LIBERIA PASSES LONG-AWAITED PUBLIC FINANCIAL MANAGEMENT ACT

UNCLAS SECTION 01 OF 03 MONROVIA 000628


SENSITIVE
SIPDIS

DEPT FOR AF/W, EEB/OMA AND INR/AA

E.O.12958: N/A
TAGS: PGOV ECON EFIN LI
SUBJECT: LIBERIA PASSES LONG-AWAITED PUBLIC FINANCIAL MANAGEMENT ACT

REF: 08 MONROVIA 891

(SBU) SUMMARY: The National Legislature passed the much-anticipated
Public Financial Management Act August 20, nearly a year after the
Ministry of Finance (MOF) first submitted a draft. Although
Liberia's HIPC Initiative debt restructuring requires the GOL to
implement the act for one year, concerns that the legislative
bottleneck would postpone Completion Point beyond 2009 may be
unwarranted. The International Monetary Fund, cognizant of both the
Legislature's notorious delays and the Executive branch's
fulfillment of the spirit of public financial management reform, has
signaled its intention to apply a liberal interpretation of that
benchmark to ensure irrevocable debt forgiveness by year's end.
Post believes it may be counterproductive to push a premature HIPC
Completion Point, but if the IMF does chose to accelerate the
process, the following staff-monitored program should entail strict
monitoring. END SUMMARY.

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Who Controls the National Purse?
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2. (SBU) The Ministry of Finance, with assistance from the
International Monetary Fund, began drafting the Public Financial
Management Act in 2007, and submitted it to the National Legislature
on August 28, 2008 (reftel). The Paris Club, International
Financial Institutions, domestic fiscal hawks and President Sirleaf
actively lobbied for swift passage of the draft law, which outlined
procedures for preparation, adoption, and execution of the national
budget. Indeed, the stakes were high and the timeline short: the
GOL's Poverty Reduction Strategy identified the PFM Act as a key
deliverable, and the Highly Indebted Poor Country (HIPC) Initiative
requires Liberia to implement the law for one year in order to
receive irrevocable forgiveness on the remaining $1.9 billion in
external debt. Yet despite the Act's importance, the Act failed to
make it onto the 2008 legislative agenda, languished in committee,
and only passed on August 20 in the waning days of the 2009 session.



3. (SBU) Blamoh Nelson, co-chairman of the Senate Ways, Means,
Budget and Finance Committee, and leader of a joint House and Senate
committee created to review the draft act, defended his colleagues'
lengthy deliberations. He conceded few legislators understood the
HIPC process or the consequent costs of their delay until President
Sirleaf herself summoned the joint committee to the Executive
Mansion for a briefing on the Paris Club, HIPC and the productive or
obstructive role they might play in debt forgiveness.


4. (SBU) Yet even as the committee came to understand their role in
the responsible management of public finances, they hoped to recast
the draft act to retain primacy over fiscal affairs - a mandate they
believe the Liberian Constitution grants the Legislature, and not
the Ministry of Finance. Unable to resist a HIPC mandate, the
Legislature already had conceded to MOF's absorption of the Bureau
of the Budget. Indisposed to accept further territorial erosion,
they resented the PFM Act's explicit vision of a super-Finance
Ministry that would preside over budget creation, revenue
collection, expenditure and debt management and economic analysis.


5. (SBU) The Legislature further questioned the absence of measures
strengthening legislative and executive authority over state-owned
enterprises. Historically, revenue-generating agencies such as the
Liberian Petroleum Refining Company and the Bureau of Maritime
Affairs operated outside the budgetary process and were permitted to
retain surplus earnings - reducing government revenues and
oversight, and facilitating widespread fraud. The joint committee,
with assistance from the General Auditing Commission, introduced
robust amendments requiring the refund of surplus funds from SOEs to
a single GOL account known as the Consolidated Fund. Additional
legislative amendments to the final version included a stronger
system for registering and tracking government assets for audit
purposes, and the placement of internal auditors within each
ministry.

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The Compromise PFM Act
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6. (U) The final version of the PFM Act provides the legal basis for
comprehensive reform of Liberia's public finances, empowers the MOF
to create implementing regulations that will improve revenue
collection, strengthen auditing and enforcement, streamline onerous
procedures imposed upon tax payers, tighten internal controls within
the ministries that spend money, and establish transparent
procedures for debt management and reporting. However, it also

MONROVIA 00000628 002.9 OF 003


concedes authority to the Legislature for budgetary review and
notably constrains the revenue and operational autonomy of
state-owned enterprises. The Act applies to all GOL institutions,
agencies and entities, targeting five broad areas:

-- Budget Preparation and Approval: strengthens the links between
economic and development policy priorities and the budget process,
calls for three-year forecasts of revenue and expenditure, specifies
the format and timeline for submission of the MOF's draft budget to
the Legislature and release to the public, and outlines the
Legislature's rights and responsibilities for modification and
approval of the budget.

-- Budget Execution: provides legal mandates to control commitments
against appropriations, limits the amount that may be transferred
between line items, and requires annual procurement and spending
plans for each ministry and spending agency.

-- Debt Management: requires that all proceeds from government
borrowing be credited to the Consolidated Fund, stipulates that debt
service payments are among the first claims on resources, and
requires the publication of a debt management strategy and the
bi-annual submission of reports on new borrowing. The PFM Act also
establishes a Debt Management Committee (composed of the Ministers
of Finance and Justice, the Governor of the Central Bank, and two
other presidential appointees) that must approve all central
government loan agreements or contracts that impose contingent
financial liabilities upon the government.

-- Accounting, Reporting and Auditing: mandates quarterly public
reports and internal audits for all agencies, requires publication
of the general budget and annual external audits of the final
accounts. The law also requires that the budget include separate
annexes on foreign grants and loans.

-- Oversight of State-Owned Enterprises: requires SOEs and
autonomous agencies to submit draft budgets and strategic plans to
the Minister of Finance for approval, compels SOEs to petition the
Debt Management Board prior to contracting debt, and directs SOEs to
disburse all surplus money to the Consolidated Fund at the
conclusion of the fiscal year.

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HIPC Completion Point: Still on Track?
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7. (SBU) Despite fears that legislative wrangling would stymie the
MOF's adamant and very public determination to reach HIPC Completion
Point by the end of 2009, the International Monetary Fund appears
ready to assent to a generous interpretation of the trigger that
Liberia "implement" for one year both the PFM law and supporting
financial regulations. Alexander Deline, senior economist for the
IMF in Liberia, said the Liberian Executive Director Samuel Itam has
argued persuasively that the 2009/2010 budget process embodied the
spirit of the PFM Act. Deline believes political pressure from
donors eager to support Liberia would make a delay past 2009
untenable.


8. (SBU) In fact, Yuri Sobolev, the new Resident Representative in
Liberia, conceded that the IMF had permitted President Sirleaf to
interview him concerning his views on Completion Point. Only after
he assured her of his commitment to an end-2009 timeline did she
assent to his appointment as ResRep.

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Comment
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9. (SBU) The passage of the PFM Act should empower the MOF to
continue its admirable progress toward a tightly controlled and
transparent budget process. The PFM Act is also welcome as the
Governance and Economic Assistance Program (GEMAP) will end in
October, and GEMAP technical advisors will no longer have co-signing
authority at SOEs, the only check against questionable expenditures
in the early years of the Sirleaf administration. As public
financial management continues to improve, budget support from the
donors is expected to increase, enabling the GOL and donors to
better coordinate resource allocation.


10. (SBU) The GOL continues to demonstrate its commitment to a
post-HIPC regime of fiscal prudence and cautious debt management,
but the IMF's vocal willingness to push Completion Point this year
may be counterproductive, given that impending debt forgiveness
constitutes the GOL's most compelling impetus for reform. To that
end, post will continue to press the GOL to move forward not only
with PFM implementation, but with other HIPC-mandated reforms that

MONROVIA 00000628 003 OF 003


are behind schedule, including external audits of key ministries,
the development of an active Anti-Corruption Commission, and the
rollout of a new debt management strategy.


11. (SBU) It appears that Secretary Clinton's address to the
Liberian Legislature August 13 may have had some effect, as
legislators now seem intent on passing key legislation before they
recess. However, if the Legislature is to become a responsible
interlocutor in the budget process, it needs both training for its
members and a staff or technocratic experts capable of independent
budget analysis. Ongoing support provided by both the House
Democracy Assistance Committee and USAID (through the National
Democratic Institute) is welcome. Now that the PFM Act is signed,
there also is an opportunity for NDI to help support the budget
committee's vision of a Legislative Budget Office. A peevish
Legislature that feels relegated from the budget process may
willfully delay MOF priorities or renew oft-threatened efforts to
spin off the revenue function into an autonomous agency that
resembles the Internal Revenue Service.


12. (SBU) Post recognizes that political imperatives may make an
end-2009 HIPC Completion Point inevitable. Indeed, both the MOF and
Legislature have demonstrated laudable progress in exercising
responsibly their respective roles in public financial management.
However, we are concerned that a premature Completion Point would
not give Liberia the time to institutionalize its promising track
record of reform. One way to address this concern would be for the
IMF's staff-monitored program to reinforce continued PFM reforms and
restrict new borrowing to sectors that offer strong employment
prospects and contribute to Liberia's economic recovery.

ROBINSON