18 June 2019

Liberia: Grant or Loan? Liberia, IMF in Deadlock Over U.S.$100m From EJS Era

Monrovia — Discussions between the George Weah-led government and a team of experts and tacticians from the International Monetary Fund(IMF) have reportedly hit a snag. At issue is a brewing controversy surrounding the classification of a whopping US$100 million which came to the country from the IMF between 2014 and 2016 - when former President Ellen Johnson-Sirleaf's government was in charge.

Was it a loan from the IMF to the Sirleaf administration or a grant? Either way, where did the money go?

That's the sticky question Weah administration officials are said to be running in circles with the IMF team, fearing that a US$100 million loan could increase Liberia's indebtedness to the international monetary body.

President Weah recently endorsed an IMF-Supported Program for Liberia. The experts have over the past few days been meeting with senior officials and several sectors of the government in a bid to help resuscitate the ailing economy.

Last Friday, the IMF team, as part of its mission to Liberia, met with both Houses standing committees on Budget, Ways, Means and Finance in the national legislature. The meeting was intended to convince the legislative branch of government to buy into the reform process. The crux of the meeting focused on wage bill reform which will see a harmonization of salaries across ministries and agencies of government.

Finance Ministry sources tell FrontPageAfrica that its Debt Management Unit does not recognize the US$100 million in question as a loan. "The government has always seen this as a grant that will not be repaid and that it does not have documentation to show this is a loan," said a source speaking on condition of anonymity Monday.

The MFDP is arguing that the national legislature did not ratify the amount and to classify it as a loan would be a huge violation of the Public Finance Management Regulations(PFM) and a major breach of governance under the Sirleaf administration.

IMF Rarely Gives Grants, Except...

The IMF, according to sources privy to the ongoing discussions, has reportedly agreed that the activity would be a major or breach of governance but says its record shows the amount as a loan. However the IMF does not give grants to countries except in extreme emergencies as it did during the deadly Ebola virus outbreak when it granted Liberia, Guinea and Sierra Leone - the three countries stricken by the deadly virus a debt relief of about $100m (£65m) as it prevailed on other international lenders to the countries to take similar action as it established a catastrophe containment relief trust to provide grants to countries suffering epidemics and other natural disasters.

The trust was aimed at providing the money to the three countries so they could pay off debt to the IMF. The IMF also offered the west African states $160m of new interest-free loans at the time.

The IMF's Catastrophe Containment and Relief (CCR) Trust allows it to provide grants for debt relief for the poorest and most vulnerable countries hit by catastrophic natural disasters or public health disasters. The relief on debt service payments frees up additional resources to meet exceptional balance of payments needs created by the disaster and for containment and recovery. Established in February 2015, the CCR Trust grants complement donor financing and the IMF concessional lending through the Poverty Reduction and Growth Trust.

Assistance through the CCR Trust is available to low-income countries eligible for concessional borrowing through the Poverty Reduction and Growth Trust and which also have either a per capita income below the International Development Association's (IDA) operational cutoff (currently US$1,165) or, for small states with a population below 1.5 million and a per capita income below twice the IDA cutoff (currently US$2,330).

According to the PFM law, the Debt Management Committee is mandated to participate in the negotiations of government guaranteed loans ,together with the Minister. "Any proposals for amendments to the loan or guarantee agreement, in the cases of government guarantees already issued, shall be made with the prior approval of the Minister in consultation with the Debt Management Committee; Borrowers under government guaranteed loans shall provide to the Minister, on a monthly basis by the 15th of the month, information on the state and movement of funds under the loan."

The law stipulates the terms and conditions that projects applying for government guaranteed financing should meet, and the government guarantee issuance procedures shall be determined by the Debt Management Committee with interest and principal payments of government guaranteed debt to be paid by the borrowers.

Section G of the PFM law states that "All moneys received by way of loans, grants, and donations shall constitute public moneys and shall be paid into the Consolidated Fund; The Minister shall make provision in the budget estimates for loans, grants and donations receivable in cash; Where the quantum of the loan, grant or donation referred to in sub regulation; is not known a provision shall be included in the estimates and when the quantum becomes known a supplementary estimate shall be raised for the amount involved; Where loans, grants and donations are receivable in kind, the value of such donations shall be determined and included in the estimates and reflected as expenditure in the financial year; Moneys received for specified projects which have been paid into the Consolidated accounts."

The disagreement over the US$100 million comes as the IMF pushes the belief that a credible budget will enable monetary policy to operate and help bring down inflation and rising prices. Addressing the revenue and expenditure gaps, according to the monetary body, will also require a new approach in SOEs contribution to the resource pot. State-Owned Enterprises are operating in a way that does not provide a definitive contribution towards budgetary support. SOEs are also noted for determining their own expenditure including salaries and other benefits which is way above other ministries and agencies of government.

30% Purchasing Power Lost

Extended assistance to Liberia's GDP in the past years was one of the highest. In recent months however, it has taken a tumble.

The aid was paying for both capital revenue and wage including goods and services. The net flow of foreign exchange has also reduced; something that started around 2016 due to UNMIL departure, the slumped in natural resources. The IMF informed the House's committee that a recent household income expenditure survey shows that the poorest earn and buy in Liberian Dollar and that they have lost about 30% of their purchasing power.

Last week, the latest Article IV IMF Consultation on Liberia concluded that the near- and medium-term outlook under the baseline scenario is challenging. "Growth is projected to slow further to about 0.4 percent in 2019 and remain below 2 percent into the medium-term. In the baseline scenario, the authorities face the possibility of a forced, abrupt adjustment when domestic and external financing options are exhausted. An alternative reform scenario is therefore presented as a more viable alternative, in which growth weakens somewhat in the near term, due to proactive fiscal and monetary tightening, but picks up significantly over the medium term to exceed 5 percent by 2024."

The IMF emphasized that significant fiscal adjustment is needed going forward. They underscored that efforts should focus on mobilizing domestic revenue and rationalizing spending, especially the wage bill, while securing needed space for social and capital spending. Directors encouraged the authorities to formulate realistic budgets and to implement a sound borrowing plan that ensures debt sustainability, while advocating caution in engaging in non-concessional borrowing. They also called for further progress in public financial management reforms to improve the quality of spending in a resource-constrained environment.

The monetary body agreed that the Central Bank of Liberia (CBL) should tighten monetary policy with the objective of reducing inflation to single digits by 2021. Directors emphasized that further issuance of CBL bills should be suspended until the cost of the operation is included in the government budget, and the fiscal financing gap is closed without CBL financing.

The IMF also noted that while the financial soundness indicators show that the banking sector appears adequately capitalized, the CBL should enhance its supervisory efforts. They highlighted the need to prioritize strengthening the CBL's supervisory, regulatory, and resolution frameworks in light of the elevated level of nonperforming loans, focusing on measures that improve loan underwriting standards.

Debts Piling Up Again After 2010 Relief

In 2010, Liberia was on a high after meeting the requirements for achieving the final step, or completion point, under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The IMF's share of this debt relief amounts to about $730 million in end-June 2007 present value terms--among the largest IMF country commitments under the enhanced HIPC Initiative, representing over one-fifth of the total financial support for the HIPC process. Liberia's graduation from the HIPC process brings to 29 the number of countries reaching the HIPC completion point--the stage at which full and irrevocable debt relief is won.

In accordance with the Enhanced HIPC Initiative and the Multilateral Debt Relief Initiative, "completion point" brought cancellation of an estimated $2.7 billion in debt from the Paris Club, the IMF, World Bank, African Development Bank and other creditors, marking the culmination of a process that will ultimately result in a greater than 90 percent reduction of the debt inherited by Liberia's government, which has been estimated at $3 billion in 2007.

The HIPC Initiative was launched in 1996 by the IMF and the World Bank to ensure that no poor country faces a debt burden it cannot manage. It entails coordinated action by the international community, including multilateral organizations, governments, and private creditors. In 1999, the initiative was modified to provide faster and broader debt relief and to strengthen the links between debt relief, poverty reduction, and social policies.

The debt relief was expected to pave the way for Liberia to secure additional financing, in initially modest amounts, to help deliver critically needed services and infrastructure necessary for Liberia's future prosperity.

Tightening Screws Amid Decline

As the see-saw battle between the Weah administration and the IMF lingers, the government, racing against time is aggressively pursuing a reform effort said to be concentrated in two broad areas: macroeconomic stability and investment growth, said to be the key components of an economic program the government is developing with the IMF.

Sources say, the macro part has fiscal and monetary dimension while on the fiscal level, the biggest chunk lies in the national budget, where the government is planning to pass a budget that is closest to realized revenue and in line with the IMF's desired objective.

Realized domestic revenue is projected to end around $476 million while the planned budget is being penciled in around US$515 million. The gap, sources say would be covered by budget support from development partners, whose support will increase with an IMF supported program.

The US$515 means the government would have cut US$55 million from the last budget, which officials say, would be large adjustment. To achieve this goal, the government is said to be indulging a wage harmonization while abolishing the General Allowance pay structure that would allow officials of government to set salaries and hire arbitrarily. This, one source said Monday, would be a major reform achievement of the administration. "The country could not do this in last 10 years, after millions dollar spent and dozens of experts and reports. The IMF and other partners are very impressed with the exercise," one official bragged Monday.

Where it becomes tricky is the issue of salary cuts, where the government contends, civil servants will now be paid according to a standardized grading system, making the salary structure more equitable. Cuts are also being done to wasteful spending as well while officials are pledging that the new budget will be governed by stricter fiscal rules that support budget credibility and creating an enabling environment for vendors to be paid on time.

Officials say, payment of domestic arrears owed to vendors will be a major part of the adjustment and the administration says it has already issued a US$65 million bond to commercial banks for infrastructure loans taken by the Sirleaf administration.

On monetary side, the administration says it is putting in place a new Management at the CBL, after a few scandals that have marred the reputation of the Bank, pledging that reform of the bank will be key in the months ahead. "We expect stronger internal controls, reduction in CBL budget and more aggressive enforcement of monetary policy," one source explained Monday.

More Questions; Less Answers

The administration says a new monetary framework has been put in place to upset previous measures where the CBL used excess USD liquidity and reserve money to intervene in the market to stabilize the exchange rate. The source said the new framework will base or anchor more on interest rates, encouraging customers to invest in CBL Bill's. The Bank has already issued a one-year bill at 7%, which is 5% higher than the savings rate. The Bill is also said to be indexed to inflation so that investors do not lose value on their money as the rate depreciates.

The administration is also planning to target strategic importers of food during a CBL auctions to receive FX on a high priority basis. As it is now, importers go into parallel markets to find US dollars, pay higher cost to get them and pass that cost over to consumers. The administration is hoping that its Pro Poor plan of action would prevent this and assure them of a reliable supply of USD for imports.

As the government and IMF discuss the terms of the program under review, the $US100 million-dollar question continues to linger: If the mystery amount is a loan, then the question is, why did the Legislature not ratify the loan? Were they even in the know of the money? What was the money used for and who authorized it?

For the Weah administration, the answer could make the difference between reducing the country's borrowing space and piling on more debts it says was brought on by its predecessors.

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