Understanding Liberia’s Debt Relief – by Seltue Karweaye

Last updated 01/01/2012

As a Liberian, I was filled with joy when I read that the International Monetary Fund (IMF) and the World Bank’s International Development Association (IDA) have decided to SUPPORT US$4.6 billion of debt relief for Liberia. I was discussing with a friend of mine on the debt relief issue and his response was “our country was awarded debt relief by the international Financial Institutions (IFIs) and so what?” Indeed many other Liberians are asking similar questions given the high expectations that had been created by senior Government officials on the possible benefits to Liberia of reaching the Completion Point and getting debt cancellation in the amount of US $4.6 billion. These questions are many and need candid answers from all of us but particularly from Government. For instance, what does the Debt Relief really mean for a Liberian man, woman and child? What are the current debt levels after the Completion Point? What are the specific timelines for the delivery of debt relief to Liberia by the International Monetary Fund (IMF), the World Bank and the other creditors? Is debt relief part of direct budget support? Is there conditionality attached to the HIPC and the G8 debt relief packages? How can Liberia avoid another debt trap in future?

Brief History of IFIs Dealing With Liberia

In the 1960s and 1970s, Liberia debt was largely incurred by corrupt, unaccountable regimes. Many loans were officially targeted toward large, wasteful infrastructure projects, but often the money went into the pockets of the top 100 or 200 people surrounding the regime leaders and ended up in private Swiss bank or American accounts back in the first world. Much of the Liberia’s total external debt of US$ 4.6 billion is from accrued interest on the original loans or on refinanced versions of them.

Over a period of just over four years, between September 1980 and December 1984, the IFIs approved no less than five stand-by agreements with the Doe’s military dictatorship, the then Liberian government under the Structural Adjustment Programs (SAP). As a consequence of these agreements, outstanding credit (excluding Trust Fund loans) of the IMF to Liberia increased from 30 Million in 1979, to a peak of about 121 Million by the end of 1984. These loans provided by the IMF were short-term loans issued on non-concessional terms. For a tiny country like Liberia, the loans were large-scale in size. These loans were accompanied by rigid schedules for repayment, and rapidly led to the emergence of arrears on repayment of the given debts. The effect of these loans in my opinion was to significantly increase Liberia’s external dependence. The country had been drawing on the IMF’s finance since the early 1960s, the stand-by-arrangements of 1980-1984 importantly increased the country’s dependence on the world financial institution. Further, it needs to be noted that the stand-by-arrangements dramatically failed to achieve their principal target, namely to support the country’s economic growth. Liberia in the past had witnessed high growth rates, for instance in the decade of the 1950s. For example, the IMF projected a positive growth rate for Liberia as a consequence of its proposed stabilization measures, agreed under the stand-by-arrangements, Liberia saw a decline in its real GDP (Gross Domestic Product) averaging 3.6 percent per year between 1980 and 1985. The cumulative decline in real GDP, according to the author Mills-Jones, amounted to more than 18 percent between 1980 and 1985. There is thus a pressing need to analyze why the Liberian government failed to achieve the IMF’s targets, and understand whether the then military government of Liberia is to be blamed, or the IMF, or perhaps both before Liberian get in another trouble.

The negative growth rate throughout the period when stand-by-arrangements were signed brings out that these arrangements did not help the Liberian economy to resume its process of growth. Liberian economy suffered from the same kind of external constraints that affected many other Third World countries in the given period. From the late 1970s onwards, the terms of trade for most raw materials traded by Third World countries on the world market fell, and this was also true for the raw materials on which Liberia depended at the time, i.e. rubber and iron ore. Moreover, contrary to Middle Eastern countries possessing rich oil and natural gas resources; and similar to other Less Developed Countries (LDCs) which are exporters of non-fuel raw materials, Liberia was dependent on the importation of oil, the price of which skyrocketed at the time of the second oil shock in 1979, i.e. on the eve of the first stand-by-arrangement. Thus, throughout the years when Liberia implemented the IMF’s prescriptions, the country’s terms of trade deteriorated. This again is brought out well by the chart on the terms of trade published alongside Mills Jones’ essay on structural adjustment programs and Liberia. The IMF’s prescriptions were aimed at helping the Liberian government to ‘stabilize’ the situation through a combination of measures. On the one hand the measures included devaluations, which presumably would help to stimulate the exports of raw materials. On the other hand, the government was also put under pressure to achieve a better budget balance (Sound like the HIPC Initiatives right?). Neither of these prescriptions, however, bore the country convincing results. The second half of the 1970s, the budgetary surplus of $ 3.4 million in 1975 turned into a deficit of $ 16 million in 1976. The deficit reached the figure of $ 141 million by 1979. And the problem worsened under the IMF’s structural adjustment programs of 1980-1984. According to Mills- Jones, the budget deficit was higher in 1985 than it had been in 1980, and was equivalent to more than 12% of Liberia’s GDP. The ineffectiveness of the IMF’s policies towards Liberia was clearly stated by Mills-Jones, the biased nature of the prescriptions of the IFIs was revealed in his analysis. Mill-Jones revealed in his publication that the Liberian government was obliged to undertake certain measures.

Firstly, these measures included savings and taxation schemes, such as a compulsory national savings scheme, a national reconstruction tax and higher excise taxes, proposals which targeted Liberian citizens, instead of Liberia’s foreign concession-holder. This was a grave injustice to the Liberian people, as research undertaken by the Dutch academician van der Kraaij brings out crystal clear. In his comprehensive investigation of the role of concessions in the Liberian economy completed in 1983, van der Kraaij argues that the Liberian treasurer lost potential revenues of nearly $ 300 million during the period from 1975 to 1979. According to him, $60 million or 40% of the average annual domestic revenue was foregone in consequence of poor taxation policies vis-à-vis foreign companies.

Secondly, the austerity measures imposed by the IMF also comprised cuts in the salaries of state employees. And the cuts were major cuts. They amounted from 16 2/3% up to 25% in January, 1983. From the IMF’s ideological point of view these cuts may have seemed a very logical step. The IMF believed and believes that the role which government institutions play in Southern economies should be restricted, and that bureaucracies need to be ‘slimmed’. Yet whereas the salary cuts obviously served to weaken the morale of Liberia’s civil servants, they did not serve to strengthen the key function which Liberia’s state functionaries were supposed to play, namely to oversee the activities of the foreign concession holders. Liberia’s bureaucracy suffered from management deficiencies, the deficiencies were most marked with regard to supervision of the operations of the foreign concession holders present in Liberia. A close review of the structure of the Liberian economy at the beginning of the 1980s, then, brings out that the IMF’s structural adjustment policies were not only ineffectual and helped aggravate the crisis which the Liberian economy already was suffering from. It also brings out that these policies were heavily biased against the interests of the Liberian people, and were implicitly biased in favor of the foreign concession holders. Liberia’s ‘Open Door Policy’, under which foreign companies were granted ample privileges – tax exemptions, the freedom to repatriate profits, etc., was exceptionally lenient towards multinationals investing in the Liberian economy. Instead of addressing these biases in policymaking, the IMF designed policies which precisely played into the hands of the concession holders. In short ill-designed structural adjustment measures contributed tremendously towards the downslide of the Liberian economy in the decade preceding the outbreak of civil war. They distinctly contributed to the dramatic collapse of the Liberian state in 1989.

Heavily Indebted Poor Countries (HIPC) Initiatives
In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world’s poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt-service burdens in these countries. One measure used to reach debt sustainability in HIPCs has been the HIPC Initiative. The Initiative was modified in 1999 to provide three key enhancements:

1. Deeper and Broader Relief- external debt thresholds were lowered from the original framework. As a result, more countries have become eligible for debt relief and some countries have become eligible for greater relief;
2. Faster Relief- a number of creditors began to provide interim debt relief immediately at the “decision point.” Also, the new framework permitted countries to reach the “completion point” faster; and
3. Stronger Link between Debt Relief and Poverty Reduction- freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

The Monterrey Conference in Mexico in 2002 called for “continued efforts to reduce the debt burden of heavily indebted countries to sustainable levels”. Up to now, 35 countries have started the program and 22 sub-Saharan African countries have reached completion point. Liberia accessed the Initiatives in 2008 after reaching the Decision Point. The country further reached the Completion Point in June 2010 after an “on-off-on-off” experience with the IMF and the World Bank prescribed policies.

The Multilateral Debt Relief Initiative (MDRI)
HIPC states. The G7 Finance Ministers (G8 minus Russia) agreed in principle to write off US$40 billion to US$55 billion of nominal debts mainly owed to the World Bank, the IMF and African Development Fund (AFDF). The MDRI is meant to free up additional resources for Millennium Development Goals (MDGs), to make particular efforts in Africa, which on current rates of progress will not meet any of the MDGs by 2015. The G8 debt cancellation proposal through the MDRI attempts to do three major things:

1. Pledges to unlock resources urgently needed in selected HIPC countries for poverty reduction and development in general;
2. Pledges to deliver US$25 billion in foreign aid to mostly Sub-Saharan Africa (SSA) by 2010;
3. Pledges to relieve by 100 percent 18 post- HIPC countries of their heavy multilateral debts.

Special Features of the MDRI

First, cancellation is done upfront and so is irrevocable 100 percent write-off of IDA, AFDF, and the IMF debt stocks for HIPCs that have reached (or once they reach) the Completion Point.

Second, for the IDA and the AFDF, additional resources would be provided by donors to ensure that their financial capacity is preserved, with resources being allocated across all low-income countries (LICs), whether post–completion point HIPCs, pre-completion point HIPCs or non-HIPCs. This is in accordance with the existing modalities of implementing performance-based allocations (PBAs). It is worth noting that the MDRI provides a framework that commits to achieve two objectives: deepening debt relief to HIPCs while safeguarding the long-term financial capacity of IDA and the AFDF; and encouraging the best use of additional resources for development by allocating them to Low-income countries on the basis of policy performance. Debt relief to be provided under the MDRI will be in addition to existing debt relief commitments by IDA and other creditors under the Enhanced HIPC Initiative. Potentially, up to 46 countries could benefit from the debt cancellations under the MDRI and these are: 18 post-completion HIPCs (14 in Sub-Saharan Africa (SSA) and 4 in Latin America). These have fulfilled certain conditions on macroeconomic management, poverty reducing strategies (PRS) implementation and public expenditure management (PEM). So far the MDRI has generated a lot of interest among HIPC countries as they see it as the final effort by creditors to entirely relieve them of their heavy debt burdens.

Magnitude and Composition of Debt Cancellation Under MDRI

Concerning the magnitudes of the debt cancellation, cumulative debt servicing obligations of the 38 HIPCs entailed by the G8 cancellation initiative has been estimated (assuming debt outstanding and disbursed as at end-2004 would be eligible for cancellation) to be US$42.5 billion in respect of IDA. For the AFDF and the IMF, debts to be cancelled under the MDRI stand at US$9.1 billion and US$6 billion respectively. For the 18 post-completion point HIPCs, the amount stands at US$30.3 billion for IDA and US$4 billion for the IMF credits.

Categories of Liberia Debts To Be Cancelled

According to the IMF press release No. 10/267 dated June 29, 2010, IMF and the World Bank’s International Development Association (IDA) have decided to support US$4.6 billion of debt relief for Liberia:

1. The IMF will provide debt relief of US$730 million—the IMF’s biggest ever HIPC contribution for a single country;
2. The World Bank’s IDA will provide debt relied of US$374million;
3. The African Development Bank will provide debt relief of US$17.2 million;
4. EU Special Debt Relief Initiative has already written US$ 0.9 Million of Liberia debt.

Under the MDRI Arrangement:

The IMF is expected to deliver SDR117.4 million or US$173 million to Liberia under the MDRI debt relief package. This will be financed by resources in the HIPC Umbrella Account, the Special Disbursement Account (SDA), and bilateral contributor resources in the Subsidy Account of the PRGF Trust. Part of the cost will finance through the HIPC Initiative; the incremental cost is about (Special Drawing Rights) SDR 2.1 billion” (See IMF Website i.e. www.imf.org). Please note that different creditors have devised different cut-off dates for debts.

Issues of Conditionalities and Timelines

Is the picture on debt relief for Liberia really rosy? A critical analysis of the current debt relief measures reveals that debt cancellation is not automatic, even for the existing 18 post-Completion Point countries that would be required to go through some final and one-time checks. As a Liberian student I am very concerned that Liberia and other poor countries will still continue to implement trade and economic liberalization policies before they can receive debt relief from the multilateral creditors. For instance, the post Completion Point HIPCs will only receive their debt relief under the MDRI if performance in three “key completion point areas” has not deteriorated since reaching Completion Point. This means that Liberia and other HIPC ‘graduates’ will be assessed regarding:

1. Satisfactory macroeconomic performance under an IMF Poverty Reduction and Growth Facility (PRGF) program or its equivalent, as assessed by the IMF staff;
2. Satisfactory implementation of their poverty reduction strategies (PRS), as assessed jointly by the World Bank and IMF staff; and
3. The existence of a public expenditure management (PEM) system that meets minimum standards for governance and transparency in the use of public resources, as assessed by the World Bank staff.

If Liberia lapsed in any of these three areas, debt relief under the MDRI would be delivered only after the World Bank Board determines that appropriate remedial steps had been taken. When these actions are implemented, all three criteria would be re-assessed to determine eligibility for debt relief. The IMF, has, however, waived this requirement and has already delivered most of its relief under the MDRI arrangement. As a development practitioner, I strongly believe that stringent measures tied to debt relief are likely to dilute potential positive impacts of donor aid. For example, debt relief conditionality essentially means a strong control of Liberia economy by the IMF and the World Bank. The MDRI especially for Completion Point HIPCs means further calls for free market reforms, budget cuts in order to control inflation, promotion of financial and trade liberalization, strict adherence to macroeconomic stability, etc. The deal in its current form falls far short of what is needed on debt (deeper and broader cancellations), aid (more and better aid) and trade (fair trade and not free trade) and also ignores the flight of capital in Liberia or African economies. The new money promised by the G8 can be likened to pouring small cups of water into a bucket when what were needed were jugs full. What is more, the G8 failed to notice that the bucket is leaking.

The time frame for any public policy in Liberia should be determined by the gravity and urgency of the situation it is meant to redress. Current debt relief packages do not seem to be moved by desperate poverty situations in many HIPC countries as can be seen by their lengthy delivery periods. What most Liberian failed to realized is that our debt relief is not automatically but will spread over a number of years. Most developing countries that completed the HIPC (UGANDA, GHANA, Tanzania, Mozambique, etc.) debt relief spread for number of year e.g., 20 years, for the World Bank, 3-5 years for the IMF and 14 years for the African Development Bank (AfDB).

Will Debt Relief Benefit Liberia?

Liberia still owes bi-lateral debt to the Paris Club, which represents many European creditors. We need to meet the Paris Club and ask some of their members to forgive their bi-lateral debt. The benefit of the HIPC decision is that Liberia can become credit-worthy again and secure sensible, manageable loans to pay for development projects if necessary.

The attainment of the HIPC completion point debts in most African countries a number of economic phenomena and key among them is the appreciation of the local currency. A trend analysis of selected post-HIPC countries such as Ghana, Tanzania, Uganda and Mozambique reveals that they all experienced an appreciation of their local currencies against major convertible currencies. Other factors behind the appreciation of according to the analyses , are the increased donor inflows, increased foreign direct investment portfolios, reduced demand for foreign exchange by government (government no longer requires huge sums of forex in order to service foreign debt since a significant portion of it was cancelled at Completion Point), and international businesses moving into these countries due to attractive interest rates on government securities—treasury bills and bonds.

I am not go in the ‘pros and cons’ of a strengthening our local currency because I already wrote about the effect of capital flight in Liberia but merely will make very general observations. Why are we still using two legal currency (one been the Liberian Dollar and the other been the US Dollar? For instance, Liberia had always pursued an export-led development strategy. What does this mean? This means that the economy is to be anchored on the promotion of exports to generate the required revenues for development. How is this to occur when the exporters have become ‘victims’ of a strengthening local currency and thus are getting less and less for each ‘Dollar earned through exports? Isn’t the Liberian government contradicting itself by pursuing an export-led strategy while at the same time eroding its very foundations through an appreciation? How do we strike a delicate balance between a genuine need to have a strong currency and the desire to promote exports? How did Tanzania, Uganda, Mozambique and Ghana, etc handle their appreciations without destroying their export competitiveness?

While debt relief is generally meant to help in fighting poverty, however, it is sad to note that rich countries continue to protect their firms to help them maintain a firm grip on international markets but are not allowing poor countries (including Liberia) to do the same. Farmers and producers in rich countries get government subsidies to overproduce goods and then sell them cheaply (dump) in poor countries thus putting African farmers and manufacturers out of business. There need for fair trade and greater access to markets in rich countries for the exports of Low-income Countries (LICs)’ goods and services. If this is done and done now trade could generate substantial gains in real incomes and thus reduce poverty in Liberia and Africa in general. Without addressing current trade imbalances in the international arena, all efforts aimed at promoting trade for development in poor countries will not yield much in terms of tangible results.

The Risk of Liberia Sliding Back Into the Debt Trap
The risk of Liberia sliding back into the debt trap due to lack of adequate legal, administrative and institutional checks and balances in the decision-making processes is real. Fiscal space created by debt cancellations should not be used to acquire unnecessary new loans that might lead to debt unsustainability again. It is for this reason that I am calling upon government to implement prudent loan contraction procedures with Parliamentary oversight. Parliament need to form or amend authorization for loan from IFIs. The current on the book empowers the Executive Branch through Minister of Finance without parliamentary approval to contract foreign loans. This is a recipe for economic and financial mismanagement. Parliament also need to enact a Debt Reform Plan which should clearly be link to the human needs-based debt sustainability analysis and a host of other international civil society organizations involved in the debt cancellation campaigns. Basically, the human needs- based should calls for frameworks that go beyond economic indicators to the inclusion of social indicators in determining levels of debts that Liberia should be allowed to carry.

Policymakers in Liberia should bear in mind that reaching debt relief or sustainability without addressing fundamental problems of trade access and financial capacity of HIPC, will not resolve Liberia developmental challenges. I am calling for the parliament to enact a plan called the Debt Reform Plan. I am also calling on the Constitutional Review Commission (if any) on the need to put constitutional restraints on foreign borrowings through Parliamentary oversight.

As debt relief began trickling into Liberia, my position is that the current debt initiatives are not a substitute for total debt cancellation demands anchored on clear monitoring and evaluative mechanisms. When you fight debt without resolving corruption and monitoring how funds are used, you cannot get far. In Liberia, corruption wide spread and is a function of poverty and a loose societal value system. There is therefore need for the Liberian Government to target more resources at areas that directly eradicate poverty. The Liberian Government should equally strengthen its investigative arms such as the Liberia Anti-Corruption Commission (LACC) while at the same time ensuring that the Auditor General’s office is capacitated to be able to carry out audits of government accounts in an efficient and effective manner without executive branch intervening. It is also important for the Liberia Government and non-state actors to work together to ensure that debt relief is properly utilized and accounted for in a transparent manner.

The Way Forward
From the foregoing and as Liberian, I put forward the following policy recommendations:

1. There is urgent need to reform the international financial institutions (IFIs) and make them more democratic to include poor countries like Liberia in their decision-making processes;
2. Debt relief should immediately be delivered to other deserving African countries without further delays;
3. The donors should quickly make their pledges available to the IMF, IDA and the AFDF to enable them begin effective implementation of the MDRI debt relief package;
4. Future aid to poor countries like Liberia should be delivered on predictable terms and in a transparent manner;
5. There is need to broaden the list of debt relief recipient African countries, not based on stringent conditionality but based on unique country situations;
6. Debt relief should be aligned to national development plans and priorities within the context of country budgets;
7. The Liberian Government should develop a set of monitorable indicators to be able to measure impacts of aid and debt relief on development;
8. The Government should move towards full information disclosure on public finance to make monitoring by stakeholders much easier;
9. The Government should use debt relief resources to increase investment outlays in the social and physical infrastructure;
10. The Government should quickly move towards parliament in implementation of the proposed loan contraction procedure that includes parliamentary oversight;
11. As much as possible, Government should go for grants instead of loans;
12. As much as is possible, Government should desist from contracting foreign loans without a clear exit strategy;
13. Debt relief alone will not significantly respond to the problems of low income countries like Liberia unless this is tied to a reform of the international trade arena—to make trade fair.
14. Liberian Government needs to meet with the Paris Club to seek bi-lateral debt cancellation from some of their members.

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