Debt And Adjustment in the Liberian Economy: Some Policy Implications

By Geepu-Nah Tiepoh

As Liberia emerges from the ravages of war, her economy wobbles under debt and monetary crises which threaten the country with further economic uncertainty and poverty. The threat comes not only from the direct impact of the crises but also from the policy options that are available for resolving them. In an increasingly competitive world capital market, where a country's access to foreign capital is largely determined by its ability to maintain 'appropriate' macroeconomic and structural balances, it is certain that Liberia, which has recently emerged out of war with no significant domestic capital sources, and whose debt and monetary conditions are debased, will have to adhere to the demands of global capital by instituting some macroeconomic and structural adjustment. This will require the implementation of policy measures aimed at improving Liberia's trade, fiscal and monetary, and structural balances. Late last year, Liberia's minister of finance held a series of meetings with the IMF and World Bank to discuss his government's plans for adjustment and the repayment of the country's debt. However, economic adjustment, as demanded and supported by these institutions, despite its great intentions, often entails adverse socio- economic implications and consequences for the adjusting country. This article provides a brief perspective of some of these implications for post-war Liberian economic future.

At present, the Liberian economy is characterised by huge debt burdens, currency crisis, and deep recession. Liberia's total external debt outstanding, which stood at US$537 million in 1980, now projects over US$3 billion, with debt payment arrears to multilateral institutions alone standing at over US$1 billion. According to IMF records, for the period 1990 to 1994, debt services due to multilaterals and bilaterals averaged 11 percent of Liberia's GNP, while debt services actually paid averaged 0.8 percent (IMF Pamphlet Series, NO. 51). The country's monetary system is also in serious crisis, with the continuation of a triple currency and exchange rate regime, and a forced US-Liberian dollar parity which fuels a parallel exchange market in the economy. At the existing low output in the economy, government has been attempting to suppress domestic demand, ration output, and contain inflation through the restriction of money supply. Such demand management and anti- inflationary efforts are being blessed by the government's inability or reluctance to pay public sector salary arrears. While it has managed to pay some of these arrears, the government's desired policy of keeping real money supply and demand in check may well be a main reason for not wanting to settle the full accounts. As the minister of finance said, "even if we have the resources to clear it all up, prudence will advise against it. We will just fuel inflation by putting all this money into an economy where demand has been suppressed for so long" (New African, December 1997).

The linkage between a country's external debt and the demand for adjustment is straight-forward. Basically, the size of the balance of payment deficit which a country can run depends on the amount of new foreign loans and other capital flows that are available to sustain it. However, when a country has excessive levels of foreign debt (ie, more debt than it can repay), then external creditors are reluctant to supply new inflows. As a result, the country must rapidly adjust by implementing policy measures aimed at drastically reducing or eliminating the deficits. Macroeconomic adjustment, as supported by the IMF, focuses on reducing a country's balance of payment deficits and inflation through tighter monetary and fiscal policies and exchange rate devaluation. The main stated objective of restrictive monetary policy is to reduce the growth of domestic demand and stimulate domestic savings and investment through budgetary austerity, lower inflation, and higher real interest rates. Exchange rate devaluation is intended to discourage the domestic demand for imports and exportable goods, thus increasing export volumes and foreign exchange earnings. All of these measures are aimed at one important goal: to enable the debtor country acquire enough foreign exchange to repay its external debt, with simultaneous improvement in its balance of payments position. The World Bank's version of adjustment supports wider economic structural reforms, such as trade liberalization, market deregulation, and public sector restructuring, among others.

While it is true that Liberia requires economic adjustment, any adjustment programs without strong investment and growth backing will be unsustainable for the country in the short and even the long run. This is because in the absence of significant growth, domestic absorption (especially household consumption), which has already been vastly suppressed, would have to be further axed in order to maintain debt service payments and a healthy balance of payments position. Even the IMF and World Bank, which support these programs, recognize the social impacts of adjustment, and they try to "sooth" them by allowing additional new loans and encouraging various debt rescheduling schemes. While such additional lending and debt settlement schemes do provide present relief, they also deepen the debt trap and prolong the economic plight of the indebted country.

Demand management policies (ie, tighter monetary and fiscal controls), in addition to being socially inefficient, are in many cases self-conflicting and ineffective in terms of achieving their goals. Take, for instance, the policy of higher real interest rates which, according to the adjustment logic, is designed to induce domestic savings for ensuring more investment finance and growth in the economy. Ample evidence indicates that at least in the earlier stages of adjustment, higher real interest rates tend to decrease rather than increase domestic savings. This is because in the earlier stages of adjustment, household incomes (including incomes of non-incorporated micro enterprises) are often depressed and, in order to maintain consumption, many households will draw on their existing savings or refrain from making new savings. In the specific context of Liberia, where the socio-economy is just emerging from the wounds of war, it is unlikely that any hike in real interest rates could have a meaningful positive impact on households' ability to save in the short run. Second, even if higher real interest rates induce more domestic savings, they would tend to increase the cost of productive investment relative to financial investment. As a result, most firms would prefer to borrow from the domestic capital market for financial investment purposes as opposed to productive activities. Third, since a large portion of capital investment in the economy is imported, and the cost of that is paid in foreign exchange, the policy of devaluation does increase the cost of investment, thereby discouraging domestic investment. While foreign investors could help fill the investment gap, the presence of excessive foreign debt often makes this option less rewarding for the country, as most new investors have to be induced using too much lucrative incentives. In Liberia, the Taylor government is already boasting of the "influx" of French, Taiwanese, South African, Libyan and other foreign investors. To the extent that such inflows are significant, they are due partly to the government's very lucrative Investment Incentives Contracts (IICs) which, among other things, promise "unrestricted repatriation of foreign investment and remittance of profits and dividends at any time" (New African, December 1997).

There are other self-conflicting tendencies within demand management policies, which have serious implications for the post-war Liberian economy. For example, consider budget deficit reduction which, according to the monetarist view, is necessary to stamp the growth of money supply and lead to a downward domestic demand, increased savings and investments. Compare such a budgetary control requirement with those for devaluation, import reduction, and high real interest rates. First, devaluation raises the domestic currency costs of the government's foreign exchange spending on the external debt and investment imports, thereby contributing to the budget deficit. This could be especially true in post-war Liberia where accumulated debt services are expected to entail substantial current debt payments, and where public enterprises are not noted for good export performance to compensate for the increased domestic currency costs. Second, the call for import volume reduction, which is associated with adjustment, has a potential to increase the budget deficit since such a reduction narrows the government's tax base for import tariffs. Third, in order not to relax monetary policy in times of inflation or output growth, real interest rates need to be raised during adjustment. However, such increases in real interest rates often translate into higher interest payments on the government's domestic debt, thereby contributing to a rise in the budget deficit.

The above-mentioned policy conflicts combine to explain why the growth impact of adjustment has been largely disappointing for most adjusting countries. Thus in the absence of significant growth backing, adjustment is often implemented at high social costs to the adjusting economy. These policy conflicts reveal not only the weaknesses in the adjustment process, but also the dilemma that debtor countries, like Liberia, face in their quest for economic development. On the one hand, Liberia must meet her debt obligations or forever remains estranged from the dominant global financial system. On the other, in order to meet those obligations, she must do so within a prescribed policy regime whose preoccupation is to safeguard the commercial integrity of a world financial order. In the final analysis, however, it is the Liberian government which has the ultimate responsibility for ensuring that sustainable economic policies are designed and implemented for the country. After all, the debts in question were contracted by successive Liberian governments. The present government has to make sure to put in place a sustainable macroeconomic policy, whereby Liberia's debt is paid but not at the cost of its people's survival. In a subsequent issue, I will provide some policy suggestions towards economic reforms.

Geepu-Nah Tiepoh Is A Development Economist & Consultant - ACLAD Development, Canada