February 14, 2000

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

I would first like to express appreciation on behalf of the government of Liberia for the support and assistance the Fund has provided and continues to provide toward our economic reform and reconstruction efforts. Secondly, I would like to take this opportunity to brief you on recent developments in Liberia.

The government of Liberia recently held discussions with the Fund staff on the 1999 Article IV consultation and a new staff-monitored program (SMP). We are pleased to report that Liberia's macroeconomic performance improved in 1998 and 1999. Key indicators of this improvement include a significant increase in real GDP, low inflation, and a stable exchange rate. These improvements continue despite the September 1998 security incident and tension in the subregion. We have made significant progress in normalizing the security situation both nationally and in the subregion, which has resulted in the return of a large displaced population. We have also succeeded in our initial efforts to stabilize the macroeconomic situation and have begun to offer important social sector services.

Liberia is now at a critical crossroads in its economic and reconstruction efforts. The government of Liberia understands that there is a need to widen and deepen our economic and reconstruction strategy to establish the foundation for a sustainable increase in economic growth over the medium term that will benefit all segments of Liberian society and address the abject level of poverty in the country.

The attached memorandum of economic and financial policies, which was prepared in collaboration with IMF staff, assesses recent economic developments and prospects and presents a broad medium-term policy framework. It also lays out policies and measures that the government of Liberia intends to pursue during the period January–June 2000. We anticipate that the Fund staff will continue to monitor the government's program, which is aimed at further strengthening fiscal policy and accelerating structural reforms to facilitate the emergence of a vibrant private sector. We also intend to continue to make regular payments to the Fund as committed.

The government of Liberia believes that the policies and measures outlined in the attached memorandum are adequate to achieve the objectives of its economic and financial objectives. Needless to say, we will of course take advantage of all opportunities to exceed those objectives as they present themselves. If necessary, however, the government is prepared to take further measures to achieve these objectives in consultation with the management and staff of the Fund.

We also intend to continue to constructively engage the donor community for the provision of assistance in expanding capacity and creating an enabling environment to accomplish these important goals. We are confident that the pursuit of this strategy and the establishment of a track record of policy implementation consistent with our SMP will provide impetus for an effective donor conference in mid-2000. We would anticipate a donor conference focused on the massive reconstruction and reform effort needed to make substantive and lasting improvements in the standard of living, including the necessary financial assistance.

While recent macroeconomic improvements may be the result of the implementation of specific fiscal and structural policies, they are also a manifestation of the tenacity of the Liberian people and their desire for a better standard of living, self-sufficiency, and empowerment. This desire, however, is of little significance in the absence of the fundamental requisite capacity to accomplish key economic, social, and political objectives. Consequently, the government believes that all efforts at economic reform and reconstruction, social progress, and political stability must be done in concert with the strengthening of human capacity to implement and sustain these specific objectives.

We appreciate the technical assistance that the Fund is providing to the government of Liberia for the restoration of its economic policymaking capacity and hope to continue benefiting from such support in the future. However, donor support continues to be primarily in the form of emergency and humanitarian assistance, for which we are grateful, but there has yet to be external assistance provided for budgetary support to rebuild our capacity to implement reforms. Given the serious capacity limitations we face, we consider this capacity building a top priority for technical and financial assistance.

We hope that the timely and effective implementation of our program will continue to enhance cooperation with the Fund. As part of our effort to make economic policy and management transparent, we intend to publish the attached memorandum and periodic reviews of program implementation. Furthermore, we hope that establishment of a strong track record will enable us to begin the process of normalizing financial relations with our external creditors and provide a basis for a possible rights accumulation program with the Fund.

Attachment: Memorandum of Economic and Financial Policies

1.  Following the end of Liberia's devastating seven-year civil war, the democratically elected government of Charles G. Taylor took office in August 1997. The new government immediately initiated a comprehensive program of reconciliation and reconstruction to begin the long process of rebuilding the country's physical and social infrastructure that had been virtually destroyed during the conflict.

2.  Benefiting from substantial humanitarian and technical assistance from the international donor community, and a significant improvement in the security situation, the government has made impressive progress over the past two and a half years in resettling a large proportion of the nearly 480,000 Liberian refugees living in neighboring countries and some 700,000 internally displaced persons. The provision of basic social services has been a major priority of the government and, with the assistance of the donor community and nongovernmental organizations (NGOs), the government has rehabilitated 230 health clinics, 14 hospitals and 13 health centers, out of a prewar total of 330 clinics, 31 hospitals, and 54 health centers. In addition, the adoption of the government's assisted school enrollment program has led to increased enrollment at both the primary and secondary levels, with current levels exceeding those of the prewar era.

3.  On the economic front, domestic production has rebounded strongly since the end of the civil war, though it still remains at only about one-third of the prewar level. Based on provisional data, real GDP is estimated to have grown by some 25–30 percent in 1998 and by20–25 percent in 1999, led by the recovery in postwar agricultural output. Rice production is estimated by the Food and Agriculture Organization (FAO) to have increased to some 70 percent of the prewar level in 1998. The recovery has also been supported by a sizable increase in cash crop (rubber, coffee, and cocoa) and timber production.

4.  Consumer price inflation and the exchange rate have remained relatively stable during the first eleven months of 1999. Consumer prices (12-month basis) increased by 3 percent in October 1999, compared with the same period in 1998, reflecting price hikes in services and fuel, which were partially offset by a decline in food prices. The Liberian dollar averaged L$42 per U.S. dollar during the first 11 months of 1999; it appreciated to L$37 per U.S. dollar in December, in part reflecting seasonal factors associated with holiday-related remittances from abroad.

5.  Following the maintenance of a tight fiscal stance in 1998, the fiscal situation deteriorated significantly during the first three quarters of 1999. While a balanced budget was targeted for 1999 as a whole, a fiscal deficit of US$11 million (2½ percent of GDP) was recorded during January-November 1999 (on a commitment basis). Revenue performed largely as programmed during this period, increasing by some 35 percent over the corresponding period in 1998, largely owing to higher customs and excise tax revenue. Expenditure, however, was 70 percent higher than during the same period in 1998, primarily because of sizable unbudgeted expenditures (on a commitment basis) related to the purchase of government vehicles and equipment, the refurbishing of the Ministry of Foreign Affairs, and security-related outlays. The deficit was financed by a further accumulation of domestic payment arrears. Expenditure overruns largely reflected the lack of adequate expenditure controls within the government, particularly with respect to extrabudgetary commitments, and the lack of coordination among the government agencies overseeing budget implementation.

6.  The government took decisive actions in December 1999 to improve the fiscal situation. First, it accelerated efforts to improve revenue collections, with the effect of increasing revenue by US$2 million above the December revenue target, thanks partially to higher maritime receipts. Second, it closely monitored expenditure allotments, with the effect of realizing a cash surplus for the month of December of US$0.6 million. Finally, it completed an interagency review of the outstanding stock of US$10 million in payments vouchers that had been held up by the Ministry of Finance during 1999. The interagency task force found that US$8 million of the US$10 million in unpaid vouchers did not include proper documentation or approvals, did not include an underlying contractual commitment and did not reflect goods or services that had already been provided. Consequently, the Ministry of Finance cancelled the payments vouchers and asked ministries to reconsider any expenditure requests as part of the 2000 budget. As a result of these actions, the budget deficit for the year as a whole was reduced to US$2 million (½ of 1 percent of GDP) on a commitment basis, with a cash surplus of US$0.3 million. The government understands this action could put additional pressure on the 2000 budget but is committed to meeting the agreed budget targets during 2000.

7.  With the passage of the new central bank law in March 1999, the Central Bank of Liberia (CBL) replaced the largely defunct and illiquid National Bank of Liberia (NBL) in October 1999. One of the first tasks of the new central bank was the compilation of preliminary balance sheets for the CBL and commercial banks for 1998–99, the first such monetary data in nearly a decade. The provisional monetary survey suggests that broad money growth has remained subdued, reaching only 2 percent on an annual basis at end-September 1999. Credit to the private sector also increased only modestly (by 3 percent) during the same period, reflecting both liquidity constraints in the banking sector and the highrisk lending environment. These factors contributed to high real rates of interest; commercial bank lending rates in real terms averaged some 14 percent in the third quarter of 1999. Government recourse to the banking system declined substantially during 1999, with net claims on government increasing marginally (1.2 percent) for the year ended September 1999, reflecting the accrual of interest on the outstanding stock of public debt.

8.  Following a surge of nearly 70 percent in 1998, growth in exports in U.S. dollar terms continued to recover in 1999, though the rate of growth moderated to 30 percent, led largely by a strong pickup in rubber and timber exports (which account for about 95 percent of export earnings). With the completion of the large humanitarian aid program in 1997, imports fell significantly (by 34 percent) in 1998. Notwithstanding the decline in unit import prices, import growth, at 4 percent, remained sluggish in 1999. The estimated trade deficit of US$112 million in 1999 (25 percent of GDP) was largely financed by donor grant assistance, private transfers, and foreign investment capital. Given the extremely difficult external situation, Liberia was unable to increase its official foreign exchange reserves in 1999, with the stock of official reserves estimated at only US$0.2 million at end-October. Liberia is a heavily indebted poor country, with a total stock of external public sector debt estimated at US$2.5 billion (692 percent of GDP) at end-1998, most of which (US$2.2 billion) is in arrears, including US$1.2 billion to multilateral institutions.

9.  Some progress was made on structural reforms and institutional capacity building in 1999. In the area of statistics, the National Statistics Coordinating Committee has met monthly since May 1999 to reestablish the economic database, and the Ministry of Planning and Economic Affairs has published monthly price indexes since May 1998. The civil service audit was completed in July 1999, and the information obtained through the process of handing paychecks directly to employees in order to identify genuine workers is being reviewed. At the same time, in an effort to improve morale and productivity, a new salary scale was introduced in August (the minimum monthly wage was increased from L$175 (US$4) to L$850 (US$20)). In an effort to begin the process of reintegration into civil society, some 12, 000 ex-combatants were brought onto the public sector payroll, as an interim measure, in the third quarter of 1999.

10.  A World Bank-financed team led by the Liberian Minister of Commerce and Industry visited Senegal and The Gambia in October 1999 to study the experiences of those two countries in liberalizing rice imports. Drawing lessons from the experience in these countries, the team recommended a speedy liberalization of the rice sector in Liberia (as described in paragraph 30 below).

11.  In January 1998, the Liberian authorities agreed on an economic and financial program that could be monitored informally by the IMF staff. The first phase of the IMF staff-monitored program (SMP) was completed in June 1998 and a second phase (July 1998-March 1999) was agreed in October 1998. However, implementation during the second phase was weak and the program veered offtrack in the first quarter of 1999, largely as a result of substantial extrabudgetary expenditures. In the event, four prior actions were specified that would need to be completed before discussions on a new SMP could begin. Three of the four prior actions were subsequently completed, relating to (a) the full accounting of maritime revenues and expenditures in the budget; (b) provision of a full explanation and accounting of the government's fleet of vehicles and related purchases for the government by West Oil; and (c) inclusion in the 1999 budget of the first quarter 1999 rice stabilization fee revenue. The fourth prior action, which related to balancing the budget during the first six months of 1999 on a commitment basis, was not achieved. However, the government implemented a number of additional expenditure control measures in December 1999 and is committed to improving budget performance significantly during January–June 2000.

12.  The government of Liberia is in the process of developing a comprehensive medium-term economic reform and reconstruction strategy, with a view to expanding the near-term relief and reconstruction focus of the National Reconstruction Plan. It is anticipated that elaboration of the strategy will be completed by April 2000 and could form the basis for subsequent discussions with the international donor community. The strategy takes into consideration the unique circumstances of Liberia, including the near-total destruction of the county's infrastructure, the still fragile security situation, the return of Liberian refugees from neighboring countries, the resettlement of internally-displaced persons, and the reintegration of ex-combatants (some 20,000).

13.  The objectives of the government's medium-term strategy are to create an enabling environment to consolidate and sustain the current economic recovery and to lay the foundations for sustainable economic growth, with a view to achieving a considerable reduction in poverty. In this connection, the key tenets of the government's policy framework include: maintaining a stable macroeconomic environment; accelerating the reconstruction of core infrastructure destroyed during the war; rebuilding institutional capacity; undertaking civil service and public enterprise reform; introducing further trade liberalization; and restructuring the financial sector. Improving transparency and promoting good governance and the rule of law also constitute core components of the strategy.

14.  Reconstruction and poverty reduction must take center stage over the medium term. Consequently, reconstruction of the country's physical infrastructure destroyed during the war (including roads, buildings, and public utilities) and rebuilding human capital must be accelerated if important gains in poverty reduction are to be achieved in the foreseeable future. The strategy will fully articulate a reconstruction and poverty reduction action plan, including the financing requirements necessary to achieve this objective.

15.  Maintaining macroeconomic stability over the medium term will require a sound fiscal position, which itself will need to be based on a credible path for the postwar economic recovery and domestic revenue. In this regard, increased revenue mobilization will require continued tax reform, a sizable reduction in tax exemptions, and more efficient tax administration, as well as effective public debt management. Effective expenditure policy will depend on a comprehensive civil service reform, including rightsizing the civil and security services and allowing for a sizable increase in wages to remaining staff to boost morale and efficiency. In this regard, demobilization and demilitarization will require significant technical and financial assistance from the donor community. Given the current difficult state of the banking system and the need to preserve macroeconomic stability, fiscal policy over the medium term will aim to continue to achieve a balanced domestic budget.

16.  The development of a functioning monetary and financial system will be a core component of the medium-term strategy. Accordingly, a consistent monetary policy framework with the objective of maintaining a low-inflation environment will be central in the medium-term policy framework, including operational rules and the development of instruments for the CBL to conduct monetary policy. The emphasis in the financial sector will be on strengthening the banking system through compliance with prudential regulations and closer supervision. Resolution of the failed banks, as well as undertaking prompt corrective action to resolve weaknesses in a number of active commercial banks, will also be an important medium-term objective.

17.  Measures to improve transparency and pursue good governance will be a critical aspect of the medium-term strategy, including actions to improve the transparency of the budget process and the adoption of international best practices in fiscal and monetary policies. In addition, the reform of the legal system, broad deregulation, and price decontrol will be crucial to establishing an investor-friendly environment.

18.  Substantial external financing will be required to achieve the medium-term objectives of the government and, consequently, will be fully reviewed in the strategy. In addition, strategies and scenarios to address Liberia's unsustainable external debt burden will also be reviewed.

19.  The program aims to foster macroeconomic stability, consolidate progress in rebuilding the economy, and continue to restore public confidence. These objectives will be accomplished by further strengthening fiscal policies, reestablishing a viable central bank and issuing new currency, and undertaking key structural reforms. Under this program, the government will ensure that funding for priority sectors and basic social services in education and health is restored, and that the bulk of any additional revenue is directed toward these sectors. The government also intends to use the program to establish a credible record of policy implementation that could serve as a basis for possible discussions of a rights accumulation program with the IMF, as well as discussions with the donor community regarding additional financial and technical assistance. To improve policy coordination and monitoring under the program, the government has established an interministerial coordination committee that meets monthly.

20.  The program seeks to support the economic recovery in 2000; GDP is expected to grow by some 20 percent, as food and cash crop production continues to rebound, and timber and mining exports continue to expand. With tight demand management policies, inflation is expected to remain below 4 percent, while the external current account deficit (including grants) is expected to be in the range of US$50 million (and the trade deficit in the range of US$115 million), assuming continued donor-financed imports in the range of US$40–45 million.

21.  Prudent fiscal policies will remain the cornerstone of the government's macroeconomic stabilization strategy in 2000, with a balanced budget targeted for the year as a whole, as well as on a quarterly basis. This will be achieved by maintaining a tight reign on expenditure while implementing revenue-enhancing measures, including transparently reflecting all revenue and expenditures of the central government in the budget.

22.  The government recognizes the need to adopt prudent fiscal policies to rebuild confidence in the economy and to encourage private sector activity. In this regard, the authorities have decided to deal with domestic payment arrears accrued in 1999 immediately through a supplementary budget for January–June 2000 which has been submitted to the legislature. As important, the supplementary budget brings the budget cycle into conformity with the 1977 Revenue and Finance Law which specifies the fiscal-year as July–June. A return to the legally mandated fiscal year cycle will also enable the budget to effectively incorporate the sizable maritime receipts, the bulk of which are received during the last week of December and which are often reflected in the statement of the following January.

23.  The six-month transitional budget is a balanced budget on a cash basis, to be managed with no accumulation of domestic payments arrears and the reduction in the existing stock of domestic payments arrears by US$2.7 million. Based on tax yields in 1999 and taking into account seasonal patterns, total revenue is programmed to be US$33 million during the January–June 2000 period, with tax and maritime revenues totaling some US$21 million and US$7 million, respectively. Consequently, total expenditure of US$33 million is programmed for in the supplementary budget, including a payment of US$2.7 million to settle the existing domestic payments arrears that accrued during 1998 and 1999. In addition, US$2 million has been allocated toward repayment of the West Oil loan. To ensure appropriate funding for the social sector, US$6 million (18 percent) of the budget has been allotted to the priority social and community sectors of agriculture, education, health and sanitation. The budget assumes no domestic or foreign financing during the January–June 2000 period. Consequently, the government will consult with Fund staff before considering any potential financing offered to the government.

24.  The fiscal program focuses extensively on strengthening government-wide expenditure controls. In this regard, a budget analysis task force—with representatives from the Ministry of Finance (MoF), the budget bureau, CBL, Civil Service Agency and the Ministry of Planning and Economy—was established in January 2000. The taskforce will issue a monthly budget execution report within 15 days of the end of each month; will meet monthly to review revenue and expenditure for the previous month; and make allotments for the coming month, taking into consideration the need to fund the priority social sectors. A monthly cash flow for January-June 2000 has been prepared, and will be reviewed and updated by the taskforce during their meetings.

25.  To prevent wage arrears (which arose temporarily in the third quarter of 1999), the government will make available priority funding for the wage bill on a monthly basis. As part of the budget submission process, a contingency reserve has been established, equivalent to some 6 percent of quarterly revenue (US$1.0 million). In addition, as part of the expenditure policy, no further wage awards are anticipated during the supplemental budget period and all nonessential foreign travel has been frozen. In addition, the MoF will conduct a study of foreign travel allowances, comparing Liberia with other countries in the region and countries with similar per capita income levels, and adopt an appropriate system.

26.  With the technical assistance of the IMF, the authorities have reviewed the 1977 Revenue and Finance Law and have formulated a simple tax code that is intended to encourage investment and expand the tax base further. The new tax code, which incorporates a sales tax and revised income and corporate tax codes, is being reviewed and studied and will be submitted to the legislature by end-February 1999. At the same time, the authorities have initiated a public education campaign on the new tax code. The new code will become effective on July 1, 2000, tying in well with the new July–June fiscal year. The major feature of the new code is the introduction of a sales tax on imported goods (including petroleum products) and local manufactured goods that will be at the same rate for domestic and imported goods. The code will also rationalize the tax system—in particular the proliferation of excise duties. Excise taxes will remain on a few commodities yielding high revenue, such as petroleum products, alcoholic beverages, tobacco, soft drinks, and luxury cars. Under the new personal income tax, the marginal rate will be reduced from 65 percent to 35 percent and the number of tax brackets from 12 to 7, and the National Reconstruction Tax will be merged with the personal income tax and reflected in this new rate structure. Technical assistance will be provided to ensure a smooth and successful change in the tax system, and to improve administration.

27.  The government inherited a system of numerous customs and tax exemptions for a wide variety of sectors and organizations. For customs duties alone, exemptions for January–November 1999 amounted to some $6 million. While the government continues to support the exemption from taxes and duties for certain high-priority sectors and diplomatic missions, it intends to undertake a review of exemptions by end-April 2000, and to introduce measures to prioritize their application and reduce the level, based on best practices in the region, by July 2000. The process of verifying all claims against the government made by vendors during the transitional pre-1998 period is under way and the government intends to complete this exercise by end-June 2000.

28.  The balanced 2000/01 budget will be presented to the legislature by end-June 2000.

29.  The government is committed to strengthening its legal and regulatory framework, in a way that will secure individual property rights, remove entry and exit barriers, and lower the cost of conducting business in Liberia. To this end, structural reforms will remain an integral part of the government's economic policy, given their critical importance in improving the business climate for private investment. A new "investor-friendly" Investment Code is being finalized and will be introduced by July 2000. Legislation is being prepared for the mineral and forestry sectors to ensure that those resources are exploited in an organized manner, and that the environmental implications of mining and forestry activities are adequately addressed. The government also intends to continue to improve the effectiveness of the court system and confidence in the rule of law. To improve the business climate, the authorities have recently demolished the numerous checkpoints constructed in the city of Monrovia during the civil war and a modest supply of electricity was restored in Monrovia in late December 1999.

30.  Monopoly rents represent a substantial cost to consumers in the form of higher prices and to the economy in the form of forgone benefits of competition and reduced scope for private sector activity. In this regard, the government will fully liberalize the importation of rice, including the elimination of minimum import requirements, quality requirements (except as related to health and safety), and price controls, by end-June 2000. At the same time, the government considers it important to set up a detailed monitoring system by February 2000, with the assistance of the World Bank, which will provide daily information on stocks of rice held by different importers, and the price levels of various qualities in the domestic and international markets. In the meantime, the authorities intend to embark on a public education drive beginning February 2000 in the news media on the proposed measures and the benefits to the consumer in terms of wider varieties available and a more competitive range of prices. The government is fully committed to the liberalization of the importation of rice. However, there must be appropriate safeguards to ensure an adequate supply of this strategic commodity at all times. Consequently, as an integral part of the liberalization process, the rice-monitoring committee will develop appropriate safeguards, in consultation with the World Bank, to assure the availability of a sufficient stock of rice.

31.  Similar benefits to the consumer in terms of the liberalization of rice imports apply in the case of imports of petroleum products. Accordingly, with the assistance of the World Bank, the government will adopt a procedure similar to that used for rice imports by visiting countries in the region to study their experiences following the liberalization of imports of petroleum products. An action plan on the best approach to liberalizing petroleum imports will be prepared by June 2000, following the consideration of the report of the study group, which will address the issue of efficiency and the role of the Liberian Petroleum Refining Company (LPRC). As a result of the crisis in Liberia, a substantial portion of the accounting and operational records of the LPRC were destroyed or lost. The government will contract a domestic accounting firm to assist the corporation in reestablishing reliable and accurate accounting and operational records, to be completed by end-June 2000. Based on this information, the government will contract with an accounting firm to complete and publish a statutory audit of the LPRC for 1999 by end-December 2000, based on internationally accepted accounting standards.

32.  Progress in civil service and public enterprise reform has been slow, owing to the lack of financial resources. Following the recent payroll audit, the next steps will be the functional audit of the civil service, which will be completed by May 2000, and the issuance of identification cards to all civil servants by September, if donor financial support is secured. The government remains fully committed to reform of the civil service and public enterprises, and has approached several donors for assistance. In view of existing financial constraints, progress in these areas will to a large extent depend on financial assistance.

33.  Significant progress has been made in addressing poverty issues, much of which has been directly related to the civil war. With the assistance of the international community, the government has repatriated some 336,000 refugees to points throughout Liberia. Significant additional financial aid is still needed to consolidate the progress of the returnees and the internally displaced population. In addition, the reintegration of some 10,000 former combatants into civil society, most of them young and poorly educated, also remains a major challenge. There is a growing need for increased funding to the social sectors to address the problems of overcrowding in classrooms, improved teacher-student ratios, and improved provision of health services. The government intends to continue to address these issues in the context of annual budgetary allocations while seeking donor assistance.

34.  One of the main objectives of the newly created central bank during the January–June 2000 program period will be to issue a new stock of currency in exchange for the existing stock of Liberty and JJ Roberts notes in circulation and establish a properly functioning clearing and payments system at the CBL. Considerable preparatory work has already been done with respect to currency issuance, with the assistance of the IMF, and an action plan for the actual introduction was completed in January 2000. The CBL intends to request additional short-term technical assistance from the IMF to assist in the operational aspects of the currency exchange should the need arise. It is anticipated that the currency exchange will take place by March 2000. The conversion rate for the exchange will remain at the rate previously used—1JJ for 2 Liberty. To ensure credibility during this initial period, the CBL will refrain from issuing additional new currency through end-June 2000.

35.  It is expected that the capitalization of the CBL will be completed by March 2000. However, it will be important that an action plan be prepared to ensure that the CBL has sufficient liquidity, including an allotment in the January-June 2000 supplemental budget. While the bank currently receives monthly payments of US$0.1 million from the Ministry of Finance, this amount is inadequate and—as important—does not generate an independent stream of income to cover operational costs. Therefore, the CBL, in conjunction with the MOF, will agree on the outstanding stock of government debt owed to the CBL and commercial banks by end-March 2000 and adopt a plan to regularize the arrears by end-June 2000, and include adequate provision for debt-service payments in the 2000/01 budget.

36.  The overall objective of monetary policy will remain the achievement of price stability. The exchange rate of the Liberian dollar will remain market determined, and the central bank will seek to facilitate the establishment of interbank markets. To these ends, the CBL aims to maintain broad money growth generally in line with developments in the economy, though the current anemic state of the financial system will require a lower rate of growth in the near term. With the CBL refraining from providing financing to the government and currency issuance limited to an exchange for the existing stock of currency, reserve money is targeted (on an indicative basis) to increase by some 4–5 percent from end-December 1999 to end-June 2000. The CBL will also endeavor to begin to rebuild gross official reserves in 2000, though admittedly at a slow pace. The demand for credit to the private sector is also expected to expand at a relatively slow pace in 2000, as the banking sector continues to undergo significant structural reforms. Consistent with fiscal policy, the monetary program will not provide for government recourse to the banking system.

37.  During the program period, the central bank will draw on the recommendations of the IMF technical assistance missions and other experts to substantially strengthen its capacity to compile monetary statistics and by February 2000 will begin to prepare consolidated balance sheets of the CBL and commercial banks within 30 days of the end of each month. The CBL is developing prudential guidelines for commercial banks based on international standards and will introduce these by end-April 2000. The CBL will also request IMF technical assistance to establish a properly functioning payment and clearing system and reactivate clearing at the CBL by June 2000.

38.  The financial position of most commercial banks remains fragile, and the quality of assets of the banks is severely impaired. At end-1998, 78 percent of assets were classified as nonperforming. To this end, the CBL will agree with commercial banks that do not meet the minimum paid-in capital requirement on a program of corrective action before issuing them provisional licenses. In addition, the CBL will prepare a comprehensive strategy for dealing with failed banks. It will also proceed cautiously in licensing new banks until it has the capacity to inspect and supervise banks.

39.  External policies will aim at strengthening the balance of payments position in 2000 through the continued recovery of exports and the encouragement of domestic and foreign investment. The government will work toward the recovery of exports, which remain hampered by damage to the productive capacity and the transportation infrastructure. In this regard, the National Investment Commission has been established to coordinate and promote foreign investment.

40.  The government of Liberia accumulated an external public debt of US$2.5 billion at end-1998; virtually all of it is in arrears, including US$650 million in arrears to the Fund. The government recognizes the urgent need to strengthen the external debt-management capacity of the Ministry of Finance in order to monitor and provide current information and analysis on this debt. The government will seek donor support to strengthen the debt-management capacity of the Ministry of Finance and will initiate a loan by loan review of the outstanding stock of external debt, including arrears.

41.  Given the already high level of Liberia's external public debt, the government recognizes the urgency of minimizing the accumulation of further debt. Consequently, the government will rely on grants and loans on concessional terms. The Ministry of Finance will remain the sole institution responsible for approving any new external borrowing contracted or guaranteed by the government.

42.  The civil war destroyed much of the country's statistical base. While there has been some progress made in the compilation of fiscal and monetary data with the help of technical assistance from the IMF, the World Bank, donors and NGOs, enormous weaknesses remain, especially in measuring agricultural and industrial production and balance of payments flows. The authorities are committed to improving the coverage, quality, and timeliness of the macroeconomic statistics to facilitate macroeconomic analysis and enhance the effectiveness of program monitoring. In this regard, it has been decided that the CBL will be the lead agency to compile BOP statistics. Technical assistance will be sought to compile balance of payments, national income accounts, agricultural production, and labor statistics.

43.  The government intends to continue to execute monthly payments to the Fund of US$50,000, with a view to reducing the rate of increase of arrears accumulation. However, given the difficult external situation and the pressing needs of the country to rebuild its infrastructure following the civil war, it is not possible to increase payments at this time. The government places a high priority on restoring normal financial relations with its external creditors and plans to discuss its relationship with creditors later in 2000. In particular, the government intends to review its level of payments to the Fund as well as to the World Bank and African Development Bank as part of the 2000/01 budget.

44.  The policies set forth in this memorandum, which the government considers adequate to achieve the objectives of the January–June 2000 program, will be modified and complemented by additional measures, if necessary. Reporting and monitoring will be conducted as indicated in Annexes I–IV. Quarterly quantitative benchmarks for the first two quarters of 2000 have been set in Annex I for the following : (a) floor on central government revenue; (b) ceiling on total central government expenditure on a cash and commitment basis; (c) new government domestic arrears; (d) new credit from public enterprises to the central government; (e) new net credit from the banking system to the government; and (f) new nonconcessional external borrowing. Structural benchmarks under the program are presented in Annex II, and a summary of policy measures is provided in Annex III. To enhance the effectiveness of program monitoring, the government will provide the IMF with statistical data specified in Annex IV. To monitor progress under the program, a review of end-March 2000 performance will be conducted with Fund staff in the second quarter of this year on the implementation of the supplementary budget, the restructuring of the banking system, the liberalization of rice and petroleum markets, and civil service reforms. It is anticipated that the World Bank staff would participate in the review of rice and petroleum liberalization and civil service reform.