Liberia’s Medium Term Expenditure Framework Budget: Big on Ideas but short on Substance

Liberia’s Medium Term Expenditure Framework Budget: Big on Ideas but short on Substance

By: John N.M. Coffey

The Perspective
Atlanta, Georgia
January 10, 2013

As per the budget framework paper, the key policy goals of this Government are: to achieve middle income status by 2030; to invest to ensure we meet the security challenges from the UNMIL drawdown and to ensure we meet the major investments in infrastructure, health and education to improve livelihoods and wellbeing of the Liberian people. For the next three years the administration has prioritized the key areas of Energy, Infrastructure, Education, Health and Social Development.

The National Revenue Forecast for FY12/13 was US$649.723 million. This is a 43% increase over the revised year end estimate for FY11/12. The forecast is composed of core revenue of US$542,329,000, contingent revenue of $24.4 million, borrowing of US$80 million and an estimated US$3 million brought forward uncommitted bank balance. Borrowing accounts for US$80 million, or 15% of total revenue, and Contingent revenue is worth 4% of total revenue and comprises uncertain revenues.

Core revenue for FY12/13 is forecast at US$542.3 million, which is 36% higher than the FY11/12 revised year end estimate. Core revenue comprises US$443.3 million tax revenue or 82% of total core revenue, US$53.9 million of non-tax revenue or 10% of total, and US$45.1 million of grants or 9% of total core revenue.

Of the total US$443.3 million tax revenue, US$260.7 million is projected to come from internal revenue sources, or 59% of the total, and US$164.9 or 37% from customs. The largest contributors to tax revenue in FY12/13 are projected to be taxes and duties on imports at US$161.1 million or 36% of total, individual taxes on income and profits at US$181.4 million or 27%, and corporate taxes on income and profits at US$63.7 million or 14%. These three tax revenue sources account for 77% of total tax revenues.

The government should be applauded for significantly improving the tax regime as evidence by the increase in tax revenue when compared to past fiscal years. However, the nation’s revenue stream still remains narrow and highly concentrated in revenue sources that are vulnerable to external shocks. Our tax base is heavily concentrated in International Trade, which is highly vulnerable to external shocks. For example, a downturn in the global economy would impact taxes and duties on imports, especially for luxury goods, which would also impact taxes on incomes and profits and corporate taxes. As Liberia stabilizes, the withdrawal of UNMIL and other international organizations that have been instrumental in boosting the Liberian economy could greatly impact areas such as housing, imported goods, and even the amount US currency that flows into Liberia, as these institutions comprise approximately 80% of inflows into the country.

As per the MTEF Debt Service Projection contained in the budget, as at March 30, 2012, Liberia’s Domestic Debt portfolio stood at US$276.19 million, and External Debt stood at US$256.71, for a combined domestic and external debt portfolio of US$532.9 million. Borrowing is projected to increase to 253% or 202.22 million from 2012/13 to 2014/15, while revenue is projected to increase by only 13 percent or 66.23 million over the same period.

All things being equal, at the end of the 2014/15 Fiscal Year, it is projected that Liberia will have accumulated external debt amounting to US$706, 919. 00. If the projected borrowings are realized, Liberia will have a total debt portfolio of approximately 1.2 billion dollars by the end of fiscal 2014/15.

As reflected in the table, beginning in 2013/14 fiscal year, borrowing will represent 69% of core revenue, and drops off to 50% in 2014/15. At an average projected debt repayment rate – principle and interest - of approximately US$29.6 million a year for the next three years, it will take Liberia about 41 years to pay off US$1.2 billion dollars.

The Liberian people should be alarmed and concern over such massive growth in debt, considering not only dismal projected revenue performance, but also Liberia’s sad history with debt, which is evidenced by the most recent HIPC initiative.

The question the Liberian people should be asking is whether the country is prepared to sustain such high levels of borrowing, especially when one takes into consideration the low growth in revenues over the next three years. Based on the trend in revenue growth, Liberia may not have the fiscal space to accommodate the projected levels of borrowing. The Konneh administration is anticipating borrowing in the absence of a plan as to how the debts will be repaid, or the revenue sources from which the debts will be repaid. It should be noted that recent past performance in terms of delays in approving “credits” by the Legislature, poses significant risk to many of the projects that are tied to these borrowings.

The administration may want the Liberian people to believe that “this budget makes sense”, however, this borrowing plan does not make sense! If the debt projected materializes in the absence of substantial revenue growth and a sound strategy as to how accumulated debt will be repaid, the future of this county will be mortgaged and in a few years the Liberian people will be left asking themselves what happened?

The Public Financial Management (PFM) Act of 2009 requires the budget to comprise all revenues and expenditures, including those of public enterprises such as LPRC, NPA, NOCAL, etc. Section ten requires the budget to show any proposed budget surplus or deficit, being the difference between total revenues excluding new borrowings and total expenditure. In the case of a budget deficit, the law also requires the budget to stipulate the means of financing the deficit, which shall be subject to legislative approval. The Budget is also to reflect among others: an Annex summarizing the financial operations of each autonomous agency, indicating in each case the resources to be transferred from the National Budget. An Annex summarizing the annual financial plans (budget)and operations of each state owned enterprise or financial institution.

It is noteworthy that the crafters of the budget failed to provide information on revenues and expenditures of Public Enterprises such as LPRC, NPA, NOCAL, etc. Additionally, the budget does not include financial plans of each enterprise. Considering that this sector is one the least transparent sectors, for the next budget year, the Minister must adhere to the law by ensuring that revenues and expenditures of public corporations are included in the budget. As required, the budget does not contain information on the financial operations of autonomous agencies, indicating the resources to be transferred from the National Budget.

For the 2012/13 budget year, a deficit of US$80,034,474 is projected. However, as required by section ten of the PFM Law, the Minister failed to stipulate the means of financing the deficit, which should have been subjected to legislative approval.

The Konneh led administration has acknowledged the need the for economic transformation in the Country, and his administration believes that they are the ones to put in place the “big ideas” which will move our nation towards the future we want, and that is to become a middle income country by 2030. While this sounds ambitious, it is difficult to move to the future we want when we don’t know the past we are coming from.

Development Plans have come and gone with little fanfare and marginal improvements to Liberia’s economic bottom-line; from President Edwin Barclay’s ambitious three year development plan to a nine year development plan (1951-1960), to Tubman’s five year development plan (1946-1950), all of which failed to transform the Liberian economy. We have once again embarked on another development plan that is anticipated to propel the nation to a “middle income” country by 2030 in the absence of an independent assessment of the successes, failures, challenges and lessons learned from the Poverty Reduction Strategy/county development agenda.

Liberia’s Poverty Reduction Strategy (PRS) was the Government’s overall vision and major strategies for moving the country towards a rapid, inclusive and sustainable growth and development during the period 2008-2011 (PRS Paper). The government also prepared County Development Agendas (CDAs) for each of the 15 counties, in consultation with local leaders in each county. These agendas drew from the national PRS and adapted the priorities to the local circumstances and needs. These Agendas were the government’s attempt to decentralize the PRS, as such they were taken as the principal guide to funding development activities in the various Counties and essentially country-wide.

The CDA’s were drafted, centered around the four Pillars of the national Poverty Reduction Strategy, namely: Security (Pillar 1), Economic Revitalization (Pillar 2), Governance and rule of Law (Pillar 3), Infrastructure and Basic Social Services (Pillar 4). There were deliverables in the form of projects and programs that should have been implemented in the various counties in the past five years, yet to date the current administration responsible for both the PRS and the CDAs have yet to provide to the Liberia people an independent assessment of the CDAs. Other than a broad assertion from the former Planning Minister, now Finance Minister, that the PRS was 85% percent successful, no one really knows the outcomes of the PRS at the local level. Where the infrastructure projects ranging from the construction of hospitals, schools, feeder roads, etc, ever completed? What were the successes, challenges and lessons learned at especially the local level?

While it is acknowledged that many of the counties have experienced increased economic activity since the end of the war. With the exception of Montserrado County, many other counties are still vulnerable to food insecurity and chronic child malnutrition, and the bulk of the business conducted in all the counties is petty trading at the individual level as reflected in the Labor survey released in 2010. After six years there are still limited formal employment opportunities available in the country, with the vast majority of the labor force being self-employed in the informal sector. The Liberian people still don’t know the extent to which poverty – especially extreme poverty - has been reduced. Has the poverty level for those without basic food requirement/those living in extreme poverty improved? Has it improved for those who are not in extreme poverty but are living below the poverty line? Government is yet to answer these questions, yet is has embarked on another development plan in the mist of uncertainties in regard to the wellbeing of the Liberian people.

Overall, progress in reducing poverty has been slow. Anecdotal evidence have shown that that the number of Liberians living in extreme poverty has fallen by a few percentage points, and those living below the poverty line have also fallen by a few percentage points as well. For state-building to progress, Liberia desperately needs to expand its economic base, with a radical increase in agricultural productivity and the development of manufacturing and service sectors to provide employment for the vast numbers of underemployed urban and rural Liberians.

When the PRS was crafted in 2007, the Liberia Institute of Statistics and Geo Information Services (LEGIS), released the results of a Core Welfare Indicator Questionnaire Survey which covered every region, demographic group, income level and household type. The survey revealed that 63.8 percent of Liberians live below the poverty line, which implies that 1.7 million Liberians were living in poverty at the time. Of the 1.7 million living in poverty at the time, about 1.3 million people were living in extreme poverty, equivalent to 48 percent of the population. The survey also revealed that Poverty was higher in rural areas (67.7 percent) than in urban areas (55 percent). Another significant finding to note from the survey is the total poverty line for Liberia at the time, was established at LD$21,424 and USD equivalent of $357 yearly for rural dwellers based on an exchange rate of LD/US rate of 60/1. The poverty line for urban dwellers was established at LD$30,222 and USD equivalent of US$504 yearly. I stand to be corrected, but I doubt if this situation has improved significantly.

There is no denying that the Liberian economy has seen strong growth over the past six years; and the economic indicators continue to trend upwards. However, this growth must be viewed in context in terms of the economic environment from which Liberia is recovering and growing. In a country where approximately 70% of the population is under the age of 36, and about 81% under the age of 40, it is crucial that budgets are focused on sustainable employment for the Liberian workforce. It is also significant to note that approximately 65% of Liberia’s labor force is under the age of forty.

According to the 2010 Labor Force Survey, Liberia has a labor force of about 1.1 million, of which 195,000 (18%) are paid employees. The vast majority of the labor force are working for themselves or are engaged in unpaid labor. Close to 80% of Liberia’s labor force are engaged in what is termed vulnerable employment, meaning that most of these workers are engaged in employment activities that are unlikely to have the benefits of favorable conditions such as an assured salary, pension, sickness benefit or job security. The survey also reveals that informal activities account for a significant proportion of total employment and income generation.

I am of the opinion that the budget as it currently stands does not do enough to boost sustainable employment for a nation wishing to become a “middle income” country by the year 2030. It does not do enough to rebalance the economy or to stimulate economic activity and job creation. The administration must not be comfortable with government being the largest employer because government resources are limited; as such a clear strategy must be formulated to expand the private sector to absorb those that may not have the opportunity to obtain government employment.

The underemployment or unemployment situation in the country is due largely to a lack of strategy on the part of the government. Our Government has also paid very little attention to the issue of unemployment and underemployment. The measures that the government has attempted to put in place are ad hoc. While it is acknowledged that resources are limited, if government had a clear vision on job creation, those scarce resources would be better targeted. Government must put in place the necessary mechanisms to spur growth in the private sector, so as to enable our youthful population to be properly positioned economically.

Instead of ad hoc measures, Liberia needs a strategy for employment and growth. While the impact of economic reform over the past six years has been significant, the impact of the reform is not reflected in the lives of the average Liberian who struggles to eke out a living rain or shine. The path to a middle income country will not be possible if the government does not have a strategy on employment and growth to put its young and restless population to work.

My final opinion on this budget is that it is an overall good budget. Short on substance –voluminous and overly detailed, but a decent budget never the less. My biggest fear for this MTEF budget is implementation! For this budget to succeed those charge with governance must perform at maximum capacity, and be held accountable for implementation and monitoring deliverables under their control. It is wonderful to build excitement, but the expectations for what this budget can do are too high, and the Minister and his lieutenants must to all they can to deliver to the Liberian people.