Liberia: Second Review Under the Extended Credit Facility Arrangement and Request for Waiver of Nonobservance of Performance Criteria and Modification of a Performance Criteria

KEY ISSUES Context: Real GDP growth is projected to remain robust at 8.1 percent in 2013, led bymining, construction, and services. Inflation should reach 8.5 percent in December (y/y)due to higher international food prices and recent exchange rate pressures. The baseline outlook is positive, with new mining projects and plantations due to start operations inthe coming years. Downside risks stem from delays in public investment, and uncertaintylinked to the weak external environment. Accelerating implementation of the authorities'poverty reduction strategy, the Agenda for Transformation, and in particular road andenergy projects, is key to boosting growth in the non-mining sector and reduce poverty.Policies: Fiscal policy focuses on scaling-up public investment while maintaining debtsustainability and strengthening project execution capacity. Budget implementationhas improved, but weaknesses in liquidity management have led to repeatedspending overruns in FY2012 and FY2013. After delays in securing external financing,recent agreements bring debt close to the program limits. The monetary and exchange rate policy framework needs to be strengthened. In thehighly dollarized setting, an increase in government spending in Liberian dollars ledto exchange rate and inflation pressures. In the context of the recent launch of bothT-bills and CBL bills, improved liquidity management and forecasting would be keysteps towards establishing a monetary policy anchor. The authorities continue to make headway with their structural reform agenda. TheProject Management Unit will help ensure readiness and quality of investmentprojects. Progress towards a Treasury Single Account continues, albeit with delays.The creation of the Liberia Revenue Authority will help strengthen tax administration.Program performance: Program performance has weakened relative to the previousreview, as well as the former ECF-supported arrangement. Three out of six performancecriteria (PCs) and two out of four indicative targets (ITs) were missed. Although deviationsfrom two PCs were only minor, foreign reserves fell below the program floor byUS$14 million, reflecting the CBL's larger sales of U.S. dollars to mitigate exchange ratepressures, the launch of a new credit stimulus scheme, and high operationalexpenditures. Four out of eight structural benchmarks were met, including two withdelays; three are proposed to be re-set, and one (on procurement plans) became a prioraction. An update of the 2011 safeguards assessment has been completed.