> home > News

Debt Relief for Liberia Finally in Sight

13 November 2007

Debt Relief for Liberia Finally in Sight

Almost two years since the election of President Johnson-Sirleaf to power in Liberia, the country has finally managed to secure an international agreement to help clear the country’s massive arrears to the IMF, World Bank and African Development Bank (AfDB). Arrears to the three institutions amount to over US$1.5bn (US$458mn to the World Bank, US$772mn to the IMF and US$233mn to the AfDB). These arrears had been accumulated over the last twenty years due to a protracted civil conflict which devastated the economy and displaced thousands of people from their homes.

This situation has paralysed the Liberian Government since its inception. If a country has fallen into arrears on its debt service to the multilateral institutions it cannot access fresh funds from the international community. But how could a country which in 2006 operated on a budget of some US$86mn to support 3mn people possibly pay such amounts back? And how can a country fund essential reconstruction when it cannot directly access new funds from the international community? Catch 22. This was quickly recognised by the world’s donors but for a further 18 months they wrangled over who would stump up the cash to clear the US$1.5bn. The World Bank had already pledged to find the resources internally to write-down Liberia’s arrears. So the problem lay with the IMF and AfDB. But the IMF had repeatedly stated it could only fund so much of the arrears clearance operation internally. In the end, donors will contribute US$842mn of which US$71mn is from the G8.

The fact that it has taken two years to secure a plan to clear Liberia’s arrears is criminal. The government of Ellen Johnson-Sirleaf enjoys widespread international support and faces an uphill struggle to rebuild a devastated nation. Unemployment stands at around 85% and each person owes US$1000 to international creditors. Moreover, many of the credits extended to previous authoritarian governments in Liberia could easily be described as dubious or illegitimate having funded in some cases military expenditures.

However the government had to waste scarce human resources over two years to secure an international deal to help fund Liberia’s arrears clearance operation to the multinationals. This involved multiple trips, letters and negotiations in various capitals around the world. It also meant that President Johnson-Sirleaf had to demonstrate “good faith” principles to her creditors, i.e. the international community requested assurances that she really was trying to restore macroeconomic stability within the country and “normalise” relations with lenders. This involved in practice Liberia making monthly token payments of some US$50.000 to the World Bank and IMF as a demonstration of this good faith. The World Bank has put these funds into trust to be released to Liberia later on but it is not clear whether the IMF will also return these badly-needed funds to the country.

According to the IMF press release, once donors’ pledges have actually been received (they are still just on paper for the moment) the arrears clearance operation will take place and will be followed by new IMF programme and fresh finance from the institution.

On the one hand, this paves the way for the country to access much needed fresh resources from international donors who take their signal from the Fund. It also kick starts the debt relief process for Liberia. Liberia is entitled to comprehensive debt cancellation under the HIPC and MDRI Initiatives provided it follows a process of economic reforms supported by the World Bank and IMF. But two of the key conditions of the HIPC Initiative are that the country be on-track with repayments to the multilateral institutions and have an IMF supported structural adjustment programme in place. Only now have these criteria been met.

On the other, it means that civil society organisations will need to carefully scrutinise the conditionalities associated with both the IMF-supported programme and HIPC Initiative. The fresh funds provided by the IMF will also not be eligible for debt cancellation since international debt cancellation agreements only cover debts accumulated until end-2004. CSOs will also need to carefully monitor whether their governments have counted any extra contributions to the IMF as Official Development Assistance (ODA) and whether this means less real aid to Liberia or other poor countries as a consequence.

So what are some of the lessons that can be learned from this experience? There are a number of other “protracted arrears” cases which may emerge in a similar fashion over the next 5-10 years should governance conditions improve in these nations. These include Sudan and Somalia which have also accumulated billions in arrears to most external creditors. Will those countries have to go through the same arduous and lengthy process at critical times in their nations’ peace-building and reconstruction? President Johnson-Sirleaf had a number of advantages – such as a former career as a World Banker which familiarised her with Bank processes and politics in Washington – which other leaders may not have.

IMF Managing Director Dominique Strauss-Kahn Announces Financing Milestone on Debt Relief for Liberia
November 12, 2007
IMF Managing Director Dominique Strauss-Kahn today announced that the International Monetary Fund has secured sufficient financing pledges from member countries to allow the Fund to provide debt relief to Liberia. When these pledges, amounting to more than SDR 530 million (US$842 million) are formalized, a process will be followed of arrears clearance and new Fund financing that will enable the delivery of HIPC Initiative and other debt relief to Liberia. See the following link for the full press release and information on the IMF and Liberia: http://www.imf.org/external/country/LBR/index.htm 

Arrears Clearance Plan for Liberia Approved
WASHINGTON, 12 November 2007
A comprehensive arrears plan achieved today positions Liberia for debt relief under the Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).  The agreement, which covers Liberia’s arrears to the World Bank, the IMF and the African Development Bank, will permit Liberia to rapidly clear much of its arrears to smaller multilateral creditors and, with the Paris Club assistance, to clear much of its arrears to bilateral debtors.

Liberia’s total arrears to the International Financial Institutions amount to $1.5 billion, including $458 million to the World Bank, $772 million to the IMF and $233 million to the African Development Bank. or more information about the World Bank in Africa: http://www.worldbank.org/afr 

Further news and comment on Liberia:
IMF ready to cancel Liberia debt: http://news.bbc.co.uk/go/em/fr/-/2/hi/business/7091917.stm