Liberia: Challenges to Expand Fiscal Space Remain

The World Bank has today launched the Second Edition of the annual Liberia Economic Update, “Finding Fiscal Space”.  According to the report, economic growth is expected to recover to 3.6 percent in 2021, before rising gradually to an average of 5.2 percent over 2022–2025. In the near term, growth will be driven by the expected recovery in the mining sector underpinned by the recent uptick in commodity prices.

Having reached a peak of 31.3% in 2019, inflation declined significantly in 2020 and 2021, and is now down to single digit, largely because of strong macroeconomic policies. The drop in world oil prices in 2020 allowed some easing in Liberian fuel prices, a frequent driver of inflationary pressures, although their decline was moderated by the introduction of an excise tax early in the year. But it was macroeconomic policy that was at the center of the action, with tighter monetary and fiscal policies, and the ensuing lower aggregate demand pressures, helping to ease the self-reinforcing cycle of depreciation-inflation observed in late 2018 through 2019.

The Government must be commended for making tough policy choices that have resulted in this positive turnaround in macroeconomic fundamentals, especially under a challenging COVID-19 environment,” said Dr. Khwima Nthara, World Bank Country Manager for Liberia. “The focus now should be on complementing the improved macroeconomic environment with critical structural and governance reforms that will help boost domestic and foreign private investment to create more jobs,” he added.  

After successfully stabilizing the macroeconomy, the government needs to create enough fiscal space to finance the country’s massive investment needs in physical infrastructure (power/energy, roads, rails, ports, and airports). In addition, Liberia needs to invest in its people and institutions, and create an educated, skilled, and healthy labor force, in both the public or private sectors, and protect its economy and vulnerable population against repeated exogenous shocks, the Liberia Economic Update emphasized.

According to this new economic report, the government also needs first and foremost to reduce the very high level of recurrent spending and strengthen domestic revenue mobilization to generate savings for public investment financing. Between 2012 and 2020, government operating expenses exceeded the domestic revenue it collected by 4 percent of GDP. This means that the external resources mobilized in the period financed a significant part of the government’s operating expenditure instead of financing public investment in infrastructure.

The recent efforts to reduce duty waivers and the successful implementation of the pay and payroll reform are steps in the right direction and need to be complemented by actions to improve the efficiency in the consumption of goods and services by the Government” said Mamadou Ndione, Senior Country Economist and main author of the report.