LIBERIA: PROGRESS ON DEBT, BUT SPENDING REMAINS A

UNCLAS SECTION 01 OF 03 MONROVIA 000087

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR AF/W AND EEB/OMA
TREASURY FOR RICHARD HALL, OREN WHYCHE-SHAW, WILLIAM REMINGTON

E.O. 12598: N/A
TAGS: EFIN EAID ECON PGOV LI
SUBJECT: LIBERIA: PROGRESS ON DEBT, BUT SPENDING REMAINS A
CHALLENGE

Ref A) Monrovia 63 (MinFin meeting)
Ref B) 07 Monrovia 1377 (IRS request)
Ref C) 07 Monrovia 1348 (MCC)
Ref D) 07 Monrovia 1322 (Fiscal update)
Ref E) 07 State 108948 (Arrears)


1. (U) SUMMARY: Liberia's fiscal picture is rosier in 2008 but
there are still challenges. The July-September first quarter of FY
2007-08 saw revenue increase more than 50% from the same period the
previous year, thanks to the Governance and Economic Management
Assistance Program (GEMAP). The GOL continues to struggle with
timely expenditures, although those, too, have improved over FY
2006-07. Scrubbing the civil service payroll has saved almost US$4
million dollars.


2. (SBU) SUMMARY CONT: The GOL is settling valid domestic debts
incurred by past governments and is proceeding with evaluation of
"contestable" domestic debt. A legal opinion from the Ministry of
Justice on the overall debt strategy is a prerequisite for further
action on debt management. Agreement is near on settling GOL debt
to domestic banks (including the Central Bank),which should help
stabilize the financial sector. The GOL plans to resume discussions
with foreign commercial creditors in mid-February. The IMF, World
Bank and African Development Bank have each committed to moving
forward on debt relief, opening the route to the next stage of the
Highly Indebted Poor Country (HIPC) process. Although those
announcements garnered broad press coverage, and are an important
step toward debt relief, they are only one aspect of a multi-pronged
strategy to return Liberia to a sustainable fiscal footing. Despite
the progress, the GOL's difficulty in expediting expenditures
contributes to the sense among Liberians that there has been no
improvement in their daily lives, despite the increase in revenues
and flow of foreign aid. END SUMMARY.

Revenues Improve
--------------


3. (U) The Quarter I Fiscal Outturn for Liberian FY 2007-08 reports
continued strengthening of the government's fiscal position. (Note:
The fiscal year starts July 1. End note.) Revenues of US$43.75
million exceeded projections and were 50% greater year-on-year. The
increased revenues were supported by the ongoing post-war economic
rebound and foreign development assistance, but also by improved tax
administration and revenue collection. Donor supported GEMAP was
key to the improving fiscal picture. In response to a request from
Finance Minister Sayeh (refs A & B) Treasury is sending advisors in
February to assess the GOL's future tax administration training
needs. The complete Fiscal Report is available at
(http://www.mofliberia.org/0708q1fiscalreport .pdf).

Speeding GOL Expenditure
--------------


4. (SBU) Expenditures of US$32 million, at 16% of the annual
appropriation, were 22% below projections but the pace of spending
was better than the same period the previous year. Delays in
passing the budget meant QI spending did not start until August 16,
six weeks into the fiscal year. Expenditure for the quarter was
also slowed by continued unfamiliarity with the new Public
Procurement Act and lack of advance planning on procurement by GOL
ministries. More than half of QI spending was for personnel
expenses.


5. (SBU) Assistant Minister of Finance for Expenditure Aletha Browne
told Econoff in December that the focus is on debt clearance and
expediting expenditures. Browne noted procurement bids should have
been tendered at the start of the fiscal year contingent on
availability of funds. The quality of vouchers from ministries and
agencies is improving, indicating better understanding of the new
procurement system.


6. (SBU) Browne said capacity is a continuing problem. For example,
MOF has analysts to cover each GOL ministry and agency but most of
them are completely unfamiliar with the workings of their assigned
ministries. She plans to build stronger relations with other major
government agencies in the coming year.


7. (U) In a newspaper interview published December 31, Finance
Minister Antoinette Sayeh cited the following examples of progress
since the Sirleaf administration took office two years ago:

-- The minimum civil service salary has increased from US$15 to
US$55 per month.

-- Civil service salaries and pensions are current for the first
time in decades. (The Sirleaf administration inherited has also
taken responsibility for civil service salary arrears incurred by

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past governments. Of the $13.12 million in public servant salary
arrears inherited in January 2006, about $9.21 million remains.)

-- GOL revenues have more than doubled since 2006, from a starting
budget of US$82 million to an FY2007-08 budget of almost US$200
million.

-- The Ministry of Finance (MOF) has streamlined the process for
paying taxes and fees and for voucher reimbursement.

-- The GOL is harmonizing tax and tariff policies with the region
(ECOWAS).

In the interview, Minister Sayeh confirmed debt cancellation is in
sight, perhaps within the next two years. (i.e. it is possible the
HIPC completion point could be reached by late 2010.)

GEMAP Shows Results
--------------


8. (SBU) The positive revenue story owes much to the continued
success of GEMAP, whereby donor-funded controllers at the major
revenue agencies (including the Central Bank, port, airport,
Ministry of Lands, Mines and Energy, the Cash Management Committee,
Ministry of Finance (MOF),Budget Bureau and the Public Procurement
and Concession Commission) have co-signing authority on financial
transactions and are working to institutionalize sound financial
management procedures. The increase in revenue, at rates far
exceeding GDP growth, reflects the capture of funds that formerly
"leaked" from public coffers. However, constant vigilance is needed
to counter ploys to divert government funds as efforts to introduce
sound fiscal management are squeezing employees' ability to use
their positions to pursue "rent seeking."

Vanquishing Payroll Ghosts
--------------


9. (SBU) MOF has taken steps to address pervasive problems in
delivery of government checks. In the absence of banks up-country
or a functioning national postal system paychecks were traditionally
given to supervisors to distribute to employees, an unreliable
method that contributed to corruption. As of September 2007, most
civil servants now collect and sign for their individual checks.
The Central Bank has branches in six counties and, with UNMIL
assistance, sends paymasters to the other nine counties for three
weeks every month to cash government checks. However, far-flung
civil servants must still carry checks, often long distances on bad
roads, to the county seat to be cashed. The inability to move money
around the country safely and efficiently is a major constraint on
economic growth and provision of effective government services.


10. (SBU) In her January 28 State of the Union message, President
Sirleaf reported they had purged 12,300 names from the government
payroll, saving nearly $4 million. In December 2007, the GOL
reported 22,734 government checks, totaling US$763,000, were
unclaimed in FY2006. (Note: GOL checks are valid for six months.
End note.) Assistant Minister Browne said they believe the
unclaimed checks belong to "ghost" employees. After consulting with
the Director General of the Civil Service Agency and the President,
the GOL has decided not to try to investigate further or press
charges. They will remove invalid names from the payroll, and
employees who subsequently claim expired checks will have to
re-qualify for their job through the Civil Service Agency.

More Clarity on Domestic Debt
--------------


11. (SBU) During a January 17 meeting (ref A),Minister Sayeh
expressed appreciation for Treasury's assistance on domestic debt
management and stressed that MOF still has work to do, most
importantly obtaining a legal judgment on the debt management
strategy and proposed Trust Fund structure from the Ministry of
Justice. MOF officials state it would be difficult to defend
rejected claims without clear legal grounding. The Deputy Minister
for Expenditure will provide us with a draft scope of work for next
steps for USG assistance once the legal opinion is granted.


12. (SBU) Domestic claims against the GOL totaled approximately
US$900 million. Last year the GOL started paying the US$300 million
in clearly valid claims incurred by past governments. It completed
payment on claims of up to US$50,000 and has approximately US$1.1
million in the current budget to start paying claims of between
US$50,001 to US$1 million. (Claims larger than US$1 million will be
handled separately.)


13. (SBU) Most (US$263 million) of the valid claims are owed to
domestic financial institutions, of which US$260 million is owed to

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the Central Bank of Liberia (CBL). The MOU with the CBL has been
signed and negotiations with both commercial bank creditors on
repayment terms are nearing completion. The Central Bank is
considered a preferred creditor, and GOL debt is being restructured
so as to safeguard the CBL's capital strength and the GOL's fiscal
space. Debt to the two domestic commercial banks will be discounted
at an average rate of 46.6% and calibrated so it does not become a
trigger for bank failure but minimizes moral hazard. The GOL is
requesting a budget appropriation in FY 2007-08 to begin servicing
the debt to the domestic commercial banks.


14. (SBU) The GOL will review the roughly US$300 million
"contestable" debt in early 2008, with the help of KPMG-Ghana.
After establishing what each claim is missing, the GOL will be able
to announce that creditors can provide the missing information to
support reconsideration of their claim.

Closer to International Debt Relief
--------------


15. (SBU) On November 18, the IMF Board announced it had approved
procedures to clear Liberia's arrears, which should be completed in
March. On December 5 the World Bank announced that "Liberia cleared
all overdue debt service payments." On December 18, the Board of
the African Development Bank also agreed to a proposal clearing
Liberia's arrears. Clearance of arrears to the international
financial institutions moves Liberia along the process of obtaining
debt relief under HIPC, to which GEMAP is linked. Conclusion of the
GEMAP process is a key indicator of donor confidence in the GOL's
ability to manage an effective and transparent fiscal regime.

The "Litigating Creditors"
--------------


16. (SBU) Even after clearance of multilateral and bilateral
foreign debt, Liberia owes an estimated US$1 billion to foreign
commercial creditors. The GOL has been working with the IMF to try
to determine from foreign commercial creditors what the GOL owes to
whom. Minister Sayeh told the Ambassador January 17 that she had
met with one of Liberia's major commercial creditors, and reported
to President Sirleaf at a January 23 LRDC meeting that she plans to
resume discussions with commercial creditors in mid-February.

Comment
--------------


17. (SBU) On December 31, a major Liberian newspaper named Finance
Minister Sayeh "Person of the Year" for "helping Liberia become
unshackled." Despite Liberian journalists' proclivity to criticize
the Sirleaf administration, there is appreciation for the vigorous
efforts the President and the Finance Minister have made to move
Liberia towards debt relief. Sayeh has been a forceful leader on
debt relief; a supporter of accountability and transparency; she
strongly advocates tax administration reform and is deeply engaged
in upgrading Customs and rehabilitating the port.


18. (SBU) Comment continued: Continued USG support for debt
management and tax administration reform will have broad impact on
further improving Liberia's fiscal situation, enhancing the
investment climate and increasing the GOL's ability to tackle
poverty. President Sirleaf recognizes that her administration needs
to do more to involve the legislature in meeting HIPC benchmarks.
The GOL's difficulty in expediting expenditures contributes to the
sense among Liberians that there has been no improvement in their
daily lives, despite the increase in revenues and flow of foreign
aid.

Booth