Liberia Risks Defaulting On Debt Service Obligations -As COVID-19 Rages On

Dr. Samora P.Z. Wolokolie, Deputy Minister for Fiscal Affairs at the Ministry of Finance and Development Planning (MFDP) has divulged that Liberia faces “a major challenge as debts previously contracted on concession terms are due now” 

Addressing the Special Edward Wilmot Blyden Forum, recently organized by the Press Union of Liberia (PUL), in Monrovia, Dr. Wolokolie disclosed that Liberia “with falling growth rate and revenue, rising expenditures and widening current account and fiscal deficits, the country risks defaulting on its debt service obligations.” 

He, however, told the forum that “to prevent this from occurring, the Government is seeking a debt waiver on its external debts and a restructuring of its domestic debts.

According Deputy Minister Wolokolie, the International Monetary Fund (IMF), under its  “Catastrophe Containment and Relief Trust (CCRT)” has approved debt service relief for the country. This provides grant to cover IMF debt obligation for an initial phase over the next six months. This frees up scarce financial resources to be channeled towards the health sector to combat the COVID-19 outbreak, and also towards domestic debt services to stimulate the domestic economy.”

At the same time, Wolokolie who is a senior official of the governing Coalition for Democratic Change (CDC), disclosed that the effect of COVID-19 on Liberia is devastating and far reaching as every fabric of the country’s livelihood has been impacted by the deadly virus.

 He added that “Liberia, as part of the global village, is not immune from the effects and shocks of COVID-19 pandemic which affected more than 100 countries worldwide, sickened millions and killed hundreds of thousands.”

“The effect and impact of this menacing pandemic is ubiquitous. From Asia to the Americas, from Africa to the Middle East, and from Europe to Australia,  confirmed cases of the novel coronavirus which first appeared in China at the end of last year, now exceed 115,000 as of March 10 and are likely to climb significantly higher,” he added.

He pointed out that as it was with the Ebola outbreak in 2014, Liberia’s “economy is under enormous stress.”

Speaking on the Theme: “The Economic Impact of COVID-19 On Liberia,” the Deputy Finance and Development Planning Minister asserted that while lock-down is an effective mitigating measure to curtail the spread of the virus, it is negatively impacting economic activities and placing substantial burden and challenges on the vulnerable population.

“In addition to the vulnerable population, COVID-19 has placed enormous strains on the operations of government. Government’s budget execution, revenue collection and expenditure decisions have all been impacted by the events emanating from COVID-19,” he further told the gathering.

According to Dr. Wolokolie, prior to the outbreak of COVID-19, domestic revenue was projected at 444 million dollars out of a total of 505 million dollars of which 61 million was attributed to external resources.

“This projection was consistent with the recast budget that was passed into law in January 2020. Major lines informing the domestic resource envelope included taxes on income and profit, international trade, goods and services tax, administrative fees, etc,” he disclosed.

He pointed out that “while the Liberia Revenue Authority was taking “proactive measures to ensure that lawful revenues were collected to support the national developmental agenda of the government, the tentacles of the deadly coronavirus arrived on the shores of Liberia.” 

With the outbreak of COVID-19 came the declaration of a State of Emergency by President George Weah.” As a mitigating factor, the SOE sanctioned social distancing, reduced workforce, reduced hours for economic activities, and a limited curfew. All these measures combined resulted in a precipitous drop in viable economic activities.”

Covid-19 donations to Liberia

He added that considering the fact that the COVID-19 preventive measures (i.e. social distancing) will slow down economic activities and lead to low revenue generation, the Government of Liberia, supported by the IMF initiated another recast, known as “the COVID Recast,” which he said, was necessary to adjust prior projections taking into account the prevailing situation.

“Towards that end, the COVID recast was submitted and enacted into law with a decrease in domestic revenue (from 444 million to 395 million),” he further informed the forum.

The Liberian official maintains that the spread of COVID-19 in the global economy affected domestic resources mobilization at the end of February 2020, with US$294.2 million of revenue collected.

“Despite this collection representing an increase of US$ 97.9 million (49.9%) over the collection at the end of December 2019, it fell short of the revenue projection (US$317.4 million) at the end of February 2020 by US$ 23.2 million, thus representing undercollection of 7.3%.

This was mainly attributable to US$ 18.8 million undercollection in grants and US$12.6 million undercollection in tax revenue despite over collection of US$ 8.2 million in non-tax revenue, he asserted.

He further narrated that the “undercollections in taxes on international trade (US$ 14.3 million) and in taxes on goods and services (US$ 4.1 million) were responsible for the massive undercollection in tax revenue.”

According to the Deputy Finance Minister, “given the declaration of the outbreak as a pandemic and the unprecedented measures being put in place to contain the virus both at home and abroad, we anticipate significant underperformance in revenue over the course of the fiscal year.”

He further accentuated that the global lock down will affect revenues from taxes on international trade. The domestic lock down will affect demand for goods and services, thereby adversely affecting payroll tax receipts, receipts from taxes on goods and services, receipts from surface rentals and corporate income tax receipts amongst others.

Wolokolie pointed out that to mitigate the impact of the fall in revenue collection, the government is in consultations with development partners, specifically the World Bank, the IMF, the African Development Bank and the European Development Bank, to access grant facilities to aid the country in combating the outbreak and in stimulating the economy.

On the expenditure front, he asserted that it was projected that US$ 525.9 million would have been spent on the administration of the affairs of the state for FY2019/2020. 

Of the projected expenditures, recurrent spending was projected to amount to US$ 492.4 million (93.6%) while capital spending would amount to US$ 33.5 million (6.4%). Of the projected recurrent spending, compensation of employees was projected at US$ 296.9 million (60.3%), Use of goods & services, US$ 77 million (15.6%), interest, US$ 62.9 million (12.8%), grants, US$ 54.1 million (11%), and social benefits, US$ 1.5 million (0.3%).

“As of end of December 2019 when the COVID-19 outbreak was restricted to China,” he disclosed that the Government expended US$ 195 million representing 37.1 percent of the proposed expenditures for FY2019/20.

The amount spent was entirely on recurrent activities with compensation of employees accounting for the highest expenditure item. However, as at the end of February 2020, government expenditures increased by 50% on account of a 61.8% increase in compensation of employees relative to the end of December 2019.

Wolokolie: “With the increase in the number of cases in the country and the imposition of restrictions on movement in the country, we anticipate an increase in health-related expenditures to enable the country to identify those infected, isolate them, contact traced those they might come in contact with and then treat the infected for the symptoms; an increase in security related spending to enforce adherence to the safety measures being put in place to limit the spread of the virus, and increase in social benefits to affected communities.

Further narrating, he pointed out that “ all of these are coming against the backdrop of regular payments of salaries to workers and to suppliers of goods and services and debt servicing. This puts a strain on the budget which was crafted on the basis of fiscal austerity. Moreover, re-allocation of spending threatens to make the Government to default on some of its commitments.”

Dr. Wolokolie asserted that to mitigate the impact of these increased expenditures on the budget and to prevent the widening of the fiscal deficit and the buildup of debts, the Government has re-allocated budgetary appropriations, thereby deferring discretion’s spending that are critical to the fight against the virus, but protecting the payment of salaries in the process.

“This re-allocation process succeeded in freeing up US $25 million to be used to provide food aid to affected communities and a further US$ 4 million to support the provision of electricity and water to homes,” he added.

At the same time, Minister Wolokolie indicated that during the crafting of the FY2019/20 national budget, the government committed itself to implementing a credible budget by aligning spending to identifiable available revenue, thereby reducing the temptation of deficit financing which curtails the increase in debts and the depletion of reserves.

He said during budget execution over the past eight months, in an attempt not to resort to deficit financing and in response to revenue shortfalls, “we adjusted expenditures to match available revenue.”

However, he added, given the huge increase in expenditure coupled with projected sharp decline in revenues on account of a slowdown in economic activities, “we anticipate a widening of the budget deficit. Given the low level of foreign reserves and the weak balance sheet of the Central Bank of Liberia, financing the deficit would prove to be a herculean task.”

Moreover, he said to narrow the budget deficit, the government has been engaged in discussions with its international development partners in sourcing finance.

“These discussions have yielded fruits as the World Bank has committed to provide US$ 17 million to partly support the National Response Plan. The European Union has also pledged to re-allocate US$ 15 million of its pre-COVID-19 assistance to the country. The Government is also working with the African Development Bank to determine the Bank’s support to Liberia as regards the AfDB’s recently announced US$10 billion COVID-19 support to African countries.

Commenting on the country’s total debt stock, he disclosed that at the end of February 2020 it stands at US$1.47 billion of which domestic debts account for US$ 604.4 million (41%) while the external debt stock account for US$ 861.8 million (59%).

Of the domestic debts, debt owed to the CBL amounts to US$ 487.5 million (80.7%); commercial banks, US$ 65.2 million (10.8%); other institutions, US$ 51.5 million (8.5%); and claims, US$ 0.2 million. On the other hand, of the total external debt, multilateral institutions account for US$ 748.3 million (86.8%) while bilateral sources account US$ 113.5 million (13.2%).

He maintains that the rising debt levels coupled with falling growth rates have resulted into the country being classified into the category of moderate rate of debt distress and as such, “it inhibits our ability to borrow to finance infrastructure projects needed to narrow our infrastructure gap and to also fund a meaningful stimulus package for the country”.

He indicated that the total debt service at the end of February 2020 amounted to US$ 21.4 million of which principal repayment amounted to US$ 7.6 million (35.5%), interest payment amounted to US$ 12.8 million (59.8%), while subscription amounted to US$ 1 million (4.7%). Of the principal repayment, domestic debt accounted for US$ 2.2 million (28.9%) with payments made entirely to debts owed to other institutions while external debt accounted for US$ 5.4 million (71.1%) of which multilateral sources account for US$ 4.1 million (75.9%) while bilateral sources account for US$ 1.3 million (24.1%).

With regards to interest payment, interest paid on domestic debt amounted to about US$8 million of which US$5.9 million was paid to commercial banks while US$0.2 million was paid to other institutions. This made interest paid on external debt amounted to US$ 4.8 million with interest paid on multilateral debt amounting to US$ 3.8 million while bilateral debt amounted to US$ 1 million.

Wolokolie: “For the purposes of today’s event, I have also come to inform the Liberian people and the world at large about recent transformative developments that have been achieved at the Ministry of Finance and Development Planning. These developments include, but are not limited to regularization of the payroll process, prudent cash management, tax policy reform and financial reporting.”  

Meanwhile, Deputy Minister Wolokolie said “while there is no consensus among economists and policy makers about how long it would take for economies around the world to recover, we in Liberia are proceeding with the understanding that with a proper mix of fiscal and monetary policies, Liberia’s economy can be returned to pre-COVID levels in a relatively short period.”

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