Prying under Foreign Aid and Resource Based Economy: Liberia’s National Budget at a Glance

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Abstract
Going to a big event like the U.N. General Assembly is one dream one will wish to realize in a lifetime, just like attending a World Cup opening ceremony. On the other hand, we rarely care about the planning of these events. Simply put, we most times prefer to be at the receiving side of life so much that we are reluctant about the phenomenon deposit of time and expertise required to budget for these events. How much we utilize our time and resources as individuals are reflections of our aspirations and goals. This is parallel to the public planning in the context of budgeting. Like Jacob Lew has put it, the budget is not just collection of numbers, but an expression of our values and aspirations.

Considering the above assertion, how can Liberia’s budget manifest same? Is the budget base comprehensive in enough to address the numerous issues? Attempting to answer these questions, this paper looks at the budgetary process of Liberia by identifying sources of budget with plausible assumptions of tax relationships. It asserts that, the notion that tax holidays attract Foreign Direct Investment for companies in the extractive Industries is of fluidity.
Introduction/ background

What is Government budget? It may be viewed as a document presenting the government’s proposed revenues and spending for a financial year that is often passed by the legislature, approved by the chief executive or president and presented by the Finance Minister to the nation. This document estimates the anticipated government revenues and government expenditures for the ensuing (current) financial year (available at Public Budgeting and Financial Management, Florida International University).

The practice of presenting budgets and fiscal policy to parliament was initiated by Sir Robert Walpole in his position as Chancellor of the Exchequer, in an attempt to restore the confidence of the public after the chaos unleashed by the collapse of the South Sea Bubble in 1720( available at “History, Origins and Traditions of the Budget”).

Government budgets are of three types: Balanced Budget: when government revenue and expenditure are equal, Surplus Budget: when anticipated revenues exceed expenditure and Deficit Budget: when anticipated expenditure is greater than revenues.

Liberia’s fiscal year runs from July 1st to June 30th. The Government for many years operated a single year budget until the multiyear system was introduced in 2013 through the Medium Term Expenditure Framework (MTEF). Whether it was based on aid conditionality or economic viability can be saved for another time but, the budget literature contends that along with the 2009 Public Financial Management Law, the MTEF has significantly enhanced the national budget process with three main objectives: spending what the public sector can afford; to allocate resources in line with national priorities; and to ensure resources are used as efficiently as possible. Available at www.mdfp.gov.lr
Liberia budget at a glance).

Analysis
Spending is not only based on needs but also the available money which is usually estimated in this context. So, if the needs overwhelm available funds like in the case of Liberia, how can more money be raised? Where do we get the money? Let’s hold it here for a while and look at the staggering depreciation of currency in Liberia which looks cross cutting across the West African Monetary Zone. One answer standing tall is the decline in commodity prices.

After huge growth at the closing stages of 2013 and the early stages of 2014, there are apparent risks causing downward trends in the region that may exist for a medium term due to political instability in Mali and Niger and election processes in the region according to an IMF country report no 15/100. Thus, a short or medium term growth trajectory appears blurred.

Therefore, the gap will continue to enlarge as the demands increase while revenues decrease. So the need to identify budget sources are quite demanding. Aid will remain an instant look but the guarantee is questionable as the global trend of foreign aid decreases. Can we take a look at tax regime? Yes we can. The Liberia Revenue Authority (LRA) has justified its existence and evident by 5% growth in domestic revenue, a path to strengthen has been identified.

Can we borrow Probably yes, but with standing debt as of the end of July 2015 at 843.5 million( then 42 % of GDP) coupled with reports that Liberia’s risk of external debt has increased from low to moderate, it may seem critical. The combined impacts of Ebola crisis and sharp decline in commodity prices have significantly affected growth and exports outlook, contributing to deteriorated debt sustainability according to the Fourth Review under Extended Credit Facility Criteria report by IMF and International Development Association December 2015.

However, from the same report, Liberia capacity to monitor debt continues to be assessed as being adequate. Therefore, borrowing may still be an option. However, such borrowing must be directed at major infrastructure projects that will boast economic activities like major highways (example Ganta –Harper corridor).

Looking beyond the years, awarding of corporate tax incentives including tax breaks and holidays as incentives to attract foreign direct incentives with the insinuation to create jobs must be reconsidered. According to an Action Aid and Tax Justice Network- Africa report alarms that African countries are losing USD 9.6 billion of revenue each year by granting incentives to foreign companies. The report finds that there are considerable body of information showing that tax incentives do not result in Foreign Direct Investment and the subsequent creation of jobs. The Report titled West African Gateway further asserts that natural resources in West are rare and valuable .and extractive companies will invest with or with our tax incentives.

Major Assumptions
Liberia Revenue Authority (LRA) establishment has proven relevant by increase of five percent in domestic revenue but appears still far from sustainable institutional line of massive budget support due to capacity issues.
Government Services Agency managerial efficiency has appeared problematic for a long time causing government to repeat spending on what can be agreed as short interval, especially on movable properties.

Conclusion/ recommendation
The paper has mapped an overview of Liberia’s budgetary process and provided regional outlook of revenue. It also provided a case of tax incentives to attract foreign direct investment in West Africa as myth and advised for a rigid tax regime to spur a bigger budget envelope for Liberia.

From the initial question raised, it can argued that the revenue base of Liberia’s budget is not wide enough to supply the pressing demands therefore, revenue generations regimes must be focused which means strengthening LRA is a priority.

Authors

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