President Ellen Johnson Sirleaf acknowledged that much has been achieved in the last 10 years but that much more remains to be done. Her government is committed to increasing and ensuring transparency and accountability in government and has asked all Liberians to join her in the continued fight against corruption. This action came in the face of mounting criticisms against the President and her government on the mounting wave of corruption affecting the public service.
The outbreak of the Ebola Virus Disease (EVD) has threatened the peace and stability of the country. The UN Secretary General is recommending to the Security Council to suspend the current drawdown of UN forces from Liberia until the EVD can be contained.
These achievements are being undermined by the Ebola epidemic which has affected the economic and infrastructural development of Liberia. The withdrawal of investors has led to the reduction of revenue, thus leading to a budget shortfall. Infrastructural development projects were slowed down due to EVD and it is hoped that the sooner the virus is contained, the better it is for the country to resume its development activities.
The Ebola epidemic, which was first reported in March 2014, threatens to erode the gains made in Liberia’s economic recovery since the end of the civil war in 2003. The EVD has the potential to destroy the economy if the situation is not contained within the next few months. The economic impact so far includes the increased cost of healthcare and forgone productivity of households directly affected. In addition, the fear associated with the outbreak has considerably slowed down economic activities. The epidemic is projected to have a significant impact on Liberia’s economy in terms of forgone output; higher fiscal deficits; rising prices; food security challenges, lower real household incomes and greater poverty.
Real gross domestic product (GDP) growth in 2014, which was initially projected at 5.8%, is estimated to decline to 2.5% or less by the end of the year. In the absence of EVD, growth projections in 2014 reflected a weaker economic outturn compared to the previous year (2013). Growth was driven largely by the expansion in the mining sector (mainly iron ore) as well as increased activities in the construction sector spurred by both public and private investment. Rubber production and exports, on the other hand, had slowed down reflecting lower international prices and developments in the forestry sector had been adversely affected by weak administrative oversight capacity. Growth in manufacturing continued to be constrained by inadequate electricity and the generally weak business environment. The epidemic has further worsened the already struggling economy. Agriculture, services and mining are sectors that have been affected by the EVD crisis.
Food security concerns have heightened in Liberia due to suspension of some major food markets, increasing food prices, including rice, as well as loss of livelihoods. The average price of imported rice this year (2014), has increased by18% between July and August compared to 12 percent over the same period in 2013. According to the 2014 World Food Programme report, price increases in Ebola affected counties are even more dramatic, with prices of most commodities rising between 25% and 79% in Lofa County. The soaring prices can be explained by the rapid spread of the EVD which has limited supplies coming from supply sources because of the military roadblocks, border closure and restrictions on travel (curfew and community imposed quarantined zones).
The fiscal impact of the Ebola crisis is also expected to be substantial. The fiscal out-turn for FY 2013 showed a smaller deficit of 1.6% of GDP (down from 3.4% in FY12) largely as a result of lower than planned capital spending. However, since Ebola crisis, fiscal revenues have started to fall, reflecting the lower economic activity as well as lower tax compliance. Tax revenues for the 2014/15 fiscal year, initially projected at $399 million, could be lower by about $40 million, or about 10%. Increased expenditure, directed mainly to the health sector (approximately $20 million), but also to address social protection needs related to the loss of livelihoods (about $47 million), is substantial, and accommodated in part through some shifting from capital to recurrent spending.
Liberia’s near and medium-term economic prospects have been severely adversely affected by the Ebola crisis through its impact on all sectors. Planned foreign direct investments in the natural resources sectors have been delayed. Public and domestic private sector investments particularly in the construction sector have also been delayed as the government has shifted resources to health and social protection. Medium-term growth and employment will be directly and indirectly affected by the delayed investments. Increased spending in the face of the falling revenues and flat external grants will increase the FY2014/15 projected fiscal deficit from 7% to 11.8% of GDP.
Under more optimistic scenarios of epidemiological containment by March 2015, GDP growth is projected to recover to about 4.5% in 2015. Such recovery is likely to be driven by the mining sector getting back to steady state capacity and a sharp recovery in services as rural and urban markets are re-opened. The re-start of public investment in infrastructure is also expected to be slow and costly and increased private investments in infrastructure, including in commercial and residential construction may be the initial impetus for growth in the wake of the Ebola crisis. The general price level is expected to rise in the short-term reflecting food scarcity on account of the interruption of domestic agricultural production as well as transportation and markets. Average inflation is projected to increase to 13% for 2014 before falling back to single digit in 2015.
Liberia’s external position is likely to deteriorate over the medium term. The slow-down in production as well as delays in investments in key concessions in mining and agriculture caused by the Ebola outbreak will lead to lower exports in 2015. At the same time, recovery in imports including food, fuel and capital items will lead to an increase in the trade deficit from about $764 million in 2014 to $848 million in 2015. With no substantial recovery on the services and income account and the expected lower current transfers, the current account deficit is projected to deteriorate from a deficit of 36.4% of GDP in 2014 to a larger deficit of 40.5% of GDP in 2015. Most of the current account deficit is expected to be financed by foreign direct investment, official and private financing but there will be a net decrease in gross reserves from $414 million in 2014 to $382.2 million in 2015.
Medium term, monetary policies will remain focused on containing inflation, but the fiscal policy agenda has shifted from creating fiscal space for investments in line with the Agenda for Transformation to focus on addressing the Ebola crisis. The foreign exchange auction remains the primary instrument for intervening in the foreign exchange market. The Central Bank is also taking steps to improve the legal framework for the regulation and supervision of the National Payments System and has established a collateral registry. The Ebola outbreak is expected to have a substantial fiscal impact over the medium term. Fiscal revenues will be about 10 percentage points of GDP lower in FY14-FY15 and slow to recover thereafter, given slower growth and issues with compliance. At the same time, expenditures directly related to the crisis and additional social protection expenditure policy will push up current and total expenditure by more than 4 percentage points of GDP. Consequently, the fiscal deficit is expected to climb to nearly 12% of GDP in FY15 with little improvement over the medium term.
Last Updated: Nov 18, 2014