FrontPageAfrica (Monrovia)

21 May 2014

Liberia's Spending Curse - Will Konneh's Austerity Fix Shortfall?

In addition, US$10 million and US$8 million, respectively, will be budget support borrowing from the World Bank and the African Development Bank, while a further US$10 million will be domestic borrowing. Together, core and contingent revenue budget support grants and borrowing provide a total resource envelope of US$705 million.

As the nation prepares for yet another budget debate, Liberia's economic posture for the pending budget cycle seems set to prepare government weather a bumpy ride through austerity, evidenced by some very hard-hitting realistic projections and attendant justifications for a US$529 million budget that combines aggressive revenue generation with careful debt management and scaled-up spending in security, energy and the road networks.

Monrovia - With President Sirleaf submitting her 9th budget in her tenure as President, the Liberian economy has been challenged in recent years, registering a slower growth with increasing pressure on domestic revenue mobilization. While exchange rate fluctuation and inflation has had a compounding effect on the already volatile economic climate, the "spending spree" in government has all but exacerbated the situation. Yet analyst within the World Bank and IMF believe the situation is under control, but the government cannot allow its ambitious expenditure basket chase diminishing revenue sources.

The country seems to be experiencing, what many believe a terrible financing gap between its revenue potential and ever expanding expenditure demands. As a result, it has struggled in the last two budget cycle to raise the resources projected in the approved National Budget though revenue has increased year on. In fact revenue collected in each of those two years has been significantly higher than each of the previous years, accounting for 42% of the total revenue generated through the administration of President Sirleaf.

Total revenue collected in the eight (8) years since President Sirleaf took over amounts to US$2.716 billion, with US$1.56 billion (58%) collected in the previous five and half years of the administration, with US$1.15 billion collected in the last two and a half years.

The government has been growing revenue steadily but the budget has itself been ballooned with the combined effects of loses on duty free on certain imports by big concessions averaging nearly US$120 million a year and a noticeable reduction in activities of NGOs. Analysts familiar with customs issues fear that the government would continue to lose potential revenue unless blanket waivers in many of the concession agreements are reviewed and amended.

A recent report released by the Africa Progress Panel mentioned Liberia as one of the African countries in which in thee quest to attract investors has led to error in granting huge tax waivers to foreign companies. The tax waivers, the Panel observed dates far back as the 1990s, when demand for resources was more limited and Africa's economic environment less favourable featured extensive exemptions from corporation taxes, withholding taxes and import duties. The Panel notes that in many cases royalty charges were reduced or waived as many of these arrangements were continued even when the projects in question were highly profitable.

"Liberia continues to provide extensive tax concessions to foreign investors involved in ore projects that go far beyond the arrangements set out in the Liberia Revenue Code (LRC). In a review of the natural resource sector, one IMF assessment made the following recommendation: "If these concessions come up for renegotiation, the authorities should aim to harmonize the terms with the LRC and avoid tax breaks", the Panel stated.

But as the nation prepares for yet another budget debate, Liberia's economic posture for the pending budget cycle seems set to prepare government weather a bumpy ride through austerity, evidenced by some very hard-hitting realistic projections and attendant justifications for a US$529 million budget that combines aggressive revenue generation with careful debt management and scaled-up spending in security, energy and the road networks.

Laundry List of Austerity Measures

The authorities at the Ministry of Finance have already unpacked a laundry list of austerity measures they hope would reduce the pressure for funding of capital projects and avoid any budget disruption in the middle of the fiscal cycle.

As a means of further minimizing waste, FrontPageAfrica has learnt that the government is introducing bulk purchases in procurement for the five biggest spending entities -Ministries of Finance; Lands, Mines & Energy; Education; Health; & Public Works - and for all procurements of capital equipment in the new fiscal year, which will enable the government to benefit from economies of scale while at the same time giving GOL institutions more time to focus on the delivery of their core mandates. The GSA, PPCC and MOF will work with spending entities to develop an implementation framework before the passage of this budget into law.

A decision has also been made, according to the Ministry of Finance to limit spending on recharge cards, gasoline and foreign travels. "Further steps would be taken to reduce excessive expenditure on goods and services by eliminating scratch cards and reducing spending on fuel and foreign travel. Fuel will be restricted to operational use only; and for all air travel less than eight hours in duration, officials and ministers will be required to fly economy class. The number of foreign trips will also be limited to three per year, with the exception of the President, Vice President, the Minister of Foreign Affairs and the Minister of Finance; and there will be a limit of no more than five members on any travel party" says the President, in her budget address.

The government hopes that these recurrent savings will raise the required funding within the budget space to address critical infrastructure and security challenges. Despite these seemingly drastic austerity measures undertaken by Government, it remains to be seen whether or not the National Legislature during its review process will not determine unrealistic revenue sources so as to impose unnecessary expenditure on the fiscal year 2014-2015 annual budget.

In delivering the budget, the President of Liberia has called for the legislature to view the submission in light of challenging economic situation and the shortfall in revenue. "This budget for fiscal year 2014/2015 is drawn in such a manner to allow better efficiency in the allocation of available resources, which involves the third year implementation of Liberia's first Medium Term Expenditure Framework (MTEF), the multi-year framework, that aligns development priorities with the resource envelope, including revenue, budget support from donors and borrowing, over a rolling, three-year period" says President Sirleaf.

In the submission, the President said she was presenting a budget that focuses on broadening the tax base, strengthening enforcement and eliminating fraud. She noted that the government was faced with inadequate cash flow from revenues to address rising competing demands on the expenditure side for many recurrent items in the budget and that tighter fiscal space for recurrent spending arising from policy decisions to increase the National Budget's contribution to the investment component with a view to accelerate public infrastructure projects; and the increasing debt repayment requirements.

US$529 Million Budget

With gloves off and the legislature, particularly the House of Representative bent on introducing allocation for the highly controversial and unpopular district development fund of 73 million, it is yet to be seen how the debate would unfold.

The total budget submitted is estimated at US$529 million and includes tax, non-tax and budget support grants, is 4 percent higher than the updated projection of US$486 million for total revenues for this fiscal year, but 12 percent below the 2013/14 budget. Drawing lessons from the shortfall of 2013/2014, observers think the 2014/15 projections look realistic, as contingent revenue lines have been reintroduced to factor uncertain revenues.

Out of the US$506 million in core revenue, the Government projects to receive US$413 million in tax revenue, US$66 million in non-tax revenue and US$27 million in grants.Core tax revenue is expected to grow steadily compared to this fiscal year, by nearly 11 percent, driven by expansion in taxes on income and profits and on international trade. Royalties and rents from concessions, particularly iron ore, are expected to rise, despite there being no one-off payments projected for this year. However, core non-tax revenue is falling overall, due to the reclassification of a portion of the dividends from SOEs as contingent.

Budget support grants are expected to fall as two donors, the World Bank and African Development Bank, have transitioned their budget support to loans rather than grants. Credits of US$10 million from the World Bank and US$8 million from the African Development Bank, both for disbursement in fiscal year 2014/15, are expected to be put before the Legislature, but the slow passage of previous credits means they have been classified as contingent revenue.

Under this upcoming budget cycle, total borrowing is expected to be US$175 million. Of this, US$147 million will be disbursements of project financing agreements ratified by the Legislature and intended for specific projects. Government expects US$147 million to be disbursed against financing agreements for specific projects, including US$59 million for projects in energy, administration, infrastructure and agriculture financed by the World Bank;US$30 million from the European Investment Bank for the rehabilitation of Mt. Coffee; US$8 million from the AfDB and US$1 million from the International Fund for Agriculture Development (IFAD) for the small tree crop agricultural program.

In addition, US$10 million and US$8 million, respectively, will be budget support borrowing from the World Bank and the African Development Bank, while a further US$10 million will be domestic borrowing. Together, core and contingent revenue budget support grants and borrowing provide a total resource envelope of US$705 million.

On the expenditure side, Government is clear cut on avoiding wastage by prioritizing debt repayments and other non-discretionary payments, to prevent the build-up of arrears; waging a war on waste and reducing recurrent expenditures in order to free up resources for the Agenda for Transformation by eliminating some budgetary lines and reducing other lines that are very highly discretionary. Some of these lines are operational expenses, travel, fuel and scratch cards.

Under this fiscal regime, Government will concentrate on paying portion of its high impact projects across a number of sectors, known as counterpart funding, in order to leverage over US$300 million of additional donor funds and develop much needed infrastructure; investing in the security sector to ensure that the country can fill the gaps left by the UNMIL as they drawdown; and leveraging external financing for national infrastructure - for the Fish Town to Harper road, Sinoe port rehabilitation, construction of power plants and transmission lines.

It can be recalled, when the Executive submitted the last fiscal budget to the National Legislature,it was increased from US$553 million to US$582 million, thereby imposing extra US$29 million strain on the budget, and eliciting the perennial budget shortfall debate.

Fiscal Policy

Finance Ministry officials say the government continued its fiscal expansion under Konneh in Fiscal Year 2012/13 with USD 593 million in expenditure, a dramatic increase since FY2006/07's outturn of USD 135 million, as the economy and revenue collection has recovered. The FY2012/13 outturn was lower than the approved USD 672 million budget for the year, as some of the expected loans and contingent revenues did not materialize. The 2013 deficit was an estimated 2.6% of GDP, lower than envisaged due to slow capital budget execution. The government experienced some expenditure overruns, including for the repayment of previous years' overdraft at the Central Bank and for the absorption of health and education salaries that were previously paid by donors. Some of these overruns were paid for by revenue for FY2013/14, which has called for identifying commensurate savings this year, which, combined with revenue shortfalls, may affect capital budget execution. The government's wage bill comprised more than 35% of expenditure in FY2012/13 and is high compared to the rest of Africa. Konneh has emphasized that containing the payroll and recurrent expenditure will be critical to allow for public investment.

Capital spending bottlenecks have persisted, including the slow passage of the budget by the Legislature (the last two budgets were not approved until September, three months into the fiscal year, and the FY2013/14 budget was not signed until October), delayed ratification of external financing agreements by the Legislature, and capacity constraints in project planning and implementation by sector ministries and agencies. Konneh has taken some steps to address these challenges, including the establishment of the Project Management Office and an expedited budget calendar for FY2014/15. Accordingly, public investment execution has been strengthened in FY2013/14, with financing agreements finalized for some key projects in the energy and road sectors.

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