Pro-Poor Government To Add More Tariffs to Pay Back $1B Loan?

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By J. Yanqui Zaza

It is a good idea for a country to obtain debt in order to build infrastructure and reduce poverty, ignorance, disease, etc. However, obtaining loans (for example, a $3.4 billion to build roads in Liberia) without an identifiable source of repayment is not prudent. This is because our government cannot find money to pay BACK ITS OLD DEBT ($800M) AND REDUCE YEARLY BUDGETARY DEFICITS. Seeking a new debt might compel the country to collect more taxes, sell off lucrative assets at a fire sale (i.e., sale at an unfavorable discount), and or borrow additional debt to pay the old debt.

This is the lesson of many countries such as Great Britain. In the 1900s, the British ended the war with a national debt of £250M, which generated a yearly interest of over £9.5M (3.8 percent). It could not find money. Subsequently, it increased its citizens’ taxes by twenty percent and begged the US to cancel $20M in debt, which the US did. Nonetheless, it obtained a new loan of $3.75B, an economic arrangement that was onerous to the country.

The Pro-Poor Government has yet to provide the revenue and cost analysis of each of the three different loans it proposes to acquire (i.e., $419M from Eton, $536M from EBOMAF, and $1B from the World Bank and its allies).  And now that Mr. Samuel Tweah, the Minister of Finance and Development Planning  has admitted that the Pro-Poor Government did not perform adequate due diligence in verifying the source of the of $419M and $536M, should Liberians assume therefore that the Pro-Poor Government’s economic approach is good for the country?

Predictably, the Pro-Poor Government has not put  reasonable time into determining how our country will pay back the new loans. For example, the Minister of Information, Tourism and Cultural Affairs, Mr. Eugene Nagbe’s attempt to answer questions about the feasibility of the new loan or the intended combined loans of $3.4B, raised more questions than answers. At the August 1, 2018 Press Conference, he stated that the government had relied on authoritative studies conducted by international institutions during the previous regime and that the Weah government will not re-invent the wheel.

Is Weah’s advisor implying that factors considered by the World Bank’s authorities in preparing the feasibility studies for the $500M loan are not different from the factors the Eton’s technical staff and, or EBOMAF’s technical staff would include in their feasibility studies? Also, is the advisor indicating that economic factors of six months, one year or two years are useful now without any adjustments?  More so, is the Pro-Poor Government asking Liberians to have trust and accept the products of the previous government that it (i.e., CDC Party) had accused of being incompetent and corrupt? If yes, why did President George Weah reject former President Ellen Johnson Sirleaf’s financial report that Liberia was not broke because it had US $144 million. Better yet, shouldn’t the government publish feasibility studies of its road project to the public?

If tariff tax revenue is the source of future revenue within the feasibility studies, the tariff chart below based on information from the revised 2018 Tariff Tax Law below indicates that such a prediction might not be possible because of politics.

Source: https://www.usitc.gov/publications/other/centennial_book/chapter2.pdf

Currently, Liberians are paying cost plus a fifteen percent (15%) tariff for meat or fish, twenty-five percent (25%) tariff for household soap, thirty percent (30%) tariff for bed linen, etc., for example. So, will the government increase tariff to pay for the new loans if it has no other options? Tariff revenue can be a good thing for government. In fact, President Donald Trump of the United States of America is now using revenue generated from additional tariff to reduce America’s $20 trillion debt, according to Twitter. Mr. Trump stated that he will use tariffs to pay down large amounts of the $21 Trillion in debt, although the original idea was to create jobs and improve trade.

In the case of Liberia, tariff tax rates are not only high, but the government generates about 60% of its revenue from tariffs, excise tax, and other users’ taxes. Therefore, if an increase in consumers’ tax rates is not politically possible, should the Pro-Poor government borrow the idea of generating revenue from the 2017 former Presidential candidate, Mr. Alexander Cummings?  During the Liberian Presidential debate, Mr. Cummings stated that he would generate $1 billion revenue to $2 billion revenue. However, he did not explain how his administration will increase government revenue from $500 million to $1 billion or $2 billion.

Mathematically, it would be difficult to generate $1 billion revenue based primarily on tariff and excise taxes even if the growth of Liberia’s economy did increase from 4% (i.e., according to IMF estimate) to 25%. This is because a 50% increase in gross domestic product of $3 billion (i.e., IMF new estimate as per the June 8, 2018 Report) would be $4.5 billion. For instance, using a steep tax rate of 20% for payroll, real estate, tariff, excise, etc. a government would generate $900 million revenue, short of the $1 billion revenue.

Therefore, if the government cannot increase tariff tax rates nor expand its gross national product from 4% to 50%, is there an alternative? Well, the government could institute an economic policy similar to that of  Botswana or Japan, or Germany, etc. Such an economic policy would allow the government to receive a significant portion of revenue from profit-making activities and, or natural resources, in addition to corporate tax, payroll tax, tariff tax, excise tax, etc.

Is such a radical approach possible? I would not bet on it. This is because many Liberian elites, especially those elites who are benefiting from the gold, diamonds, real estate, etc., will be against any policy that reduces their share of the profits. Additionally, expatriates might be against any economic policy (i.e., improving Liberia’ revenue intake) that reduces their influence in the country’s affairs.

Besides my view that none of the policies is feasible, past experiences indicate that a significant portion of the loans might end up in personal bank accounts. Alternatively, the new loans might be redirected to pay old debts, rather than constructing roads. The US former President, Mr.  Barack Obama ended up paying old debts with the $831B, and did not build roads, etc., as required by the Recovery 2008 Act. How the $800B stimulus failed – New York Post.

I surmise that the general public is aware that this government inherited a government in a financial “Mess.” And unfortunately, Liberians are overtaxed as per the chart above. So, instead of rushing to get more loans without a revenue and cost analysis, the government should begin to deal with the get-rich-quick mentality, which has permeated the Liberian society. This is because it might be a challenge for any leader to implement an effective program in Liberia, including, but not limited to, investing in capital intensive projects such as your vision of “Road Connectivity,” if honesty, hardworking attitudes or patriotism etc., are  not restored within our society.

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