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Home Business News Economy

World Bank Freezes Liberia’s Access to Funds over Unsettled Debt

by Lennart Dodoo
August 24, 2024
in Economy, Featured, UPDATE
Reading Time: 3 mins read
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World Bank Freezes Liberia’s Access to Funds over Unsettled Debt

Monrovia – The World Bank has suspended Liberia’s access to crucial funding after the country defaulted on its payment obligations for 60 days, a move that could derail development projects just as the government grapples with austerity measures and a recast national budget.

The suspension which became effective on August 15, 2024, halts Liberia from withdrawing funds under active credits, Project Preparation Facility advances, Institutional Development Fund grants, and other loans and grants managed by the World Bank. Michael Sahr, the World Bank’s External Affairs Officer, confirmed the decision to The Liberian Investigator, expressing hope that Liberia would clear its overdue payments to resume project financing. “The World Bank looks forward to the Republic of Liberia’s payment of all overdue amounts and remains committed to supporting Liberia to ensure the effective implementation of all the projects in its portfolio, for the benefit of the Liberian people,” Sahr stated.

This development comes as the Unity Party-led government struggles to manage a budget reallocation reflecting harsh economic realities. The revised budget has been trimmed from $738.9 million to $721.5 million.

The recast budget shifts priorities toward public administration and security, forcing cuts in critical sectors like health, education, and public investment. The health budget, for instance, was reduced from $80.1 million to $78.97 million, and education funding dropped from $111.3 million to $108.4 million. The Public Sector Investment Plan (PSIP) saw a significant cut of $33 million, focusing on immediate fiscal relief at the expense of long-term growth.

The World Bank’s funding suspension compounds Liberia’s financial challenges, and could stall vital infrastructure, agriculture, and energy projects already weakened by budget cuts.

According to the World Bank, Liberia’s economy grew by 4.7% in 2023, primarily driven by increased gold production, though growth in the primary sector remained sluggish at just 1.4%, due to declining output in key agricultural products like rubber and crude palm oil. The secondary sector expanded by 13.9%, led by mining, while services grew modestly from 2.8% in 2022 to 3.8% in 2023.

Inflation surged in 2023, with annual average inflation rising to 10.1% from 7.6% in 2022. Food inflation, in particular, spiked to 12.3%, a significant increase from a disinflation of 1.6% in 2022. Nonfood inflation remained steady at around 10%.

The fiscal deficit stood at 5.5% of GDP in 2023, slightly lower than 2022, reflecting declines in revenue and grants amid increased consumption spending. With a debt-to-GDP ratio of 54.5%, Liberia is at moderate risk of external debt distress and high risk of overall debt distress.

Despite strong gold exports, Liberia’s current account deficit widened to 24.4% of GDP in 2023, driven by a worsening trade deficit. Imports, led by minerals, machinery, and petroleum, outpaced export growth, causing the trade deficit to balloon to 18.4% of GDP. This deficit was financed by net IMF credit, loans, and drawdowns of gross official reserves.

Monetary policy remained tight throughout 2023, with the Central Bank of Liberia raising the policy rate by 500 basis points to 20% to curb inflation. The financial sector, according tothe World Bank, remained adequately capitalized, with a minimum capital adequacy ratio of 21.2%. Non-performing loans as a share of total loans dropped to 11.2%, slightly above the tolerable level of 10%.

Liberia’s medium-term growth prospects remain cautiously optimistic. The economy is expected to expand by 5.3% in 2024 and by an average of 5.9% from 2024 to 2026. However, according to the Bank, realizing these prospects will require maintaining macroeconomic stability, prudent fiscal consolidation, and the successful implementation of structural reforms in key enabling sectors. The government’s ability to strengthen domestic resource mobilization and control expenditure will be crucial in managing the projected fiscal deficit, which is expected to moderate to 3.3% of GDP in the medium term. The current account deficit is projected to remain elevated due to a surge in demand for imports tied to foreign direct investment.

Tags: economyLiberiaWorld Bank
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Lennart Dodoo

Lennart Dodoo

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