IMF THINKING ON LIBERIA'S HIPC COMPLETION POINT

UNCLAS SECTION 01 OF 03 MONROVIA 000804

SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: ECON EFIN EINV ECOM LI

SUBJECT: IMF THINKING ON LIBERIA'S HIPC COMPLETION POINT

REF A) MONROVIA 673; B) MONROVIA 628; C) MONROVIA 524


1. (SBU) SUMMARY: Resisting political pressures to hasten
Completion Point under the Highly Indebted Poor Countries Initiative
before the end of 2009, an International Monetary Fund team led by
Africa Director Antoinette Sayeh, Liberia's former Finance Minister,
estimated that Liberia may achieve irrevocable debt forgiveness in
May or June 2010. During a mission to review Liberia's progress
under its Poverty Reduction and Growth Facility, the IMF team
observed significant reforms since their last visit in February, and
offered an optimistic assessment of the country's resilience in
light of food and fuel crises and a global recession that has
delayed revenue from concessions. The IMF discerned increasingly
sophisticated monetary and fiscal policy, which should ready Liberia
for a greater degree of independent economic management. END
SUMMARY.


2. (SBU) Antoinette Sayeh, director for Africa, and Chris Lane, head
of the mission to Liberia, led an IMF team that conducted Liberia's
third review under its Poverty Reduction and Growth Facility (PRGF)
during a visit to Monrovia October 19-28. Poloff and Econoff met
with Lane and Yuri Sobolev, the IMF's Resident Representative in
Liberia, October 23. The Ambassador also met with Sayeh, Lane and
Sobolev October 27 to discuss Liberia's current macroeconomic
situation and determine current IMF thinking on timing for Liberia's
HIPC Completion Point.


3. (SBU) Despite the tremendous exogenous shocks to Liberia's
economy, the IMF remains optimistic about the likelihood of an
economic rebound in 2010. On the macroeconomic level, little has
changed since the IMF's second review in February; the extractive
industries continue to disappoint, and growth estimates remain at
4.6 percent for 2009. However, the IMF expects commodity prices
will rebound, revenues from rubber will rise, and iron ore and
timber extraction will resume, buoying growth to seven percent in

2010. While Lane conceded that the IMF had not anticipated the
extent of the Liberian dollar's depreciation this year (ref A),his
team's consultations with the Central Bank of Liberia (CBL)
reassured the Fund that an increasingly activist monetary policy
should steady the exchange rate.

HIPC Completion Point
--------------


4. (SBU) Sayeh told the Ambassador the IMF tentatively believes
Liberia could meet its outstanding triggers for HIPC Completion
Point by May or June 2010, to coincide with the IMF's release of its
fourth biannual review under the PRGF. President Sirleaf and
Finance Minister Ngafuan have long pressed for Completion Point by
year's end, arguing that the HIPC mandate to maintain a cash-based
budget constrains spending on critical social services. While Lane
acknowledged that six months ago the IMF might have acceded to the
President's request, the delayed passage of key legislation,
worrying revenue shortfalls, and the as-yet incomplete audit of
expensive government payrolls vindicated those fiscal hawks who
argued that the IMF must insist upon a track record of prudent
public financial management before Liberia should be granted the
right to contract debt.


5. (SBU) Completion Point this year is no longer possible, because
three key trigger points will slip to 2010: passage of the
Investment Incentives Act, the audit of the education payroll, and
the 12-month implementation of the Public Financial Management Act.
The IMF was disappointed when the National Legislature unexpectedly
failed to pass the Investment Incentives Act before it recessed in
September, but the Liberian business community is confident the law
will pass quickly when legislative sessions resume in January, given
that both houses already held lengthy hearings to debate its merits.
The IMF will continue to monitor the audit of the Ministry of
Education payroll. Given that teachers' comprise one third of all
government workers, the fact that ghost workers continue to collect
salaries and harmonized pay scales do not yet exist imposes an
unnecessary fiscal burden on the GOL. Lane was heartened to learn
that USAID will hire 300 auditors to comb education payrolls, and
expects to complete its appraisal by March 2010.


6. (SBU) The only pending trigger with some room for interpretation
is the implementation period for the Public Financial Management
(PFM) Act. The PFM Act passed in August, after languishing in the
legislature for nearly a year (ref B),so a literal application of
the 12-month implementation requirement would push Completion Point
until December 2010, when the IMF releases its fifth review under
the PRGF. While there is precedent for softening implementation
requirements, Lane cautioned that the IMF has learned that it must
minimally ensure that Liberia fulfills the trigger point in spirit.
During its second review, the IMF liberally interpreted the
requirement that the Liberian Anti-Corruption Commission (LACC) be

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"fully operational" for one year before Completion Point. Sayeh
acknowledged that while the LACC may have fulfilled that nominal
pre-requisite, the IMF's concession lifted pressure on the GOL to
create a robust institution with a track record of
corruption-busting. On the PFM Act, the IMF might be willing to
abbreviate the 12-month implementation period, given that the Act
itself is a solid piece of legislation that meets the IMF's high
standards, and given that the Ministry of Finance readied strong
implementing regulations while awaiting passage. However, Lane
said the IMF will insist upon "continued strong performance" under
the PFM Act and will ask the GOL to submit at least two quarterly
implementation reports.

Monetary and Fiscal Policy After HIPC
--------------


7. (SBU) Sayeh and Lane both observed promising indications that a
post-HIPC Liberia will guard against political and social pressures
to spend profligately, embarking upon a prudent fiscal policy that
uses debt only to smooth government expenditures, and an assertive
monetary policy that staves off further depreciation until greater
exports steady demand for the Liberian dollar.


8. (SBU) The delayed resumption of timber and iron ore exports,
along with sagging customs revenues and lackluster income tax
receipts, have constrained already-modest government expenditures.
Yet Lane said that while the fiscal situation is undoubtedly
worrying, it has afforded the MOF an opportunity to test its mettle.
The IMF estimates that Liberia's true resource envelope for Fiscal
2009-2010 is USD 305 million (compared to the ratified budget of USD
372 million). The budget office independently arrived at a similar
conclusion as early as June (ref C),signaling that the MOF's
capacity for revenue projection has become quite sophisticated.
Since then, Lane noted that the MOF has implemented its risk
management strategy effectively, communicating with line ministries
and negotiating budget cuts. Lane said he was impressed that every
ministry he met with seemed to understand how the revenue shortfall
would affect their respective allotments. That augurs well for a
post-HIPC fiscal environment, when Liberia must ensure kneejerk
borrowing is not the inevitable response to every budget crisis.


9. (SBU) The IMF is also working with the GOL to design a cautious
borrowing strategy. The Central Bank of Liberia is drafting the
outlines of a nascent Treasury-bill market for Liberian
dollar-denominated bonds with 90-day durations. Given that
commercial banks complain their vaults are full of Liberian dollars
collecting no interest, the IMF believes the CBL will find a ready
market for its notes. A small-scale bond market will absorb some of
this excess supply of local currency, which in turn could buoy the
Liberian dollar.


10. (SBU) The IMF also praised the CBL for an increasingly
resourceful use of it limited toolkit of monetary instruments.
In October, the CBL raised the longstanding ceiling on foreign
exchange sales at its weekly auction from USD 500,000 to USD 1.5
million, thereby reversing six months of steady depreciation. Lane
also saluted the CBL's "sensible" decision not to draw upon an IMF
allocation of Special Drawing Rights equivalent to USD 160 million.
Lane noted that where many countries have been tempted by this
low-interest credit line, the CBL exhibited laudable restraint.

Pleasant Surprises and Unmet Challenges
--------------


11. (SBU) Since its February assessment, the IMF team was pleased to
discover reforms that exceeded expectations. Sayeh was encouraged
to see that Liberia is now only the second country to achieve
compliance under the Extractive Industries Transparency Initiative.
Lane also noted that the CBL created units to monitor insurance
companies and micro-finance, shoring up some gaps in supervision,
and doing so independently, without help or support from any
international partners or advisors.


12. (SBU) On the negative side, the IMF team said their meetings at
the Ministry of Justice alerted them up to the monumental challenges
that face rule of law in Liberia. Lane said the IMF had been
focusing on commercial law reform, after discussing with Minister
Christiana Tah the monumental tasks she has faced since taking over
in July, he recognized more fundamental problems, relating to basic
training of law professionals, prison management and judicial
independence. He welcomed information about USG rule of law
programs.


13. (SBU) COMMENT: The IMF's current thinking appears to be that
while a cash-based budget imposes painful short-term constraints,
premature Completion Point would curtail the institution-building
that will be essential to sound fiscal management in years to come.

MONROVIA 00000804 003 OF 003


We welcome the IMF's sanguine assessment of Liberia's readiness for
a post-HIPC environment, but we recognize that the government sees
Completion Point as more a political achievement than the basis to
form a new fiscal policy. We regard HIPC-mandated reforms as the
modest foundation on which will rest ever-improving economic
policies that facilitate widespread growth and engender social
equity. To that end, we will continue to encourage ongoing
improvements in public financial management, external audits of key
ministries, and the development of dynamic anti-corruption
mechanisms, even after Liberia achieves Completion Point.

THOMAS-GREENFIELD