Guest Editorial by S. Karweaye
In June of 2010, the two Washington-based financial institutions — the International Monetary Fund (IMF) and the World Bank (WB) announced a total debt relief of US$4.6 billion under the Heavily Indebted Poor Countries (HIPC) Initiative. By September 2010, the Liberian government was able to conclude a deal that led to the pardoning of $1.2bn (£764m) worth of debts owed to the Paris Club and the country became virtually debt-free externally. This resulted in very strong fundamentals for the country’s financial status which was demonstrated by a respectable credit rating for the country and for the first time after the two civil wars, a significant appreciation in the value of the Liberian dollar against major international currencies.
From just over $71 million in 2006 when the Ellen Sirleaf administration assumed power, they were able to increase the country’s foreign reserves to $442 million by 2010 when the Paris Club debt was canceled off and it was this enhanced liquidity that enabled them to negotiate with the Paris Club of creditors from a position of strength and get significant concessions on the debt. The robust foreign reserves also played a major role in stabilizing the value of Liberia during that period as well.
One begins to wonder how the government then was able to build up our foreign reserves so significantly at a period when rubber, iron ore, gold, etc prices averaged and our export capacity was much lower than what we have today. The simple answer is that the government then was able to keep the cost of governance relatively low between 2006 to 2010 and rather than fritter away the increased revenues from our exports chose to save by building up our foreign reserves. It was this prudent management of resources and the presence of the United Nations Mission in Liberia (UNMIL) that created an atmosphere that enabled the economy to thrive during that period and this contributed significantly to Liberia's economy's continued strong recovery.
Sadly, from a situation where Liberia was virtually debt-free in external debts after we exited Paris Club in 2010, our stock of public debt has grown rapidly to an all-time high of over US$2.21 billion. We now find ourselves in a situation where we are now using up to US$100 million of government revenue to service existing debts while the government has to resort to taking more loans for the basic task of running the government.
The other tragic part of the increased loan portfolio is that most of the loans were taken to finance recurrent expenditure with very little capital expenditure or even investments to show for these loans so there is no hope of increased economic activity or revenues being generated to help offset these loans.
Virtually everything was used to finance consumption despite claims by the Weah administration that they invested heavily in infrastructure. The reality is that the handful of infrastructure projects they embarked on don’t come anywhere close to justifying the additional US$1.33 billion in debt incurred by the immediate past administration.
A lot of people begin to ask how these debts affect us individually as they assume that the burden is on the government alone. The reality is that it is these debts that are responsible for the high inflation rates in the country. The major cause of inflation in the country is due to the falling value of the Liberian dollar which continues to fall as a result of the government’s fiscal irresponsibility.
To finance the bloated cost of governance, the government has been taking the shortcut of borrowing more money and getting the central bank to print more money to finance their consumption. This increased money being pushed into circulation to finance consumption without a corresponding increase in the level of goods and services being produced in the country is what is directly responsible for the constant fall in the value of the Liberian dollar and the high inflation rate that we are all being subjected to today.
Given the current terrible state of our economy after Weah exited power, one would have assumed that the current administration who, by their admission, stated that they inherited a very bad and heavily indebted economy would not continue on the path of financial recklessness of the previous administration and be more prudent with the management of our country. We await the draft budget that was returned to the Boakai administration for realignment and hope the 2024 budget will be presented to the National Legislature, which won’t be mostly to finance consumption and the excesses of those who now hold the reins of power.
If the current administration is serious about fixing the economy and managing our expectations, the first step they ought to take is to make drastic cuts in the cost of governance. In the past administration, most recurrent expenditure budgets were heavily padded but Boakai’s administration can afford to cut it by up to 50% without affecting service delivery by the government. This is apart from the fact that there are a lot of redundancies in the public service that add up to increase the cost of governance unnecessarily. We can easily reduce the expenditure budget for the current year without affecting service delivery. The savings can then be used to reduce our deficit/debt burden, build roads, and schools, improve the health of the economy, etc.
Of course, several other things need to be done to revamp our economy and manage our expectations which I will focus on in subsequent articles but for now, the starting point to revamping our economy and managing Liberians' expectations should be to make drastic cuts in the cost of governance, reduce the deficit, stop borrowing. and strengthen the economic fundamentals of the country to lay a strong foundation for the needed investments that are required to turn around the economy of the country.