Document of The World Bank FOR OFFICIAL USE ONLY Report No: P7732-LR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF LIBERIA UNDER THE ENHANCED HEAVILY INDEBTED POOR COUNTRIES INITIATIVE AND THE MULTILATERAL DEBT RELIEF INITIATIVE June 9,2010 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Liberian Dollar US$1 .o - 72.00 WEIGHTS AND MEASURES Metric System FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS AfDF African Development Fund APR Annual Progress Report ECF Extended Credit Facility DRA Debt Relief Analysis HIPC Heavily Indebted Poor Countries IDA International Development Association IMF International Monetary Fund MDRI Multilateral Debt Relief Initiative NPV Net Present Value PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper SDR Special Drawing Right US$ United States Dollar Vice President, AFR: Obiageli Katryn Ezekwesili Vice President, PRM: Otaviano Canuto Country Director: Ishac Diwan Director, AFTPM: Sudhir Shetty Acting Director, PRMED: Sudarshan Gooptu Acting Manager, AFTP4: Philip English Manager, PRMED: Sudarshan Gooptu Task Team Leaders: Errol Graham, Luca Bandiera Staff Members: Signe Zeikate FOR OFFICIAL USE ONLY ASSISTANCE TO THE REPUBLIC OF LIBERIA UNDER THE ENHANCED HEAVILY INDEBTED POOR COUNTRIES DEBT INITIATIVE (HIPC) AND THE MULTILATERAL DEBT RELIEF INITIATIVE (MDRI) Table of Contents I. BACKGROUND ................................................................................................................ 1 11. FULFILLMENT OF COMPLETION POINT CONDITIONS .......................................... 1 111. COMPLETION POINT CONSIDERATIONS .................................................................. 2 IV. IDA'S DELIVERY OF ASSISTANCE UNDER the ENHANCED HIPC INITIATIVE ............. ....................................................................................................... ..: 5 V. IDA'S DELIVERY OF ASSISTANCE UNDER the MDRI ............................................. 5 VI. PROSPECTS FOR LONG-TERM DEBT SUSTAINABILITY AFTER DEBT RELIEF UNDER THE ENHANCED HIPC INITIATIVE AND MDRI ........................... 6 VII. SATISFACTORY FINANCING ASSURANCES FROM THE REPUBLIC OF LIBERIA'S CREDITORS................................................................................................... 6 VIII. RECOMMENDATION ...................................................................................................... 7 Figures Figure 1: Debt Service to IDA after HIPC Relief and the MDRI ................................................... 6 Boxes Box 1: Status of Floating Completion Point Triggers .................................................................... 3 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF LIBERIA UNDER THE ENHANCED HIPC DEBT INITIATIVE AND THE MULTILATERAL DEBT RELIEF INITIATIVE 1. I submit for your approval the following memorandum and recommendation on the assistance to be provided to The Republic of Liberia (?Liberia?) under the Enhanced Heavily Indebted Poor Countries (HIPC) Debt Relief Initiative, with respect to the debt owed by this country to the International Development Association (IDA). This report and its recommendations address the criteria for Liberia reaching the completion point under the Enhanced HIPC Initiative as agreed by the Boards of Executive Directors of IDA and the International Monetary Fund (IMF) in March 2008l, and for the debt relief to be provided irrevocably with respect to the debt owed to IDA. Upon reaching the completion point, Liberia will also become eligible for debt relief under the Multilateral Debt Relief Initiative (MDRI) from IDA. 2. This document complements the joint IDA-IMF paper entitled ?The Republic of Liberia: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point Document and Multilateral Debt Relief Initiative (MDRI)?, concurrently submitted with this document. The completion point document presents: (i) Liberia?s performance in fulfilling the triggers for the completion point under the Enhanced HIPC Initiative; (ii) an updated debt sustainability analysis including the status of creditor participation, delivery of debt relief and consideration for topping up; (iii) the provision of MDRI relief by IDA, the IMF, and the African Development Fund (AmF); and, (iv) prospects for the country?s long term-debt sustainability. I. BACKGROUND 3. In March 2008, the Executive Boards of the IDA and IMF agreed that Liberia had met the requirements for reaching the decision point under the Enhanced HIPC Initiative. Based on the HIPC debt relief analysis (DRA) presented in the decision point document, Liberia would require debt relief under the Enhanced HIPC Initiative amounting to US$2,845.5 million in present value (PV) terms as of end-June 2007, corresponding to a common reduction factor of 90.5 percent after traditional debt relief. Debt relief attributed to multilateral creditors was estimated at the decision point at US$1,425.8 million in PV terms. 4. Debt relief from IDA under the Enhanced HIPC Initiative approved at the decision point amounted to US$375.2 million in PV terms, to be fully delivered through the grant element embedded in the clearance of Liberia?s arrears to both IBRD and IDA. 11. FULFILLMENT OF COMPLETION POINT CONDITIONS 5. In accordance with the decision of the Executive Directors of IDA and the IMF at the decision point, the conditions for reaching the completion point require that Liberia have: (i) ?The Republic of Liberia: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative-Decision Point Document? (February 27,2008), Report No. 42524-LR. 2 prepared a full poverty reduction strategy and satisfactorily implemented it for at least one year, (ii) ensured macroeconomic stability as evidenced by satisfactory performance under ECFEFF- supported program, (iii) strengthened government procurement, (iv) conducted successive external audits of key ministries, (v) implement the new PFM law and supporting financial regulation for at least one year; (vi) developed a debt management strategy, (vi4 reported debt data, (viii) eliminated discretionary tax incentives, (ix) reconciled revenues from extractive industries, (x) improved payroll management in the education sector, (xi) expanded basic health service coverage, and (xi9 introduced a Anti- Corruption Commission. 6. As outlined in Box 1 (below), Liberia has satisfactorily implemented 11 of the 12 HIPC completion point triggers, However, one trigger has not been fully met, specifically the 12-month implementation of the PFM law and related regulations. The authorities are requesting a waiver on the basis of the substantial progress achieved over 10 months. To this end, the budget for FY2010/11 was prepared in line with the new PFM law, a new chart of accounts and accounting standards were adopted, the accounting function in the Ministry of Finance was unified and a new Debt Management Committee was established. In this context, the staffs of IDA and the IMF consider that the main elements of the HIPC reform program have been satisfactorily implemented. 111. COMPLETION POINT CONSIDERATIONS 7. The stock of HIPC-eligible external debt in PV terms at endJune 2007 was revised downward following the debt reconciliation exercise. The staffs of IDA and the IMF, together with the Liberian authorities, reviewed the end-June 2007 stock of debt data that was presented at the decision point document against recent creditor information. As a result, the nominal stock of debt has decreased by US$333.6 million to US$4,398.7 million, and PV of debt after traditional debt relief has been revised downward by US$106 million to US$3,038.4 million. Most of the downward revision is attributable to changes in commercial debt2. 8. The required HIPC assistance at the endJune 2007 PV terms has been revised downward from US$2,845.5 million estimated at the decision point to US$2,739.2 million. The downward revision is mainly due to changes in data of commercial debt stock. As a result, the common reduction factor (CRF) has marginally decreased from 90.5 percent at decision point to 90.2 percent. The revision amounts to 35 percent of the target PV of debt after full delivery of HIPC relief ahd therefore exceeds the 1 percent threshold set as minimum condition for the modification of HIPC relief.3 2The decrease in the stock of outstanding commercial debt at endJune 2007 by US$340.7 million reflects the netting out effect of upward revision of the total commercial debt stock by US$l 1 1.4 million and the exclusion of obligations estimated at US$452.1 million. These revisions reflect final results of the reconciliation exercise completed in November 2008 by Liberia's advisors for the IDA'S commercial debt buy-back operation. See "Information Reporting in the Context of HIPC Initiative Assistance", approved by the members of the Executive Boards of the IMF (EBS/02/36) and IDA (IDA/Sech42002-013 l), March 4,2002. 4 Triggers I Status Social sectors 1 Complete a harmonized and regularized Ministry of Implemented The payroll harmonization completed in Education (MoE) payr011.~ March 2010. Following an audit completed by the GAC in April 2010, some 3,247 unverified personnel including 2,138 ?ghosts? were removed from the MoE payroll. Salary arrears accrued before March 2008 have been cleared and MoE personnel are now paid on a regular monthly cycle, mostly through direct deposits but a few in the remote counties through checks. 1 Ensure that the Basic Package of Health Services is Implemented A nationwide survey found 47 percent delivered in at least 40 percent of all health coverage in August 2009. facilities nationwide. Iebt management 1 Develop a debt management strategy in Implemented A comprehensive debt management consultation with partners and establish a debt strategy was approved in June 2010, which updates the management unit recording all infomation on previous strategies adopted in June 2008 and July 2009. external and domestic public and publicly A debt management committee was appointed in April 2010 that will authorize all government and state guaranteed debt, including for state owned enterprise borrowing. A Debt Management Unit (DMU) enterprises, and ensure it is operational for at least is fully staffed and operational since 2o08. The Dm months leading to the point* records all external debt statistics by creditor. 1 Publish, on a quarterly basis and on a government Implemented First quarterly data report for end- website, data on external and domestic public and r D ~ e m b e 2008 Was Posted on the inkmet in February, publicly guaranteed debt, including debt stocks and 2009. Quarterly Publications have been regularly terms and conditions of new loan agreements for at published. least 6 months leading up to the completion point. ;overname Implement a revised investment incentive code to Implemented The Investment Incentives Act was ban granting tax exemptions outside the Liberia repealed and replaced by the Investment Act approved in Revenue Code (LRC). April 20 10. Fiscal incentives are applicable as specified in the revised LRC adopted in 2009. 9. At end-June 2009, the nominal stock of Liberia?s external debt amounted to US$1,772.6 million. Multilateral creditors accounted for US$ 1,066 million or 60 percent of total debt, of which IDA, IMF, and AfDB Group accounted for 4.0, 49.4, and 1.5 percent, respectively. Paris Club creditors accounted for 3 1.7 percent of total outstanding nominal debt at end-June 2009. Non-Paris Club creditors accounted for 7.0 percent of total debt, of which the main creditors remained Taiwan, Saudi Arabia, and Kuwait. 10. Liberia does not qualify for topping-up. The PV of debt-to-exports ratio at end-June 2009-after full delivery of the HIPC assistance committed at the decision point-is estimated at ?Harmonized? means that teachers are paid according to coherent payroll regulations. ?Regularized? means that they are paid with fixed periodicity and through an established and effective mechanism. 5 69.1 percent, which is 20.8 percentage points below the projection at time of the decision point. The PV of debt-to-exports ratio-after the full delivery of additional voluntary bilateral debt relief beyond the HIPC Initiative at end-June 2009- would further decline to 62.6 percent, which is below the 150 percent threshold for consideration of topping-up assistance defined under the enhanced HIPC Initiative.' IV. IDA'S DELIVERY OF ASSISTANCE UNDER THE ENHANCED HIPC INITIATIVE 11. IDA' share of debt relief under the HIPC Initiative is revised to US$373.6 million in PV terms. IDA has already provided debt relief above its estimated share of HIPC debt relief through the arrears clearance operation that amounted to US$394.1 million in nominal terms.6 12. No additional debt relief would be provided at completion point under the HIPC Initiative. V. IDA'S DELIVERY OF ASSISTANCE UNDER THE MDRI 13. Upon reaching the completion point under the enhanced HIPC Initiative, Liberia would also qualify for additional debt relief under the Multilateral Debt Relief Initiative (MDRI) and the IMF beyond-HIPC assistance and the European Union (EU) special debt relief initiative. Debt relief under the MDRI and the MDRI type of assistance from the IMF and the EU would reduce nominal debt service on average by US$13.7 million annually over a period of 20 years and would cover all remaining debt service obligations on eligible credit balances to the IDA, the IMF, the Africa Development Bank, and the EU. 14. IDA would provide debt relief under the MDRI amounting to US$66.9 million in nominal terms. IDA would provide MDRI debt forgiveness by irrevocably canceling the Liberia's debt service obligations for credits disbursed before end- 2003 and still outstanding at end-June 2010. MDRI debt relief from IDA would imply average debt service savings (net of HIPC assistance) of US$2.9 million per year over the next 25 years. The MDRI would result in the full cancelation of remaining IDA credits after HIPC relief. (See Figure 1). "Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Information Reporting in the Context of the HIPC Initiative Assistance" (IDNSecM2002-0 13 I). On December 5", 2007, IDA disbursed a grant amounting to SDR 270 million (or US$430 million equivalent) through the Reengagement and Reform Support Program for Liberia. Part of these funds was used to clear Liberia's arrears to IBRD (US$340.37 million in nominal terms) and IDA (USD 53.77 million in nominal terms). The remaining part of the grant was used to meet Liberia's foreign exchange needs associated with debt service during the interim period.. 6 Figure 1: Debt Service to IDA after HIPC Relief and the MDRI (Millions of US Dollars) 5 - Debt service before enhanced 4 - HIPC Assistance 4 - : I 3 - 1 C I 1 - .03 - .- I E2 - w3 v) \I 32 - I Debt Service after I I - I enhanced HIPC I I Assistance and 1 - I MDRI 1 0 I > ource: World Bank staff estimates. Debt service estimates based on debt outstanding as of end-2009. VI. PROSPECTS FOR LONG-TERM DEBT SUSTAINABILITYAFTER DEBT RELIEF UNDER THE ENHANCED HIPC INITIATIVE AND MDRI 15. After full delivery-at the completion point-f HIPC debt relief, additional bilateral assistance beyond HIPC and MDRI, Liberia's external public debt would be considerably reduced, and external debt indicators would improve. The PV of debt-to-exports ratio at end- June 201 1 would fall to 25.8 percent after delivery of MDRI assistance; this ratio would further decrease until end-June 2015 to 24.4 percent. Thereafter, the PV of debt-to-exports ratio is expected to increase to 27.2 percent by end-June 2030, mainly due to new borrowing. On average, the PV of debt-to-GDP and PV of debt-to-revenue ratios would also decline over the projected period (from 44 percent and 156.4 percent in FY2008/09-2018/19 to 16.7 percent and 67.1 percent in 2019/20 -29/30, respectively). VII. SATISFACTORY FINANCING ASSURANCES FROM THE REPUBLIC OF LIBERIA'S CREDITORS 16. At completion point, Liberia has received financing assurances by creditors accounting for 96.4 percent of the PV of HIPC assistance estimated at the decision point. Almost all multilateral creditors7 (of which IDA, the IMF, and the AfDB Group comprise 48.9 percent of ECOWAS has not confirmed its participation in the HIPC initiative. 7 total HIPC assistance) and all Paris Club creditors (3 1.3 percent of total HIPC assistance) have confirmed their participation. China provided outright cancellation of some of its claims. Through a buy-back operation supported by IDA'S Debt Reduction Facility (DRF), Liberia's commercial creditors provided debt relief comparable to that provided by Paris Club creditors. The authorities are working toward reaching agreements on provision of debt relief at completion point with all remaining creditors. The revised HIPC assistance in nominal terms is estimated at US$ 4.6 billion, which includes beyond HIPC assistance delivered by a number of creditors during the interim period. VIII. RECOMMENDATION 17. In view of the above, I recommend that the Executive Directors endorse the staffs' assessment contained in the completion point document concerning Liberia's fulfillment of all floating completion point conditions under the Enhanced HIPC Initiative. In this context, I recommend concluding that Liberia has reached the Enhanced HIPC Initiative's completion point and it qualifies for irrevocable assistance under the MDRI. Robert B. Zoellick President by: Ngozi N. Okonjo-Iweala Graeme Wheeler Managing Director Managing Director