LIBERIA: FIRST ANNUAL FINANCIAL ACCOUNTS SHOW POSITIVE

UNCLAS SECTION 01 OF 02 MONROVIA 001322 SIPDIS SENSITIVE SIPDIS DEPARTMENT PASS USTR FOR CONNIE HAMILTON DEPARTMENT FOR AF/EPS POTASH AND AF/W DAVIS TREASURY FOR JOHN RALYEA, RICHARD HALL AND OREN WHYCHE-SHAW E.O. 12958: N/A TAGS: EFIN LI SUBJECT: LIBERIA: FIRST ANNUAL FINANCIAL ACCOUNTS SHOW POSITIVE TREND ¶1. (U) GOL efforts to stem leakage of government revenue are showing results. In the first full-year fiscal accounting for President Sirleaf's administration, revenues increased 75 percent over the previous year to USD 148.34 million. In a significant step toward transparency, the government published its Annual Fiscal Outturn, which was published in newspapers and made available on the internet. Revenue growth exceeded projections by 9.9 percent. Expenditures increased 64 percent, to USD 135.65 million, just under projections. The GOL ended FY 2006-07 with closing balances of USD 15.79 million. In the coming year, the Ministry of Finance plans to tighten customs exemptions (which totaled USD 26 million),and expand collection of the goods and services tax, property taxes and individual income taxes. The Minister has requested donor support of USD 1.7 million to fund further automation of tax administration. Press comment has focused on the "overspending" by some GOL agencies, ignoring the fact that overall spending was on budget. The full text of the Annual Fiscal Outturn is available at http://www.mofliberia.org/0607fiscalreport.pd f. Revenue Surging -------------- ¶2. (U) The GOL published the FY2006-07 final fiscal outcomes in two-page newspaper spreads over three days. Revenues of USD 148.3 million (excluding grants) exceeded original projections by USD 18.4 million, or 15 percent. (Note: The Liberian fiscal year starts on July 1. End note.) The initial budget appropriation of USD 129.92 was increased during the year by a supplemental appropriation of USD 5.06 million and by a USD 1.5 million budgetary support grant from China. The GOL ended the fiscal year with a surplus of USD 15.79 million, up from USD 2.1 million in July 2006. An anticipated USD 1.7 million in budgetary support from France has just been announced and will appear in the FY2007-08 accounting. ¶3. (U) Revenues increased more than 75 percent over the previous year, and are 22.7 percent greater than the IMF Staff Monitored Program target of USD 120.9 million. Tax revenue accounted for 95 percent of the total, of which almost half came from taxes on international trade. The growth reflects improvements in collecting 
fees related to pre-shipment inspection, and the growth in imports as the economy expands. The second-largest category, at 31 percent of tax revenue, was taxes on income and profits. Despite some widening of the tax base, over 50 percent of corporate taxes came from the three largest taxpayers. Property taxes showed the fastest absolute growth (more than doubling) but from a very low base. This year's revenue did not include GSM license fees, due to delay in passage of the revised Telecommunications Act. (Note: these one-time fees should appear in FY 2007-08 revenue as contract negotiations with the firms are completed. End note.) ¶4. (U) The Ministry of Finance identified further improvement for the current fiscal year, including tightening customs exemptions (which totaled USD 26 million),and expanding collection of the goods and services tax, property taxes and individual income taxes. In addition, the economy continues to expand and timber exports under the just-negotiated chain-of-custody regime should boost revenue in FY2007-08. Expenditure Controls Slow Spending -------------- ¶5. (U) Expenditures increased 64 percent over the previous year, and fell short of appropriations by 0.2 percent, compared to exceeding appropriations by 2.3 percent in FY2005-06. Despite a surge in spending in the last quarter, spending over most of the year was sluggish which limited fiscal stimulus. Spending in June 2007, the last month of the fiscal year, was three times that of any other month. Legislative approval of the Budget Bill in 2006 was delayed, so there was no spending the first two months of the fiscal year. New controls by the Cash Management Committee and the Public Procurement Committee, instituted to improve accountability and control expenditures, also slowed government-wide spending. ¶6. (U) The MOF notes that ministry and agency staff need further training in preparing cash plans, procurement plans and budgets to improve spending efficiency. Accounting and recording is still, on the whole, manual but an interim automated system is being implemented this fiscal year. There are also plans to install and integrated financial management information system (IFMIS). Clearing Domestic Arrears -------------- ¶7. (U) The GOL has focused on addressing the tangle of financial obligations left by previous governments. Payments of USD 5.24 MONROVIA 00001322 002 OF 002 million in salary arrears benefited over 40,000 civil servants and almost 19,000 former military. By the end of the fiscal year, domestic obligations to vendors and landlords had been aggregated and USD 3.24 million in uncontested claims was paid to 437 claimants. The GOL is reviewing contested claims totaling over USD 19 million as of September 2007. The government also initiated restructuring of debt to domestic financial institutions, including the Central Bank and two commercial banks. Resolving those payments will help but Liberia's financial sector on a sounder footing. Liberia made token payments of USD 1.2 million to service external debt. A First Step, But More Funding is Needed -------------- ¶8. (U) The GOL attributes the strong performance on the revenue side to more consistent implementation of the revenue code, improvements in the tax payment process and improvements in auditing by using related taxpayer information, such as import records. In addition to tightening up the pre-shipment inspection process, there has been expanded use of automation in tax administration. ¶9. (SBU) The Minister of Finance convened a meeting of the major donors September 27 to request USD 1.7 million to support plans to further enhance tax administration. Of that, a USD 1 million allocation for software is the key to whether they proceed with further improvements in tax administration or continue with current procedures. Donors were supportive, but non-committal. After the presentation, the Ambassador noted the improved revenue collection is a good news story, with lower (broader) rates and greater transparency. However, businesses in the formal sector have told us taxes are onerous and encouraged the MOF to continue expanding the revenue base so the few largest firms were not bearing the brunt of tax collection. ¶10. (SBU) Comment: It was not certain the GOL would be able to overcome inaccurate data collection and poor record-keeping to compile end-of-year financial accounts, and this publication, however imperfect, is a victory. It follows the first-ever publication of the national budget earlier this year. The press responded slowly, focusing on "overspending" by some government agencies. The Ministry of Finance responded strongly, noting the criticisms reflect a "sensational" lack of understanding of the distinction between Expenditures and Adjusted Accounts. A budget expert who is very familiar with the process confirmed to us that there were no over expenditures, allotments did not exceed appropriations, and the GOL ended the budget year with an increased cash balance. In the 2006-07 budget, the "General Claims" category contained a USD 9 million contingency fund for salary adjustments, which were then distributed to the ministries and agencies through payroll. The FY2007-08 budget made the salary adjustments at the same time as the Budget Law, so "other claims" will be greatly reduced and spending will be clearer. ¶11. (SBU) Comment continued: The increase in revenue and in government transparency shows the Governance and Economic Management Assistance Program (GEMAP) is having an impact. Experience with the budgeting process, continued improvement in tax administration, combined with expected increases in revenue as timber exports resume and the economy continues to expand, bode well for the FY2007-08 budget. BOOTH