Liberia’s Economic Recovery Plan on a Progressive, Unforgivable Transformative Path
Before addressing some inaccurate utterances made in his write-up, let me remind my fellow professional colleague and “Comrade Doctor” that COVID-19 is not a Liberian phenomenon or an African phenomenon but a global phenomenon. Unlike Ebola, COVID-19 is hitting even the most organized economies in the world.
Dr. Collins’ assertion that no other fiscal measures have been adopted aside from some measures to speed up and facilitate the importation process including removal of the pre-shipment inspection and some protective surcharges is not only being economical with the facts, but a misrepresentation of his understanding of the inner workings of the fiscal authorities of the Republic or the evidence of his disconnect with existing realities.
Here we go with some fiscal highlights:
Prior to the outbreak, the Government approved a national budget of US$525.9 million for the administration of the affairs of the state for FY2019/2020. Of the approved budget, domestic revenue (comprising of revenues from tax and non-tax sources) was projected at US$465.1 million representing 88.4 percent of the resource envelope; donor grants were projected at US$20.8 million – representing about 4.0 percent; and borrowing from external sources was projected at US$40.0 million representing 7.6 percent.
As of end-December 2019, US$196.2 million of revenue was collected (representing a collection rate of 37.3 percent) against a projection of US$216.5 million for the corresponding period thus representing as shortfall of US$20.3 million or 9.4 percent of the projection. This was driven mainly by a fall in tax revenue (US$15.2 million) and in grants (US$6.2 million) despite over collection of US$1.2 million in non-tax revenue. There was a fall in all components of tax revenue with the major drivers being taxes on international trade (US$8.6 million), taxes on income & profits (US$2.6 million) and taxes on property (US$1.1 million).
The spread of COVID-19 in the global economy affected domestic resources mobilization at end February 2020, with US$294.2 million of revenue was collected. Despite this collection representing an increase of US$97.9 million (49.9 percent) over the collection at end December 2019, it fell short of the revenue projection (US$317.4 million) at end February 2020 by US$23.2 million thus representing under collection of 7.3 percent.
This was mainly attributable to US$18.8 million under collection in grants and US$12.6 million under collection in tax revenue despite over collection of US$8.2 million in nontax revenue. Under collections in taxes on international trade (US$14.3 million) and in taxes on goods and services (US$4.1 million) were responsible for the massive under collection in tax revenue.
Thus, given the declaration of the outbreak as a pandemic and the unprecedented measures being put in place to contain the virus both at home and abroad, we anticipate significant under performance in revenue over the course of the fiscal year. The global lock down will affect revenues from taxes on international trade. The domestic lock down will affect demand for goods and services thereby adversely affecting payroll tax receipts, receipts from taxes on goods and services, receipts from surface rentals and corporate income tax receipts amongst others.
To mitigate the impact of the fall in revenue collection, the government is in consultations with development partners, specifically the World Bank, the IMF, the African Development Bank and the European Development Bank, to access grant facilities to aid the country in combatting the outbreak and in stimulating the economy.
On the expenditure front, it was projected that US$525.9 million would have been spent on the administration of the affairs of the state for FY2019/2020. Of the projected expenditures, recurrent spending was projected to amount to US$492.4 million (93.6 percent) while capital spending would amount to US$33.5 million (6.4 percent). Of the projected recurrent spending, compensation of employees was projected at US$296.9 million (60.3 percent); Use of goods & services, US$77.0 million (15.6 percent); interest, US$62.9 million (12.8 percent); grants, US$54.1 million (11.0 percent); and social benefits, US$1.5 million (0.3 percent).
As of end of December 2019 when the COVID-19 outbreak was restricted to China, the Government expended US$195.0 million representing 37.1 percent of the proposed expenditures for FY2019/20. The amount spent was entirely on recurrent activities with compensation of employees accounting for the highest expenditure item. However, as at end February 2020, government expenditures increased by 50 percent on account of a 61.8 percent increase in compensation of employees relative to end December 2019.
With the increase in the number of cases in the country and the imposition movement restrictions in the country, we anticipate an increase in health-related expenditures to enable the country to identify those infected, isolate them, contact traced those they might come in contact with and then treat the infected for the symptoms; an increase in security related spending to enforce adherence to the safety measures being put in place to limit the spread of the virus; and increase in social benefits to affected communities.
All of these are coming against the backdrop of regular payments of salaries to workers and to suppliers of goods and services and debt servicing. This puts a strain on the budget which was crafted on the basis of fiscal austerity. Moreover, re-allocation of spending threatens to make the Government to default on some of its commitments.
Thus, to mitigate the impact of these increased expenditures on the budget, and to prevent the widening of the fiscal deficit and the buildup of debts, the Government has re-allocated budgetary appropriations thereby deferring discretions spending that are critical to the fight against the virus but protecting the payment of salaries in the process. Thus, this re-allocation process succeeded in freeing up US$25.0 million to be used to provide food aid to affected communities and a further US$4.0 million to support the provision of electricity and water to homes.
During the crafting of the FY2019/20 national budget, we committed ourselves to implementing a credible budget by aligning spending to identifiable available revenue thereby reducing the temptation of deficit financing thus curtailing the increase in debts and the depletion of reserves. During budget execution over the past eight months, in an attempt not to resort to deficit financing and in response to revenue shortfalls, we adjusted expenditures to match available revenue.
However, given the huge increase in expenditure coupled with projected sharp decline in revenues on account of a slowdown in economic activities, we anticipate a widening of the budget deficit. Given the low level of foreign reserves and the weak balance sheet of the Central Bank of Liberia, financing the deficit would prove to be a herculean task.
Moreover, to narrow the budget deficit, the government has been engaged in discussions with its international development partners in sourcing financing. These discussions have yielded fruits as the World Bank has committed to provide US$17.0 million to partly support the National Response Plan. The European Union has also pledged a re-allocate US$15.0 million of its pre-COVID 19 assistance to the country. The Government is also working with the African Development Bank to determine the Bank’s support to Liberia as regards the AfDB’s recently announced US$10.0 billion COVID 19 support to African countries.
The country’s total debt stock as at end February 2020 stands at US$1.47 billion of which domestic debts account for US$604.4 million (41 percent) while the external debt stock account for US$861.8 million (59 percent). Of the domestic debts, debt owed to the CBL amounts to US$487.5 million (80.7 percent); commercial banks, US$65.2 million (10.8 percent); other institutions, US$51.5 million (8.5 percent); and claims, US$0.2 million. On the other hand, of the total external debt, multilateral institutions account for US$748.3 million (86.8 percent) while bilateral sources account US$113.5 million (13.2 percent).
Rising debt levels coupled with falling growth rates have resulted into the country being classified into the category of moderate rate of debt distress and as such, it inhibits our ability to borrow to finance infrastructure projects needed to narrow our infrastructure gap and to also fund a meaningful stimulus package for the country.
Hence, to curb the increase in the public debt, the government is committed to attracting donor grants and low cost financing to support the fight against the virus and to stimulate the economy.
Total debt service as at end February 2020 amounted to US$21.4 million of which principal repayment amounted to US$7.6 million (35.5 percent), interest payment amounted to US$12.8 million (59.8 percent), while subscription amounted to US$1.0 million (4.7 percent). Of the principal repayment, domestic debt accounted for US$2.2 million (28.9 percent) with payments made entirely to debts owed to other institutions while external debt accounted for US$5.4 million (71.1 percent) of which multilateral sources account for US$4.1 million (75.9 percent) while bilateral sources account for US$1.3 million (24.1 percent). With regards to interest payment, interest paid on domestic debt amounted to about US$8.0 million of which US$5.9 million was paid to commercial banks while US$0.2 million was paid to other institutions. This made interest paid on external debt amounted to US$4.8 million with interest paid on multilateral debt amounting to US$3.8 million while bilateral debt amounted to US$1.0 million.
A major challenge to the country at this crucial time is that those debts previously contracted on concessional terms are coming due now. Thus, with falling growth rate and revenue, rising expenditures and widening current account and fiscal deficits, the country risks defaulting on its debt service obligations.
To prevent this from occurring, the Government is seeking debt waiver on its external debts and a restructuring of its domestic debts. The IMF under the Catastrophe Containment and Relief Trust (CCRT) has approved debt service relief for the country. This provides grant to cover IMF debt obligation for an initial phase over the next six months. This frees up scares financial resources to be channeled towards the health sector to combat the viral outbreak and also towards domestic debt services to stimulate the domestic economy.
Retorting Dr. Collins’ Fallacy
Dr. Collins erroneously asserted that the World Bank has approved only 1.5m and that no utilization of the funds available has begun. He was also economical with the truth and lack complete knowledge of the facts. COVID-19 budget stands around $40 million and of this amount, the Bank has committed $30 million (and immediate approval of $16.5 million made by the World Bank through the RODESEE project / PFMU) leaving a gap of $10 million expected to be financed through the budget following a recast that is shortly expected to take place.
Now, if you analyze some statements made by Dr. Paul Collins, you will be surprised to notice that the author is acknowledging the valuable job that our government is doing. First, Dr. Collins said: “Job losses are a common phenomenon around the world also due to the social distancing and other COVID19 precautionary measures. In the USA it is estimated that more than 30 million people have lost their jobs in the first quarter of this year, while in the UK the comparative number is at least a million people… “
Acknowledging the fact that this is not just a Liberian phenomenon, the author stated: “…during the Ebola outbreak in 2014, Liberia’s economic growth slowed to 0.7% from a 2013 high of 8.7%. Prior to the COVID-19 pandemic, the IMF had projected GDP growth of 0.4% for Liberia. Now, that projection has been revised to -2.5%. This is like saying the economy is going to be far worse than it was during Ebola….”
Once again, if we look at some African countries that experienced the Ebola outbreak and now the COVID-19 pandemic, the consequences with the COVID-19 will be worse than those of the Ebola disaster. Dr. Collins is misleading members of the LICPA (our professional colleagues) — his already tired audience, whom, I would think, may not be paying much attention — our citizens and the general public. It must again be emphasized here and now that, it is not only a Liberian issue!
In the same article, Dr. Collins argued: “… Revenue collection is therefore very likely to have been hampered by social distancing and other COVID-19 precautionary measures….”
Let me remind the my esteemed colleague about the following: “In a joint statement of WTO and IMF published on April 24, 2020, the two international organizations called governments to refrain from imposing or intensifying export and other trade restrictions and to work to promptly remove those put in place since the start of the year…. “
The same statement continues: “History has taught us that keeping markets open helps everyone, especially the world’s poorest people. Let’s act on the lessons we have learned.”
The above statement is in line with government’s policies to mitigate the negative impacts of COVID-19 with regard to tax collection. For example, to mitigate the impact of COVID-19 on our economy with regards to the availability of petroleum, the government is committing itself in reviewing transport fares and addressing the issues surrounding the shortage of petroleum products on the market. In fact, as regards addressing the issues of petroleum shortages, the government has been implementing some measures in the short term, and developing medium and long terms measures.
For the short term measures, the government is resolving all issues identified in the investigative report that constrained importers’ ability to import the product into the country; placing a temporary freeze on provisional lifting and reviewing the procedure in place for provisional lifting. In addition, the government is removing the freeze after the investigation and having ONLY importers, who store products with the LPRC, to provisionally lift from the LPRC with stringent requirements in place. Moreover, a grace period for lifting has been given after which charges or penalties are accrued.
Furthermore, the government is reviewing the business processes surrounding the importation of the product and if need be, create as soon as possible a one-stop window while adopting the Tobin-Baumol inventory theoretic approach to the demand for money to be used for storing petroleum.
The government is providing a special window at the Central Bank of Liberia (CBL) foreign currency auction for importers of petroleum products while ensuring that every storage tank at the LPRC has an active readable meter to have real time information on the tank capacity. Also, the government is reviewing the processes and procedures leading to the issuance of licenses, specifically performances related to procedures, and lengthening the duration of import license to two years.
For medium-term measures, the government is expanding the storage capacity of tanks at the LPRC. When it comes to long term measures, the government is rehabilitating the refinery. As regards the financial sector, the government is deepening the financial services sector by means of restructuring, strengthening and rationalizing the regulatory and supervisory framework for the provision of financial services in the country.
At the same time, measures like addressing the low capitalization and poor governance practices of financial intermediaries that submit inaccurate information to the regulatory authorities and incur costs within the financial system are taken on a daily basis. We cannot forget the development of a peaceable working environment in collaboration with financial institutions when developing a structured financing plan to offer less expensive and more accessible credit to the real sector that has been implemented.
On the monetary policy front, the CBL has instituted several policy measures to ease the negative impact of the pandemic on the Liberian economy. Among these measures, are the fact that the CBL has suspended for three months all charges on the Automated Clearing House (ACH), Direct Credit (DC) and Real Time Gross Settlement System (RTGS).
More visible are actions toward commercial banks that are accordingly required to suspend all charges to customers of these Electronic Payment Channels. The measure will reduce the cost of clearing, payments and transfers for individuals and businesses.
For Mobile Money Operators (MMOs), they have been requested to suspend for one month, all charges to customers for transfer of money from their bank accounts to their mobile money accounts and vice versa. In the same line, all merchant payment transaction fees (shops, stores, supermarkets, gas stations, general markets, retail outlets, etc.) using mobile money as payment option for goods, are also suspended for one month.
Moreover, the CBL has increased the daily transaction limit as well as the monthly aggregate transaction limit for mobile money transactions. Of course, this is unprecedented and falls in straight contradiction with what Dr. Collins asserted in his article.
To add to the above, the CBL has also suspended temporarily for three months, the rule on credits (asset classification and provisioning) to borrowers in the aviation, hospitality, tourism, agricultural and businesses involved in cross-border trading, considering the negative impact of COVID-19 on the cash flows of the affected sectors of the economy.
All these measures are taken to ease business survival, and are part of government’s measures in this period of the COVID-19 pandemic. The million dollar question that presents itself and begs is why didn’t Dr. Collins write this piece more than six years ago during Ebola? At that time, he served as Director General of the Internal Audit Agency (IAA) – it would be a salient presumption that he was an advisor to the very Liberian government.