and exchange rate changes -5.1 -10.6 -0.6 … … … … … … … … Residual (3-4) 4/ -113.5 -110.2 0.6 2.2 2.4 0.8 0.2 0.4 -0.3 -0.3 1.5 o/w exceptional financing -9.0 -3.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PV of external debt ... ... 7.9 10.6 13.8 16.1 17.8 19.3 19.8 18.0 14.3 In percent of exports ... ... 17.3 24.2 32.1 34.0 35.1 40.3 43.3 46.8 51.0 PV of PPG external debt ... ... 7.9 10.6 13.8 16.1 17.8 19.3 19.8 18.0 14.3 In percent of exports ... ... 17.3 24.2 32.1 34.0 35.1 40.3 43.3 46.8 51.0 In percent of government revenues ... ... 30.2 42.7 51.9 62.4 73.0 79.1 82.7 76.2 63.1 Debt service-to-exports ratio (in percent) 0.0 0.7 1.0 1.1 1.5 1.6 1.6 1.8 1.8 1.9 2.2 PPG debt service-to-exports ratio (in percent) 0.0 0.7 1.0 1.1 1.5 1.6 1.6 1.8 1.8 1.9 2.2 PPG debt service-to-revenue ratio (in percent) 0.0 1.3 1.7 1.9 2.4 2.9 3.4 3.6 3.4 3.0 2.8 Total gross financing need (Millions of U.S. dollars) 22.4 -37.2 50.0 82.6 107.9 131.3 137.2 134.2 119.9 68.4 -97.6 Non-interest current account deficit that stabilizes debt ratio 162.1 165.7 41.7 51.9 57.6 46.5 27.9 20.7 19.4 12.8 14.5 Key macroeconomic assumptions Real GDP growth (in percent) 5.7 7.2 8.5 5.0 7.7 8.6 6.9 6.4 6.1 5.6 7.1 6.8 5.8 5.4 5.8 GDP deflator in US dollar terms (change in percent) 1.9 8.2 7.6 7.6 3.3 2.9 1.0 4.2 3.5 0.1 1.1 2.1 1.9 5.0 2.3 Effective interest rate (percent) 5/ 0.0 0.1 1.2 0.4 0.7 1.5 1.2 1.0 0.9 0.9 0.8 1.1 0.8 0.8 0.8 Growth of exports of G&S (US dollar terms, in percent) -8.4 25.0 18.9 17.6 15.8 8.0 5.1 22.5 17.5 0.0 3.3 9.4 4.2 5.6 4.8 Growth of imports of G&S (US dollar terms, in percent) -7.6 15.2 14.7 41.9 68.6 9.3 4.0 -4.8 -11.4 -7.2 0.8 -1.6 4.9 5.0 4.9 Grant element of new public sector borrowing (in percent) ... ... ... ... ... 46.9 48.0 48.2 50.2 52.3 52.3 49.6 52.3 52.3 52.3 Government revenues (excluding grants, in percent of GDP) 22.5 23.6 26.1 24.9 26.5 25.8 24.4 24.4 23.9 23.7 22.7 24.4 Aid flows (in Millions of US dollars) 7/ 13.0 40.3 28.3 148.8 181.7 183.0 189.2 254.8 238.8 256.6 538.8 o/w Grants 13.0 40.3 28.3 44.8 46.7 40.0 39.2 109.8 118.8 175.6 388.8 o/w Concessional loans 0.0 0.0 0.0 104.0 135.0 143.0 150.0 145.0 120.0 81.0 150.0 Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 5.6 6.1 5.4 4.9 7.2 6.5 5.3 5.1 5.4 Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 60.7 59.8 58.2 59.9 72.9 76.0 84.9 86.7 84.4 Memorandum items: Nominal GDP (Millions of US dollars) 1223.5 1418.7 1656.4 1850.9 1998.5 2215.8 2431.2 2571.8 2784.3 4113.8 9109.6 Nominal dollar GDP growth 7.7 15.9 16.8 11.7 8.0 10.9 9.7 5.8 8.3 9.1 7.8 10.7 8.2 PV of PPG external debt (in Millions of US dollars) 129.2 193.6 270.6 351.1 425.5 489.2 543.2 731.4 1286.9 (PVt-PVt-1)/GDPt-1 (in percent) 3.9 4.2 4.0 3.4 2.6 2.1 3.4 1.0 0.8 1.0 Sources: Country authorities; and staff estimates and projections. 0 1/ Only includes public sector external debt due to lack of data availability of private debt. Fiscal year basis. 2/ Includes private financing flows, including for iron-ore related investment which was included in FDI in the previous DSA. 'HULYHGDV>UJȡ J @ JȡJȡ WLPHVSUHYLRXVSHULRGGHEWUDWLRZLWKU QRPLQDOLQWHUHVWUDWHJ UHDO*'3JURZWKUDWHDQGȡ JURZWKUDWHRI*'3GHIODWRULQ86GROODUWHUPV 4/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are from 2004/05 to 2011/12 due to data availability. 7/ Defined as grants, concessional loans, and debt relief. 8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 60 Table 2a.Liberia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2013-2033 (In percent) Projections 2013 2014 2015 2016 2017 2018 2023 2033 PV of debt-to GDP ratio Baseline 11 14 16 18 19 20 18 14 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 11 14 16 17 18 19 23 31 A2. New public sector loans on less favorable terms in 2013-2033 2 11 16 20 24 27 29 29 26 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 11 14 16 18 19 20 18 14 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 11 15 22 23 25 25 22 16 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 11 13 15 17 19 19 17 14 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 11 22 21 22 23 24 21 15 B5. Combination of B1-B4 using one-half standard deviation shocks 11 7 -5 -2 0 1 3 8 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 11 19 23 25 27 28 25 20 PV of debt-to-exports ratio Baseline 24 32 34 35 40 43 47 51 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 24 32 33 34 39 42 60 111 A2. New public sector loans on less favorable terms in 2013-2033 2 24 37 43 47 57 63 76 93 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 24 32 33 35 40 43 46 50 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 24 36 60 60 67 71 74 72 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 24 32 33 35 40 43 46 50 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 24 51 43 43 49 52 55 54 B5. Combination of B1-B4 using one-half standard deviation shocks 24 17 -12 -5 -1 3 9 33 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 24 32 33 35 40 43 46 50 PV of debt-to-revenue ratio Baseline 43 52 62 73 79 83 76 63 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 43 51 61 71 76 81 98 137 A2. New public sector loans on less favorable terms in 2013-2033 2 43 60 79 99 112 121 123 115 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 43 52 63 73 80 83 77 64 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 43 55 86 96 102 105 94 70 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 43 50 60 70 76 79 73 60 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 43 83 80 90 96 99 89 67 B5. Combination of B1-B4 using one-half standard deviation shocks 43 27 -19 -9 -1 4 12 35 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 43 73 87 102 111 116 107 88 61 Table 2b.Liberia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2013-2033 (continued) (In percent) Debt service-to-exports ratio Baseline 1 2 2 2 2 2 2 2 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 1 1 1 1 2 1 1 2 A2. New public sector loans on less favorable terms in 2013-2033 2 1 2 2 2 3 3 3 5 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 1 2 2 2 2 2 2 2 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 1 2 2 2 3 3 3 3 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 1 2 2 2 2 2 2 2 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 1 2 2 2 2 2 2 3 B5. Combination of B1-B4 using one-half standard deviation shocks 1 1 2 1 1 1 2 1 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 1 2 2 2 2 2 2 2 Debt service-to-revenue ratio Baseline 2 2 3 3 4 3 3 3 A. Alternative Scenarios A1. Key variables at their historical averages in 2013-2033 1/ 2 2 3 3 3 3 2 3 A2. New public sector loans on less favorable terms in 2013-2033 2 2 2 3 4 5 5 4 6 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 2 2 3 3 4 4 3 3 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 2 2 3 4 4 4 3 3 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 2 2 3 3 3 3 3 3 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 2 2 3 4 4 4 3 3 B5. Combination of B1-B4 using one-half standard deviation shocks 2 2 2 2 2 2 2 1 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 2 3 4 5 5 5 4 4 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 48 48 48 48 48 48 48 48 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 62 Figure A1-2: IDA at 4% NPV of GDP Baseline Fix Primary Balance Most extreme shock Growth Historical scenario 100 PV of Debt - to - GDP Ratio 80 60 40 20 0 -20 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 400 PV of Debt - to - Revenue Ratio 2/ 350 300 250 200 150 100 50 0 0 -50 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 18 16 Debt Service - to - Revenue Ratio 2/ 14 12 10 8 6 4 2 0 2 -2 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 ource Country Sources: au s; an try authorities; estimates and proj and staff estim projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. 2/ Revenues are defined inclusive of grants. 63 Figure A1-3: IDA at 5% NPV of GDP a. Debt Accumulation b.PV of debt -to GDP ratio 8 53 40 7 52 35 6 30 51 5 25 50 4 49 20 3 48 15 2 10 1 47 5 0 46 2013 2018 2023 2028 0 Rate of Debt Accumulation 2013 2018 2023 2028 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt -to -exports ratio d.PV of debt -to -revenue ratio 120 250 100 200 80 150 60 100 40 50 20 0 0 2013 2018 2023 2028 2013 2018 2023 2028 e.Debt service -to -exports ratio f.Debt service -to -revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2013 2018 2023 2028 2013 2018 2023 2028 aselin Baseline orical scenario Historical Most extreme shock 1/ Threshold Countr authorities; and Sources: Country nd staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. In each figure it corresponds to a terms shock where public sector loans are on less favourable terms. 64 Figure A1-4: IDA at 5% NPV of GDP Baseline Fix Primary Balance Most extreme shock Growth Historical scenario 120 PV of Debt - to - GDP Ratio 100 80 60 40 20 0 -20 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 400 PV of Debt - to - Revenue Ratio 2/ 350 300 250 200 150 100 50 0 0 -50 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 18 16 Debt Service - to - Revenue Ratio 2/ 14 12 10 8 6 4 2 0 2 -2 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 ourc Country Sources: ies; and staff ntry authorities; estimates and p ff est ons projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. 2/ Revenues are defined inclusive of grants. 65 Figure A1-5: IDA + Medium Concession at 4% NPV of GDP 42 under Alternatives Scenarios, 2013-2033 1/ a. Debt Accumulation b.PV of debt - to GDP ratio 8 60 35 7 30 50 6 40 25 5 20 4 30 3 15 20 2 10 10 1 5 0 0 2013 2018 2023 2028 0 Rate of Debt Accumulation 2013 2018 2023 2028 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt - to - exports ratio d.PV of debt - to -revenue ratio 120 250 100 200 80 150 60 100 40 50 20 0 0 2013 2018 2023 2028 2013 2018 2023 2028 e.Debt service -to - exports ratio f.Debt service - to - revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2013 2018 2023 2028 2013 2018 2023 2028 aselin Baseline orical scenario Historical Most extreme shock 1/ Threshold a Sources: Country authorities; taff estimates and p and staff projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. In each figure it corresponds to a terms shock where public sector loans are on less favourable terms. 66 -6: IDA+ Less Concession at 4% NPV of GDP Baseline Fix Primary Balance Most extreme shock Growth Historical scenario 100 PV of Debt - to - GDP Ratio 80 60 40 20 0 -20 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 400 PV of Debt - to - Revenue Ratio 2/ 350 300 250 200 150 100 50 0 0 -50 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 18 16 Debt Service - to - Revenue Ratio 2/ 14 12 10 8 6 4 2 0 2 -2 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 ource Country Sources: au s; and try authorities; stima and proje an staff estimates projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. 2/ Revenues are defined inclusive of grants. 67 Figure A1-7: IDA+ Less Concession at 5% NPV of GDP a. Debt Accumulation b.PV of debt - to GDP ratio 8 60 35 7 30 50 6 40 25 5 4 30 20 3 15 20 2 10 10 1 5 0 0 2013 2018 2023 2028 0 Rate of Debt Accumulation 2013 2018 2023 2028 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt - to - exports ratio d.PV of debt - to - revenue ratio 120 250 100 200 80 150 60 100 40 50 20 0 0 2013 2018 2023 2028 2013 2018 2023 2028 e.Debt service - to - exports ratio f.Debt service - to - revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2013 2018 2023 2028 2013 2018 2023 2028 aselin Baseline rical scenario Historical Most extreme shock 1/ Threshold a Sources: Country authorities; aff estimates and pr and staff projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. In each figure it corresponds to a terms shock where public sector loans are on less favourable terms. 68 Figure A1-8: IDA + less Concession at 5% NPV of GDP Baseline Fix Primary Balance Most extreme shock Growth Historical scenario 100 PV of Debt - to - GDP Ratio 80 60 40 20 0 -20 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 400 PV of Debt - to - Revenue Ratio 2/ 350 300 250 200 150 100 50 0 0 -50 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 18 16 Debt Service - to - Revenue Ratio 2/ 14 12 10 8 6 4 2 0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 ource Country Sources: authorities; try au and staff estimates s; an projections. stima and proje 1/ The most extreme stress test is the test that yields the highest ratio in 2023. 2/ Revenues are defined inclusive of grants. 69 Figure A1-9: IDA + Non-Concession at 4% NPV of GDP a. Debt Accumulation b.PV of debt - to GDP ratio 8 60 35 7 30 50 6 40 25 5 4 30 20 3 15 20 2 10 10 1 5 0 0 2013 2018 2023 2028 0 Rate of Debt Accumulation 2013 2018 2023 2028 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt - to - exports ratio d.PV of debt - to - revenue ratio 120 250 100 200 80 150 60 100 40 50 20 0 0 2013 2018 2023 2028 2013 2018 2023 2028 e.Debt service - to - exports ratio f.Debt service - to - revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2013 2018 2023 2028 2013 2018 2023 2028 aselin Baseline orical scenario Historical Most extreme shock 1/ Threshold projections. Sources: Country authorities; and staff estimates and p 1/ The most extreme stress test is the test that yields the highest ratio in 2023. In each figure it corresponds to a terms shock where public sector loans are on less favourable terms. 70 Figure A1-10: IDA + Non- Concession at 4% NPV of GDP Baseline Fix Primary Balance Most extreme shock Growth Historical scenario 100 PV of Debt - to - GDP Ratio 80 60 40 20 0 -20 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 400 PV of Debt - to - Revenue Ratio 2/ 350 300 250 200 150 100 50 0 0 -50 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 18 16 Debt Service - to - Revenue Ratio 2/ 14 12 10 8 6 4 2 0 2 -2 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 ource Country Sources: authorities; try au and staff estim es; an projections. estimates and proj 1/ The most extreme stress test is the test that yields the highest ratio in 2023. 2/ Revenues are defined inclusive of grants. 71 Figure A1-11: IDA + Non-Concession at 5% NPV of GDP a. Debt Accumulation b.PV of debt - to GDP ratio 8 60 35 7 30 50 6 40 25 5 4 30 20 3 15 20 2 10 10 1 5 0 0 2013 2018 2023 2028 0 Rate of Debt Accumulation 2013 2018 2023 2028 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt - to - exports ratio d.PV of debt - to - revenue ratio 120 250 100 200 80 150 60 100 40 50 20 0 0 2013 2018 2023 2028 2013 2018 2023 2028 e.Debt service - to - exports ratio f.Debt service - to - revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2013 2018 2023 2028 2013 2018 2023 2028 aselin Baseline rical scenario Historical Most extreme shock 1/ Threshold a Sources: Country authorities; aff estimates and pr and staff projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. In each figure it corresponds to a terms shock where public sector loans are on less favorable terms. 72 Figure A1-12: IDA + Non Concession at 5% NPV of GDP Baseline Fix Primary Balance Most extreme shock Growth Historical scenario 100 PV of Debt - to - GDP Ratio 80 60 40 20 0 -20 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 400 PV of Debt - to - Revenue Ratio 2/ 350 300 250 200 150 100 50 0 0 -50 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 18 16 Debt Service - to - Revenue Ratio 2/ 14 12 10 8 6 4 2 0 2 -2 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 ource Country Sources: authorities; try au and staff estim es; an projections. estimates and proj 1/ The most extreme stress test is the test that yields the highest ratio in 2023. 2/ Revenues are defined inclusive of grants. 73