On July 8, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Liberia.

The Ebola epidemic and the fall in commodity prices revealed the vulnerabilities of Liberia’s economy. After barely positive growth in 2014, GDP was flat in 2015 mainly due to the decline in activity in the iron ore and rubber sectors. The current account deficit deteriorated, reflecting weaker exports receipts and the Ebola-related surge in imports. While international gross reserves increased last year, the Central Bank of Liberia’s net foreign exchange position declined due to operational deficits and exceptional support to the banking sector, under stress from the Ebola epidemic. Lower revenue from the natural resource sectors and higher Ebola-related spending, largely financed by donor support, pushed the FY2015 overall government deficit to 8.4 percent of GDP. The FY2016 deficit is estimated to have declined to 7 percent of GDP as continued revenue weakness forced the government to contain spending.

In 2016, growth is expected to rise to 2.5 percent, thanks to a rebound in services and the start of gold production, while inflation should stay in the single digits. The overall government deficit is projected to remain broadly constant, thanks to strong fiscal measures to address lower natural resource revenues, declining external budget support, the cost of the 2017 elections, and the take-over of security from UNMIL.

Over the medium term, economic growth is expected to increase to 5.5 percent on average, due to a recovery in mining, improvement in infrastructure, particularly energy and roads, and higher agricultural productivity. The fiscal position should improve thanks to the authorities’ commitment to improve domestic revenue mobilization and contain spending. Resolution of the backlog of non-performing loans and improving bank profitability could support economic growth through higher credit, especially for small- and medium-size enterprises (SMEs).

The main risks to the outlook include a stronger-than-anticipated effect of the commodity price decline, the worsening of security conditions, and a large scale re-emergence of the Ebola virus. Policy slippages also could weigh on medium-term growth.

Executive Board Assessment²

Executive Directors noted that the commodity price shock hit the Liberian economy just when it started to recover from the Ebola outbreak. Directors observed that, while growth should recover in the coming years, the outlook faces downside risks, including a stronger-than-expected commodity price impact, a possible reemergence of the Ebola epidemic, and a deterioration in security conditions. Directors commended the authorities’ measures to tackle the aforementioned shocks. They underscored the importance of continued sound macroeconomic policies, and the stepping up of structural reforms to boost growth, enhance the economy’s resilience and reduce its dependence on natural resources.

Directors commended the authorities for the ambitious measures embedded in the draft FY2017 budget. They agreed that the domestic revenue mobilization measures would help mitigate the revenue shortfall from lower activity in the natural resource sector and from the post-Ebola decline in external budget assistance. At the same time, Directors welcomed that the containment of expenditure still secures essential social spending such as on health and education. Directors recommended the further deepening of the revenue base while increasing its fairness. They also called on the authorities to continue strengthening public financial management. Directors noted that fiscal policy would benefit from a longer-term orientation, and encouraged the authorities to consider a medium-term fiscal anchor to improve policy predictability and transparency. They called for strengthening the medium-term debt strategy to prevent a further increase in the risk of debt distress.

Directors encouraged the authorities to boost external buffers. In order to build up adequate international reserves, the Central Bank of Liberia needs to rigorously implement its agreed three-year financial plan, phase out exceptional support to the banking sector, and limit foreign exchange interventions to volatility smoothing. Directors stressed the importance of enhancing the central bank’s independence and its coordination with the fiscal authorities in order to strengthen liquidity management. Given the constraints posed by the dual currency system, they also agreed that, in the long run, a gradual process of de-dollarization would increase the space of monetary policy.

Directors called on the authorities to address financial sector vulnerabilities, notably by strengthening bank supervision and establishing a bank emergency assistance framework. While recognizing that the loss of correspondent banking relationships is a global issue, they recommended reinforcing frameworks for tax transparency and anti-money laundering and combating the financing of terrorism.

Directors stressed the importance of improving economic resilience. In this regard, strengthening the business environment could help diversify the economy by supporting private sector development. Improving financial inclusion would be another channel to support economic growth and diversification.