Liberianomics of 2012/13 Fiscal Budget: Sound Allocation, but Financing and Monitoring Challenges

Liberianomics of 2012/13 Fiscal Budget: Sound Allocation, but Financing and Monitoring Challenges

Musa Dukuly, PhD Fellow/Lecturer of Economics, University of Liberia
&
C. Gyude Bedell (MBA/Finance), Financial Analyst

The Perspective
Atlanta, Georgia
June 27, 2012

Liberia’s transition from “recovery” to “transformation” requires heavy investments, appropriate resource allocation and sound financing strategy. The budget is prepared when Liberia is still grappling with myriad conflict induced problems-youth unemployment, private sector impasse, macroeconomic constraint driven by minimum emphasis on ‘growth induced’ programs and projects. The new challenges are emanated from external shocks (rising commodity prices, including fuel) and environmental related concerns (diamond, gold, iron ore mining and logging). To confront the resilience, the 2012/13 budget seems as cushioning instrument against these challenges.

This cursory outlook adds to insightful views on the proposed budget vis a vis its potentially expected spill-over on the economy, forecasts to grow at about 9 per cent this year (African Economic Outlook, 2011), underpinned by continuity in the road project, expansion of electricity, possible commercial oil discovery, strengthening of institutions (especially the SOEs), demand for natural resources, youth empowerment and dedicated financial development. “Liberianomics” is a term we have coined to describe the economic management of Liberia’s economy through the proposed budget, which seeks to further advance targets in relation to stabilization, redistribution and resource allocation (SRR).

The 2012/13 proposed budget seems ambitiously planned for spurring sporadic development, evidenced by focusing on shared and inclusive economic growth in “poverty enclave” sectors. The structure is indicative of the country’s determination at redeeming lost clout for a friendly economic landscape.

The previous budget (2011/12) was mostly recurrent (about 87%), with minimum components directed at capital expenditure, especially real capital expenditure (MoF, 2012). “Planned expenditure” was 516 million USD, with budgetary shortfall due to low “actual expenditure” of 495 million USD. It is important to note that only 52 percent of “capital” expenditures went towards real projects involving infrastructure, with the rest going towards fixed capital.

Among the winning projects/programs from previous budget were the continuity in upgrading/rehabilitation of most road networks in and outside Monrovia, refurbishing and building of markets, expansion of the emergency electrification and timely payment of civil servants. Moreover, across the country, access to education and health services increase, especially in rural areas. Let’s point that no single concentration of the budget unilaterally transmitted to pro-poor growth, implying that combination of various aspects had a positive growth effect in different contexts. Interestingly, it seems like in the last fiscal year, emphasis was on electioneering, shifting resource allocation from implementation of important projects in the country.

Projected expenditure in the 2012/13 budget is at least 640 million USD (about 50% of GDP), an increase of 26% relative to 2011/12 with core budget of 545 million USD. Drastic cut in recurrent, from about 87% (2011/12) to about 51% (2012/13), manifests sound economic desire for re-allocative efficiency to reduce poverty and inequality. In the proposed budget, revenue and expenditure forecasts aim to boost the road rarely taken by addressing pressing socioeconomic needs that could improve the country’s development, via injecting lot of resources in social spending (education and health), infrastructural development (energy, roads, airport and seaports) and youth empowerment.

Planned expenditure for earmark projects is 91 million USD, out of which infrastructure accounts for 83 million USD. This is reflective of “big push” investment plan for prioritized projects, which could transmit tremendous multiplier effects. As a way of boosting rural-urban linkage, the proposed budget prioritized development of ‘production roads’, aside from just expansion of low cost energy. The move by government to inject more funds in roads and other infrastructure is a big step for boosting capital formation, promoting private sector growth in the medium to long term.

Like most developing countries, financing Liberia’s budget will be a challenge. Taxes represented the greatest proportion of Government revenue, evidenced by about 70% in 2011/12. The concern now for the Government is how it explores funding the budget. This is suggestive of the need to coordinate programs and design innovative ways of generating the desirable revenue to meet planned expenditure. Let’s remember that previous budget ran into shortfall (about 21million USD), not to even mention projects that were not zero-down at the end of the budget period. Potential financing gap will have to be offset from abroad, mostly in the form of budget support or direct project assistance. It is also rational tapping on domestic resources while looking outside of national borders to bridge the potential gap. In the 2010/11, Liberia got 424 million USD in aid. Of that, about 17% was through budget support directed at Government executed projects. Looking at the sectoral distribution of the total aid, 128 million USD was utilized for infrastructure - electricity, roads, water. Budget support, another flexible category, is forecast by the Government to increase while it seeks to borrow about 81 million USD.

Let’s highlight that the Government could also source funds through flotation of bonds, but Liberia lacks capital market to explore this path. Even if traded on foreign market, this route however, could be costly and difficult, perhaps due to the slow recovery of developed countries from global debt crisis as money available on the international market dried up. Alternatively, if the government decides to approach local market, the chance of gathering adequate resources is dimmed, or even if it is successful to acquire domestic funding, government borrowing could potentially crowd out private investment, hence a mechanism that is adversary to sustainable private sector growth. To offset any potential deficit, value added tax should therefore be considered as alternative in the budgetary framework, focusing on specific goods/services that the mega rich elites usually spent their income on. Some of these goods may include private cars (excluding gasoline and fuel), bottled mineral water, alcoholic beverages, gold jewelries, air tickets, etc (Dukuly and Gibson, 2012).

No doubt that the proposed budget targets development priorities of economic importance for spurring inclusive growth. However, ambitiously as it is planned, the budget also exposes the economy to potentially susceptible structural risk (i.e inflation, BOP imbalance, etc) in the absence of effective monitoring, appropriate economic absorptiveness as well as coordinating with the monetary authority which should be tactful with policies that enhance money growth.

Any slip-up to allow portion of budget to filter into the economy through any unproductive transmission mechanism (i.e corruption or poor project management) could eventually hurt the enormous gains the proposed budget envisage by hiking cost of living, influencing imbalance in BOP, and creating sluggish economic growth. In addition to effective monitoring, monetary and fiscal coordination is imperative in this endeavor, because concurrently instituting two “aggressive” expansionary policies by monetary and fiscal authorities are unhealthy for macroeconomic stability. Sound fiscal and monetary policies are extremely laudable during the implementation of the budget.

Proposed Budget: Liberia’s poverty situation is multifaceted from the context of income, non-income and environmental perspectives. The positive effects of the proposed budget are undoubtedly imminent for the average Liberian because of its investment nature (increasing from 63.2 million USD in 2011/12 to 249.6 million USD in 2012/13). Notwithstanding, unless the growth of the budget and the increment in the “real capital” expenditure portion provides the optimal benefits to the economy, the socioeconomic constraint will perpetuate.

In the Figure, the budget is integrated for inclusive growth to reduce poverty. An integrated budgetary policy translates into meaningful poverty reduction as indicated in the Figure. The externality effect of the budget is through sound tax policy, sectoral allocation and other macroeconomic factors for accelerating pro-poor growth and enhancing stability. A sustained poverty reduction requires allowing the poor to participate fully in economic growth, an approach the current budgetary system seeks to follows. Thus, the strategy regarding money growth, business expansion and direct employment are potentially the key links between poverty reduction and economic growth in the proposed budget.

The design of the proposed budget engages our vulnerable groups (women and youth) for capacity development, gainful employment and wealth creation, as well as implementation of multiple impact projects. This is suggestive that the budget allocation is directed to areas with greater multiplier effects for sustained growth and poverty alleviation. Therefore, supportive views in the context of proposed budget being more pro-poor are based on the following:

Infrastructure: From an economic perspective, improved infrastructure (especially energy) is prime factor for holistic development because it supports low cost private sector growth, enhances job creation for youth, and improves income distribution. For poverty reduction to be a positive realization, huge investments in infrastructure development (roads, seaport, energy) guarantee inclusivity, whereby individuals in the various counties are strongly linked to the budgetary process.

Moreover, removal of the daunting macro-constraint by investing in electricity is transmission for galloping effect on private sector growth and employment creation. Energy has resounding economic implication for developing a vibrant manufacturing and industrial sectors to absorb the huge unemployed and youth base population. There is no question that inadequate and poor infrastructure remains a major challenge for private sector development in Liberia.

Over the years, expansion of private sector has been constrained by poor roads and infrastructure. Upgrading the road network, especially from Monrovia to Ganta and beyond, is the pacesetter of taking Liberia out of Monrovia for a pervasively viable economy. Once completed, this project will diversify the economy through access to market and attraction of foreign investors. In addition, the road project has relevance to boost the flow of imported goods, easing pressure on trade. Anecdotal statistics shows that it is costly to transport commodity to/from Ganta /Monrovia. Worse is the fact that the numerous potholes on the road usually extend traveling journey. So, the plan highway is expected to enhance efficiency.

Investing in People: A serious microeconomic constraint at household level is the high dependency syndrome inflicted from the conflict. Attractive salary/incentives trickles down by helping civil servants to meet social needs for effective spillover. This payment must be linked to productivity and sustainable initiative. The budget supports strong economy for youth development through capacity building (vocational knowledge) and short term employment via macro projects. Continuity of cash transfer policies targeting the vulnerably “poor” at low fiscal cost enhances social security.

Institutions: The budget targets traditional and non-traditional institutions like the school for “physically challenged” people, and State owned Enterprises that are vital for poverty reduction such as LPMC, NPA, etc. However, the proposed budget places less emphasis on sustainable institutional development, evidenced by lack of specific allocation for advanced training to medical doctors and university lecturers for quality services.

This budget seeks to also capture the large informal sector through “formalizing the informal sector”. Liberia is lagging behind many countries in terms of policies geared at promoting business operation. The World Bank Report on doing business has been very critical on Liberia’s bureaucracy on tax compliance. Wonderful that effort is being made to reduce these bureaucracies, evidenced by tackling corruption, instituting one-stop-shop payment and providing less complicated tax system. Interestingly, the budget does not say much about guaranteeing of loan scheme through the CBL for SMEs to thrive.

Macroeconomics: Strengthening institutional policy (avoiding wastage of resources through the budget) for remarkable macroeconomic growth and stability is vital for poverty reduction. The expansion at the NPA could induce export growth (through rubber, iron ore, log) and reduce trade deficit, which has implication for an efficient public spending.

Inflation and exchange rate: The budget recognizes inflationary pressures and their impact on ordinary people, including on private sector growth and development. Notwithstanding, inflationary developments should be monitored very carefully through sound fiscal and monetary management.

That is why investment in key projects is highly prioritized. However, capacity constraint, especially in relation to the shortage of skilled labor, translates into high wage and rental costs respectively in the budget. Moreover, commodity prices are an exogenous factor for fuelling inflation. The common external tariff should allow the importation of basic commodities at lower rate to boost local supply. Exchange rate and single digit inflation (especially food and fuel) are critical for absorbing price effect on low income earners. In a bid to address the rising cost, the budget exercises flexibility in charging basic commodities.

Budgetary allocation for agriculture ventures promotes agriculture programs and enhances food security. This is expected to check on the rising prices of food commodities, thereby taming inflation. Critical in cushioning the country against the rising food prices is the Government move to increase allocation for seed rice, pesticide, agriculture training and direct purchase of local produce to boost local food production.

Borrowing/Debt sustainability: Being too meticulous about debt induces macroeconomic constraint. Debt is increasing again, but expectation is for it to be managed and maintained at a sustainable level. The debt may hover around 35%, increasing from 4% in 2011/12 budget. The proposed budget ensures that debt is tied to visible infrastructure project. Contingent liabilities associated with Government’s investment project represent a remarkable development foresight. This is a catalyst for real GDP growth, high exports and strong private sector development. The fiscal responsibility allowing for more flexibility to borrow is worthy, given that the debt to GDP ratio remains below appreciable range (i.e, below 5%). This ensures that the hard work to get debt to sustainable levels is not squandered to serve as a burden again. So, all future debt must be tied to the returns from the financed project for repayment.

Though recurrent expenditure still dominates, it is observed that the proposed budget targets socioeconomic projects and programs to remove development constraint for shared and inclusive economic growth. However, budget deficit is imminent, and yet domestic financing of the budget is inadequate to meet projected expenditure. The fiscal and macroeconomic dimensions in which the proposed budget has robust multiplier effects for pro-development programs are elicited. Targeting of government expenditure at appropriate infrastructure programs and framework is inevitably the solution to removing daunting socioeconomic constraint. Notwithstanding, neglect of effective monitoring strategies of projects and programs as well as poor coordination with monetary authority could possibly fuel unanticipated macroeconomic imbalance in the short to medium term to further hurt the poor. The proposed budget is only considered as a good working tool when actual and projected expenditures are in congruence; when resources are appropriately allocated and used; and people are made to account for misappropriation and misapplication of assets. The general apprehension is not to have a good budget on document that does not translate to the expected development of the country and poverty reduction of the citizenry.