21 September 2017

Liberia - Fixing 2017/2018 National Budget

opinion

The 2017/2018 National Budget has now been signed into law. The total appropriation stands at $563m. Domestic revenue is estimated at 89% ($501.7m), comprising mostly tax revenue (78% or $393.6m) and non-tax revenue (19% or $94.7m) with the remainder being contingent revenue. Grants comprise only 9.5% of the $563m envelope ($54m).

The expenditure side is dominated as always by recurrent expenditure ($508.2m or 90%) of the national budget. Recurrent expenditure is broken into Compensation of Employees or personnel cost; goods and services necessary for administrative operations; grants and subsidies provided to private sector institutions in the education, health and other sectors; debt payments to external and domestic borrowers; etc. Compensation of employees ($291.4m) amounts to 58% of recurrent expenditure or 51.6% of the national budget.

Total goods and services are projected at $102m or 18% of recurrent expenditure. Public Sector Investment Programs (PSIP) is projected at $55.2m or 9.8% of the national budget. Elections funding and road projects dominate the PSIP.

The question economists and commentators normally grapple with borders on the allocative efficiency of budget resources by our budget authorities. Every year we hear criticisms of the recurrent expenditure component of the national budget, with particular focus on the compensation of employees' proportion of the national budget. Is government's allocation of its budget resources aimed at ensuring effective and efficient service delivery to the citizenry?

Are public programs such as agriculture, health, education, infrastructure development, security and rule of law, etc, being given a fair share of the budget resources to improve the welfare of the Liberian people? Or is the government merely paying big fat salaries to government workers without caring about the rest of the people?

This article takes a look at our budget in an attempt to understand why the budget authorities are consistently challenged by the recurrent expenditure dilemma, and attempts to look for solutions to our recurrent expenditure problem. The desire to shed light on this matter was prompted by the recent presidential debate in which the presidential candidates were asked for their views on the matter and their policies to address the challenge.

The International Monetary Fund (IMF) in its 2016 World Economic Outlook estimates Liberia's gross domestic product (GDP) for 2017 at US$2.3b, with real (nominal GDP without the effects of inflation) GDP estimated at US$920.9m (CBL annual report 2016). GDP is the estimated monetary value of all finished goods and services produced within a country's borders within a specified period of time.

It provides an indication of the size of the economy, and is usually an indicator of the country's standard of living. per capita GDP by the same IMF World Economic Outlook report for the same period is estimated at $491.65. This means if you divided GDP by the population of the country, this is how much would be estimated for each individual in the country during 2017. Breaking GDP per capita into a daily rate per individual gives $1.35.

This figure is useful for comparison purposes. So we will look at some of our neighbors per capita GDP. Sierra Leone's is $623, which when prorated to a daily rate equates to $1.71. Guinea's is $534 prorated to a daily rate of $1.47. Cote d'Ivoire's GDP per capita is $1,480 which 2 when prorated to daily rate gives $4.05.

This comparison indicates that Liberia is the poorest and least productive among her neighbors. In fact, the IMF's 2016 estimates put Liberia at 178 of 186 countries ranked in terms of GDP per capita, suggesting that we are only better than 8 other countries. The World Bank's 2016 measures put Liberia at 170 of 178 countries. The United Nations 2015 calculations put Liberia at 189 of 195 countries.

Liberia's real GDP is dominated by the service sector which is estimated at 49% according to the CBL's 2016 annual report. Agriculture and Fisheries are the next dominant items in our real GDP composition with 26%. Forestry makes up 10% of estimated real GDP followed by Mining and Panning which also constitute 10%. Finally, in our real GDP basket is Manufacturing which constitutes 5%.

The size of GDP points to a fundamental economic problem: our economy is too small or constrained because (a) households are not consuming or spending much; (b) businesses are not investing or spending much; (c) the Government is not spending much; and (d) we as a nation are spending more of our little income on foreign goods and services. So why aren't we as a nation spending much, and why are we spending our little money on imports?

Two alternative approaches to calculating GDP are either the expenditure approach or the income approach, as the spending by one is the income of another. So maybe our income is just too little to allow us to spend much. Lack of income constrains the spending of households, which affects investments by firms, and therefore affects government's ability to generate revenue that it can spend.

For households to spend more, they need jobs that pay well. Our police officers and other security sector compatriots need to make a living wage plus a premium for the risks associated with their jobs, their qualification and expertise. Nurses and teachers need to be appropriately compensated also. Firms or businesses will only invest more if they have customers, i.e., households who have enough money to buy the goods and services produced by firms.

As long as businesses/firms don't generate enough revenue or see potential for revenue growth, they will not invest. If they do not invest, their spending level will remain constrained. Additionally, because of poor revenue generation, tax payments to Government will not grow. Taxes are not lawfully paid on losses. Taxes are paid on profits.

The national budget articulates government's fiscal policy and is the tool by which government's spending is executed. By law and under our constitution, Government can only spend monies appropriated in the national budget. These monies in the national budget come from several sources, including taxes on individuals and businesses; taxes on international trade such as excise and custom duties; dividends; royalties; fines and penalties; rent; grants; loans and other miscellaneous sources.

The latest LEITI (Liberia Extractive Industry and Transparency Initiative) report for FY2014/2015 confirms that all the big companies (44 in total) in the extractive sector -the oil & gas sector, mining sector, forestry sector, and agriculture sector, including Firestone, Arcelor Mittal, China Union, Sime Darby, etc., contributed $100.73m to the national budget of $642.22m (about 15.68% of total revenue) in all payments made to the Government, whether they were withholding taxes from their employees, royalties, etc.

Corporate social contributions in cash and in kind during the same period equated to $8.3m, which amounts to another 1.7% of the national budget of the same period. This means that 3 more than 84% of Government's revenue (without factoring in the social corporate contributions since those were off budget) came from sources other than the big time outfits in the extractive sector.

The revenue envelope of the national budget shows taxes on international trade as the biggest revenue source- 33% of the national budget ($184.3m). The concessionaires or the big time investors do not pay custom or excise because they all have (almost all of them) duty free privileges.

Custom and excise are paid mostly by our Liberian SMEs who bring in their containers through our ports. The next significant source of revenue in the national envelop is taxes on profit and income, which amount to $145.8m (26% of projected revenue).

Remember also that the big investors or concessionaires have tax holidays and tax waivers, and as they have supposedly invested billions into their ventures, they are reporting accounting losses which must be carried forward to off-set future profits until those losses are fully exhausted. We therefore have a long time to wait before we start seeing them pay taxes on profits.

Those reported billion dollars investments are mostly in the purchase of heavy duty equipment for their operations. They are therefore purchased abroad usually from their associated or parent companies. Most often these are used equipment that are fully depreciated abroad for which they have received full capital allowances, and are refurbished but revalued to inflate their actual investments (in Liberia) so that their costs of operations look high, and their actual tax liabilities are therefore subsequently reduced by these high reported costs of investment.

Taxes on goods and services are expected to contribute $53.6m (about 10% of projected revenue). These are paid mostly at the ports of entry on imported goods by SMEs, and by few restaurants, hotels and other service providers who are required to charge GST for their services and remit same to Government. It is important to note that GST is not a charge to businesses, but to consumers of the goods and services that businesses sell.

However, for SMEs bringing in imports, they are required to pay on behalf of their customers the 10% even if they do not get to sell those goods, or if the selling price of the goods changes.

For restaurants, hotels, and other service providers, they actually charge their customers the GST and remit same to Government, hence GST is not a cost to them as it is in the case of SMEs. The other significant contributor to the revenue envelop is Property Income, which contributes about 13% ($72.6m) of total revenue.

Aggregating all the different sources including the miscellaneous items show a tight envelop of $563m projected for this fiscal year, which includes direct budget support from donors such as grants or loans. For their part, the donors report that they will be spending around $700m during the same fiscal period, although in practice this will not necessarily translate into actual cash coming into our economy.

The challenge the fiscal authorities face therefore is an allocation and prioritization problem within the tight fiscal space available. Needs abound while resources are scarce- Econ101. Needs therefore have to be delineated from wants and organized on a scale of preference.

Opportunity cost is significant. For instance, the priorities of GoL are roads, energy, health, education, security, etc. Roads alone are estimated to cost at least $1b to connect the entire country.

This does not include city and feeder roads, but just the main highways connecting the counties. Our actual health expenditure is estimated at $221m ($77.1m from GoL and $143.9m by donors) even though the ideal resource requirement to 4 solve all our health sector needs is about a billion dollars for FY2017/2018. Then there is education, energy, etc.

The Government could attempt to deploy all of its resource envelop to roads, or health, or education, or energy, etc., or attempt to spread that little envelop among all its competing needs, with an effect that would be unnoticeable. Or the Government could focus on priorities that it can handle well and leave the donors to do the other items that the donors can handle better.

Donors normally will not pay recurrent expenditure. They will not pay salaries, rents, stationery, or other such costs. But they will most likely build schools, health centres, cover energy cost like the Mt. Coffee hydro dam, etc. If the Government does not pay recurrent expenditure, nobody will. That would mean downsizing the 40,000 or so civil servants, closing Government offices, etc. Of course this is never an option for any Government. Governments have a responsibility/obligation to ensure full employment, at adequate remunerations.

The question about recurrent expenditure therefore has to be about waste and abuse. Salaries for the top officials are believed to be too high. Legislators for example make above $15,000 each in salary and allowances per month.

A handful of other GoL officials make such amounts. CSA commissioned studies show that the highest any top level official should actually make must not exceed $10,000. Already all cabinet ministers and other heads of entities make below this amount.

Apart from the Legislators, very few officials pass the $10,000 mark, so if the Legislators were to shave at least $7000 each off their remuneration (salary and allowances) we could easily achieve savings of around $9m (103 lawmakers x $7k x 12months), but the impact on the national resource envelop is still going to be a drop in the ocean- not enough to make any significant savings. You cannot cut salaries of the Police or health workers or any other civil servants.

We actually need to ensure the lowest paid civil servant makes at least $500. If we were to increase the Police salary from $150 to $500 ($350 upward adjustment each), and add this $350 salary to each civil servant salary, that would increase the civil servants (40,000 civil servants including health workers, etc) wage bill by $170m per year.

Deduct the savings of $9m from the overpaid officials, and you get a net increase of $161m to the payroll. Point: the recurrent expenditure needs to increase by at least $161m. I'm sure this is not the news that critics of the high proportion of recurrent costs want to hear, but civil servants have a right to be paid well, and urgently too.

The Government needs to create jobs, particularly in the private sector, in order to take the stress off the public sector. But developing the private sector will take time, hence the need to create jobs in the public sector before transitioning from the public sector to the private sector.

We do not have a welfare system, where the unemployed are paid some kind of living allowance while they look for jobs. If households are to spend money on goods and services produced by businesses/firms, in order for firms to invest more, so that Government revenue can increase for Government to spend more, we will need to create jobs.

The unemployment numbers by LISGIS suggest that only 3% of the workforce are unemployed, but the so-called 97% employment rate is actually in the vulnerable informal sector, which make up around 78% of the employed. These are value-sellers, table market sellers, subsistence farmers, marketers, etc. 5

In fact the employment records reported by LEITI also suggest that less than 19,000 (1.5% of the employed) are employed in the extractive sector excluding the Agriculture subsector.

Agriculture is not included because the report does not disaggregate employees of the agriculture component of the extractive sector from the non-agriculture extractive sector. If 1.2m people are considered employed in Liberia according to the Ministry of Labor, and 40,000 (3% of employed) are employed in the public sector (with GoL), while 930,000 (78% of the employed) equate to the number in the informal sector-the so-called vulnerably employed, then the balance 230,000 (19% of the employed) employed are in the formal private sector.

The last Labour Force Survey produced by LISGIS estimates that about half (508,000) the employed workforce work in the Agriculture, Fisheries and Forestry sector. In Liberia, Agriculture is dominated by the Rubber and Palm industries, and these are produced for export sales. Upon the arrival of Firestone and the likes, Liberian farmers were forced to stop producing food or cash crops, and were employed on rubber farms to create wealth for the plantation owners who were mostly foreigners and a handful of Americo-Liberian farmers. This has resulted into our inability to feed ourselves, but to depend mostly on imported food such as pusawa (Kpelle for 30 cups of rice).

The CBL reports that in 2014 we imported $319.5m of food with rice imports comprising $155m of this amount. Compare that with the total payment made to GoL by the combined Agriculture, Fisheries and Forestry extractive sector which netted $26m to GoL even though we exported $90m from the sector in the same period.

The point here is that we as a country earned far less ($90m earned by the entire sector while GoL received only $26m of this amount) from our productive factors of production while concentrating on traditional agricultural exports of rubber, thereby relying on imports of food for which we paid a lot more ($319.5m total food including $115m rice imports).

In other words, we are failing to efficiently exploit and deploy our factors of production (land, labor, capital and entrepreneurship). If we concentrated our factors of production on feeding ourselves rather than on selling rubber, we would not need to send out $319.5m to buy food from other countries in exchange for $90m export earnings (net import is $319.5m - $90m= $229.5m).

By refusing to focus on feeding ourselves, we are hurting our trade balance, hurting the value of the Liberian dollar, and suppressing economic growth (GDP shrinks as the gap between imports and exports widens).

Liberia needs to redeploy its factors of production on the production of goods and services that are beneficial to Liberia, whose prices the Liberian people can control, instead of producing agricultural produce or extracting our natural resources such as iron ore that we cannot eat, and for a market whose prices are dictated by exogenous market forces.

These are not revenue generating goods that are also growing the economy faster, hence our GDP is constrained; our budget is constrained; while employment is mostly in the vulnerable informal sector where majority earn less than they can eat daily (GDP daily per capita rate of $1.35).

Apart from efficiently deploying our factors of production so that we grow the economy in a manner that the growth leads to economic development, we also need to expand the revenue base by becoming more efficient and effective in revenue generation. Lower taxes, less bureaucracy, and taxpayer friendly 6 policies are the way to go.

For example, rather than charging around $15,000 to clear one 20ft container at the ports, over a minimum period of 3 weeks, during which we stress out the tax payer, we instead need to charge a fix rate for clearing a 20ft container- say $5,000, within a minimum period of 3 work days, while assisting the taxpayers professionally and courteously.

The Government needs to empower our SMEs and guide them to establish room-size factories Chinese-style. Our farmers need to move away from the hard labor styled farming to mechanized farming that would make farming easy and fun to do. Energy production, particularly solar energy for farmers and other rural areas needs to be prioritized.

Food production rather than rubber or palm production must be the key agricultural objective. Shut down the mines Tanzania style, otherwise our gold and iron ore will be depleted without the country realizing any substantial value.

Balancing the budget or living within our means is NOT fiscal discipline. Fiscal discipline means cutting out waste and abuse, and deploying our resources more efficiently. We cannot reduce the overall wage bill. The problem is not recurrent expenditure.

Additionally, the problem is not with how the budget has been prepared or with the allocation of the available resources in the revenue envelop. No; those two areas are very well covered materially.

The problem is the inefficient deployment of our factors of production; the draconian revenue generating system; the pervasiveness of waste and abuse within the economy; and the absence of incentives and stimulus to Liberian SMEs. In short, we need to increase the size of the revenue envelop.

But one of the candidates has already brilliantly articulated this!

Paul Columbus Collins, PhD - Contributing Writer

Liberia

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