The Increasing Liberia’s Debt  Profile 

By Seltue Karweaye

According to Liberia’s Public Debt Management Report for the first quarter of fiscal year 2024, which was released by the Ministry of Finance and Development Planning, public debt increased by 0.66% to reach US$2.4 billion by the end of March 2024. The World Bank has indicated that Liberia is currently facing a moderate risk of external debt distress and a high risk of overall debt distress.  

The news about Liberia’s debt may be alarming, as it suggests potential risks for its economy and well-being. A closer examination of Liberia’s debt profile reveals that, as of the end of March 2024, the country’s external debt stock amounted to approximately US$1.3 billion. The total debt stock comprises 57.80% owed to multilateral institutions, including the World Bank and the African Development Bank. This increase is primarily attributed to disbursements from the World Bank (US$9.39 million) and the African Development Bank (US$7.43 million), as well as from commercial creditors (US$9.39 million). The remaining 42.20% of the debt stock, approximately US$1 billion, is categorized as domestic debt, fueled by disbursements from the Central Bank of Liberia (CBL), and other recognized debt holders.

The Liberian People’s Party (LPP) has expressed concerns regarding the escalating national debt and has advised the Boakai administration to exercise caution in taking on excessive debt to avert potential future economic crises. The party has pointed to data indicating that a significant portion of Liberia’s $4.7 billion debt portfolio is attributed to interest payments following the cancellation or forgiveness of debts in 2010. 

Drawing attention to the high interest rates imposed by the World Bank on loans extended to debtor nations such as Liberia, the LPP highlights a specific instance where a $233 million loan from the World Bank incurred a staggering $1 billion in interest charges. The party urged  President Joseph Nyuma Boakai to provide clarification regarding the reported US$714 million that his government needs to pay for Liberia’s food projects between 2024 and 2030. 

The recognition by the Liberian People’s Party of the issue concerning Liberia’s debt is commendable because understanding a country’s debt risk is crucial for assessing its economic stability.

How much debt is too much?

The determination of a country’s debt sustainability involves the analysis of various indicators by economists. Among the widely used measures, gross debt as a percentage of gross domestic product (debt-GDP ratio) is of significant importance. In the case of Liberia, this ratio was recorded at 50.8% in 2022, while the average for sub-Saharan African countries stood at 56%.

According to a study conducted by the World Bank, an economy, particularly its economic growth, begins to suffer when the debt-GDP ratio surpasses 77%.  Despite this threshold, Liberia’s economy exhibits a strong capacity to manage its current debt level, suggesting that moderate and cautious increases in the country’s debt would not lead to an unsustainable level, at least in the short term. However, it is crucial to emphasize that this does not signify that the country should engage in uncontrolled borrowing to finance unnecessary or vanity projects. Rather, it indicates that the current debt level is not hindering economic growth, job creation, and poverty reduction.

Another indicator of debt sustainability is the Debt-Service Ratio, representing the proportion of export earnings used to service a debt. A healthy ratio is below 18%. In 2022, Liberia’s Debt-Service Ratio stood at 6.4%.  Despite Liberia’s situation being less dire in comparison to many African countries, with an average debt-service ratio of 19% in 2022, the data for 2022 suggests that Liberia is nearing a critical juncture where handling its debt could prove to be challenging in the future.

There is additional concern regarding the sustained decline in Liberia’s macroeconomic performance over the years. Creditors tend to view countries with poorly managed economies as risky borrowers, and this ongoing trend may raise further apprehensions. In 2019, the country’s economic growth was $3.32 billion, marking a 3.01% decline from 2018. 

Furthermore, in 2020, the economic growth decreased to $3.04 billion, reflecting an 8.42% drop from 2019. This was the second consecutive year of economic contraction due to the negative impact of the COVID-19 pandemic. However, there was a positive turn of events in 2023, with Liberia’s economy expanding by 4.7%.

Additionally, the annual average inflation rose to 10.9  in 2023 from  7.59 % in 2022. Food inflation surged to 12.3% in 2023 from a disinflation of 1.6% in 2022, while nonfood inflation averaged 10.3%, slightly down from 10.6% during the same period. These figures highlight significant macroeconomic challenges. The country also grapples with high unemployment, interest, and inflation rates, insecurity, poor infrastructure, and food insecurity.. 

Revenue and Spending 

To alleviate Liberia’s mounting debt burden, the current government must focus on addressing the country’s diminishing revenue. In 2023, the Liberia Revenue Authority (LRA) collected US$715.9 million, which unfortunately fell short of the revised budget by US$55.8 million, signifying significant challenges in generating adequate revenue.

At less than 14.62%, Liberia has one of the lowest revenue-GDP ratios in Sub-Saharan Africa. The average for sub-Saharan African countries is almost 20%. According to a 2024 World Bank analysis, Liberia’s debt-service-to-revenue ratio is expected to increase to 11.5% in 2024 which implies that the country would face challenges generating enough revenue to service its debt.

Furthermore,  successive governments’ spending has been consistently outpacing expectations, except during the COVID era, resulting in deficits that have to be covered through borrowings. This trajectory implies that a growing proportion of generated revenues will be allocated to debt servicing.

In a recent report published by the World Bank (WB), it was highlighted that Liberia’s debt-to-revenue ratio experienced a noticeable increase from 153.9% in 2021 to 160.7% in 2022. The World Bank’s projections suggest that this ratio is expected to continue rising to 168.5% by 2025, followed by a gradual decline that is forecasted to reach 115% by 2033. 

High debt-revenue ratios perpetuate a cycle of debt, as revenues are utilized for servicing debt, prompting the need for further borrowings to finance government expenditures. This perpetuates a cycle where the debt grows larger, requiring more revenue to service it, consequently escalating the debt-revenue ratio.

Liberia’s debt-to-GDP ratio is currently sustainable and remains below the levels specified by the IMF. However, it is alarming that the external debt-to-GDP ratio is on the rise once again, reaching 42.4 percent of GDP in 2024. In 2010, this ratio was over 600% of GDP, but Liberia successfully negotiated a landmark agreement with the Paris Club of creditor nations for debt relief worth 1.2 billion. Amid declining government revenues, slow economic growth, and growing expenditure needs, there are legitimate concerns the Liberian People’s Party is making, especially knowing that the government will continue to depend on borrowing to fuel economic development.

Digging out of debt

Continual borrowing to address economic issues could lead to unsustainable indebtedness. With limited revenue and the necessity for various projects to stimulate economic growth, create jobs, and alleviate poverty, the Boakai administration may continue deficit spending, mainly through domestic and external borrowing. The focus should not be on whether to borrow, but on how much. However, reducing governance costs significantly would be challenging if political patronage persists. For a long-term solution, exploring new revenue sources is vital. To alter the prevailing negative perception of Liberia’s riskiness, the Boakai administration must introduce policies that strengthen the country’s economic fundamentals.

Conclusion

The impact of substantial public debt and stagnant revenue growth can compel a country to resort to borrowing to finance its operations consistently (debt trap). Without borrowing, the government’s capacity to undertake meaningful action is severely limited. This constraint may impede the government’s ability to execute its programs and policies aimed at fostering economic growth, transformation, and job creation. Without instilling fiscal discipline and bolstering domestic revenue generation or implementing expenditure reductions (or both) to create fiscal space, the government will persist in its borrowing trajectory.

Furthermore, apart from revenue generation, the government must address all loopholes and ensure the judicious management of public finances. The Auditor-General’s department has pinpointed financial irregularities in its reports. The recent audit reports from the Auditor-General’s office highlighted irregularities amounting to over $500 million in public finance, encompassing undocumented payments of over $139.4 million in domestic debt over the years. When these irregularities are checked, the government will gain the confidence and support of the citizens.

The significance of a country’s debt stock is overshadowed by the impact of its economic policies. Strategic economic policies can lead to budget surpluses, which may be allocated to debt repayments. A fundamental step involves directing investments toward physical capital and infrastructure, particularly roads and electricity. Additionally, facilitating access to capital for micro, small, and medium-sized enterprises, as well as bolstering agricultural development, are vital components. Furthermore, there is an immediate requirement to diversify the economy and reduce its dependence on iron ore, timbers, etc, while also expanding the country’s limited revenue sources. I rest my pen.

The post The Increasing Liberia’s Debt  Profile  appeared first on Liberia news The New Dawn Liberia, premier resource for latest news.