Executive Summary and Action Matrix

1

LIBERIA
December, 2008

TABLE OF CONTENTS

VOLUME ONE

PREFACE

EXECUTIVE SUMMARY AND ACTION MATRIX

1.Growth, Trade and Macroeconomic Policy

Basic Macroeconomic Conditions

Foreign Trade and the Balance of Payments

Government Finances

Money Supply, Inflation, and Interest Rates

Foreign Exchange Market

Key Issues

Recommendations

2.Financial Services

Financial Sector Institutions

Key Issues

Recommendations

3.Investment Climate and Institutions

Infrastructure

Access to Land

Utilities

Other Investment Climate Constraints

Institutions and Regulatory Framework

4.CUSTOMS AND TRADE FACILITATION

Current Setting

Reforming the Trade Logistics System – Issues and Challenges

Quick Wins and Momentum Building

Moving Towards Best Practice in Border Clearance

5.Agricultural Tree Crop Value Chains

Sources of Agricultural Growth.

Specificities of Each Value Chain.

Main Structural Constraints

Elements of a Tree Crop Development Strategy

6.MINING AND PETROLEUM

The Liberian Mining Industry

The Legal and Regulatory Framework

Small-Scale Mining

Recommendations:

7.Wood Products

Alternative Strategies for Adding Value

The Roll-out Plans for Log Production and Exports

A Long-term Value-added Scenario

Non-Timber Forest Products

Policy, Regulatory and Fiscal Frameworks

Recommendations

8.Fisheries

Ensuring Increased Recognition

Improving Sector Governance and Management

Reducing Illegal, Unregulated and Unreported (IUU) Fishing

Eliminating Factors Detrimental to Trade and Value Added.

Recommendations

9.Trade Policy and Institutions

Import and Export Policy

ECOWAS and Regional Integration

Preferential Agreements

Accession to the World Trade Organization (WTO)

The Institutional Structure for Trade Policy

Export Promotion

Quality and Standards

Coordinating Mechanisms

Recommendations

Annexes

Annex A: Full Action Matrix

Annex B: Cocoa and the Role of the Public Sector

Annex C: The Import Trade Regime and the Food Price Crisis

Bibliography……………………………………..……………………………………………143

VOLUME TWO: BACKGROUND PAPERS

1. TREE CROP VALUE CHAINS
2. WOOD PRODUCTS
3. FISHERIES

Tables

Table 1.1: Basic Economic and Social Indicators for Liberia by Decade (1960-2000)

Table 1.2: Sector Composition of GDP (%)

Table 1.3: Key Recent Economic Indicators (2004-2008)

Table 1.4: Major exports of Liberia: 2000-05

Table 1.5: Recent Average Interest Rates

Table 1.6: Liberian Dollar Exchange Rates – End of Period (2005-2007)

Table 2.1: Assets, loans, and deposits, of Liberian banks (2004-2006)

Table 2.2: Commercial Banks’ Loans by Economic Sector

Table 4.1: Stakeholders in the Trade Transaction Process

Table 5.1: Potential increase in production and export earnings, 2020

Table 8.1: Summary of potential annual benefits of proposed actions

Figures

Figure 1.1: The Evolution of real GDP per capita – 1960-2002

Figure 1.2: Sources of Government Revenue (2006)

Figure 4.1: Liberia’s time to export (calendar days): 20 days

Figure 4.2: Liberia’s time to import (calendar days): 10 days

Figure 5.1: Comparison of Post-Crisis Growth by Sector: Ethiopia, Mozambique, and Uganda

Figure 6.1: Chain of Management of Natural Resources

Figure 6.2: Location of Iron Ore Mines and deposits

Figure 7.1: Roll out Plans for the Forest Concession Areas in Liberia

Figure 7.2: Roll-out Plans of the Commercial Logging Volumes in Liberia

Figure 7.3: Estimated Log Export Value and FDA Direct Revenue in Liberia

Figure 7.4: Long term Projection of Output : Logs and Finished Products

Figure 7.5: Long-Term Export Fee Forecast from Logs and Wood Products

Boxes

Box 6.1: The elements of a legal and regulatory framework for the mining sector

Box 6.2: Poverty and Social Impact Assessment on Artisanal Diamond Mining

Box 9.1: The process of accession to the WTO

CURRENCY EQUIVALENTS

(Exchange Rate as of June 3, 2008)

Currency unit = / Liberian Dollar (LD)
US$1.00 = / LD63.5

ABBREVIATIONS

ACP
ADB / Africa, Caribbean and Pacific (countries)
African Development Bank
AGOA
ATIBT
BNF
BoB / Africa Growth and Opportunity Act
Association Technique Internationale des Bois Tropicaux
Bureau of National Fisheries
Bureau of the Budget
CA
CBL / Competent Authority
Central Bank of Liberia
CBMO / Community-Based Management Organization
CD
CET / Certificate of Deposit
Common External Tariff
CPI / Consumer Price Index
CPO
DFID / Crude Palm Oil
Department for International Development
EBA / Everything But Arms
EC / European Commission
ECOWAS / Economic Community of Western African States
EDF
EEZ / European Development Fund
Exclusive Economic Zone
EITI / Extractive Industries Transparency Initiative
EPA
EPD
ERC / Economic Partnership Agreement
Export Permit/Declaration
Economic Revitalization Committee
ETLS
FDA
FDI / ECOWAS Trade Liberalization Scheme
Forestry Development Authority
Foreign direct investment
FIAS / Foreign Investment Advisory Service
FMC
FPA / Forestry Management Contract
Fisheries Partnership Agreement
FTI / Forestry Training Institute
GEF / Global Environment Facility
GEMAP / Governance and Economic Management Assistance Program
GSM
HACCP
HIPC / Global System for Mobile (communications)
Hazard Analysis Critical Control Points
Heavily Indebted Poor Countries
ICTA / Investment Climate Team for Africa (IFC)
IFC / International Finance Corporation (World Bank Group)
IMF / International Monetary Fund
IPD
I-PRSP / Import Permit/Declaration
Interim Poverty Reduction Strategy Paper
ITC
IUU / InternationalTradeCenter
Illegal, Unregulated and Unreported (fishing)
LBDI
LDC
LEAP
LEC
LEDFC
LISGIS / Liberia Bank for Development and Investment
Least Developed Country
Local Enterprise Assistance Program
Liberia Electricity Corporation
Liberia Enterprise Development Finance Company
Liberian Institute of Statistics and Geo-Information Services
LPMC
LRC
LRDC / Liberia Produce Marketing Corporation
Liberia Revenue Code
Liberia Reconstruction and Development Committee
LTA
LUS
LWSC
MCI
MCS
MDA
MEA
MFI
MLME
MoA
MoD
MoE
MoF / Liberian Timber Association
Lesser Used Species
Liberia Water and Sewer Corporation
Ministry of Commerce and Industry
Monitoring, Control and Surveillance (of fisheries)
Mineral Development Agreement
Mineral Exploration Agreement
Micro-finance Institution
Ministry of Land, Mines and Energy
Ministry of Agriculture
Ministry of Defense
Ministry of Education
Ministry of Finance
MoFA
MoH
MoJ
MoU
MPEA
MP&R
MPW
MRU
NIC
NBFI
NCC
NGOs
NMML
NPA
NTFP / Ministry of Foreign Affairs
Ministry of Health
Ministry of Justice
Memorandum of Understanding
Ministry of Planning and Economic Affairs
Marine Protection and Rescue Services Ltd.
Ministry of Public Works
ManoRiverUnion
National Investment Commission
Non-bank Financial Institution
National Coordinating Committee
Non-governmental Organizations
New Minerals and Mining Law
NationalPort Authority
Non-TimberForest Products
PPCA / Public Procurement and Concessions Act
PPCC
PPP / Public Procurement and Concessions Commission
Public Private Partnership
PRS / Poverty Reduction Strategy
PSI / Pre-shipment Inspection
RCL
SAD
SEZ
SME / Revenue Code of Liberia
Single Administrative Document
Special Economic Zone
Small and Medium Enterprise
STCP / Sustainable Tree Crop Program
TSC / Timber Sales Contract
UNMIL / United Nations Mission in Liberia
USAID / United States Agency for International Development
VMS / Vessel Monitoring Systems
WAEMU
WTO / West Africa Economic and Monetary Union
World Trade Organization

1

PREFACE

This Diagnostic Trade Integration Study (DTIS) has been prepared under the Integrated Framework (IF) for Trade Related Technical Assistance to Least Developed Countries in response to a request from the Government of Liberia.[1] The ultimate objective of the study is to build the foundation for accelerated growth by enhancing the integration of its economy into regional and global markets.

A preliminary mission was held in July 2007 to discuss the objectives and priorities of the study and to promote ownership of the process by the authorities. Terms of reference were then prepared and transmitted to the Government for approval. The main mission, consisting of national and international consultants, visited Liberia in November 2007. A technical workshop was held in February 2008 to review the draft report. The study has been reviewed internally within the World Bank, and among the IF agencies and selected donors. The report and its Action Matrix are now read to be discussed during a validation workshop, to be held July 17-18, 2008.

The members of the main mission, and their areas of responsibility, were as follows: Philip English (World Bank, task team leader, trade policy), and the following consultants: Jean-Paul Chausse and Franklin Philips (tree crops), Graeme Macfadyen (fisheries), Michel Mueller and Jonathan Mason (mining), Andrew Singer (investment climate and trade institutions), Dirck Stryker (macroeconomics, financial sector and import policy), and Jukka Tissari and Anthony Taplah (wood products). Uma Subramanian and Peter Yee of FIAS contributed most of the material on customs and trade facilitation.

The study team wishes to thank the Government of Liberia and notably the Minister of Commerce and Industry, Frances Johnson-Morris, and the national focal point, Amin Modad, for their support to the DTIS process. We also thank Antoinette Sayeh, Minister of Finance, Christopher Toe, Minister of Agriculture, John Woods, Managing Director, Forestry Development Authority, and Yevewuo Subah, Director of the Bureau of National Fisheries, for their interest in the study and their active participation in various meetings and workshops. Finally, we owe a special word of thanks to Josette Percival and Felton Yeayen for their dedication and professional administrative support throughout the entire process.

EXECUTIVE SUMMARY AND ACTION MATRIX

1. Liberia is a rich country, badly managed. This is a favorite comment of President Ellen Johnson-Sirleaf and an accurate one. The bad management is well-known, though perhaps not its duration and depth. Created in 1847, the country is far older than almost all others in sub-Saharan Africa. But for most of this time, it was ruled by an elite descended from African-American settlers who ignored or exploited the indigenous people. The result was growth without development, stark inequality, social tension and the seeds of unrest. The political order was turned upside down in a bloody coup in 1980, but bad management continued. Within ten years the country descended into civil war from which it only emerged in 2003. The 90 percent decline in GDP is possibly the most extreme economic collapse ever experienced in the world.
2. Less understood is the tremendous natural wealth of the country. It enjoys plentiful rainfall, a long coastline and ample land for its small population. Its seas are rich in fish, its streams carry diamonds and gold, its bedrock holds iron ore and other minerals, its forests are the most extensive remaining in West Africa, and its soils produce a variety of food and commercial crops. Liberia is the second largest exporter of rubber in sub-Saharan Africa and has the largest unbroken rubber plantation in the world. It has exported palm oil in the past and will do so again in the near future, as its agro-climatic conditions for oil palm are probably the best in West Africa. There is also enormous untapped potential for cocoa, as it enjoys the same conditions as neighboring Côte d’Ivoire, the largest cocoa exporter in the world.
3. Liberia’s comparative advantage clearly lies in natural resource-based industries. It is blessed with ample resources to pull its small population out of poverty and move it well along a sustainable development path. Many other countries have exploited their natural resource base with great success –from Botswana and Chile, to the Nordic countries, Australia and Canada. With the current boom in commodity prices, there should be no doubt that this remains the most promising strategy for Liberia for the foreseeable future. As the limits to growth imposed by the small, poor domestic market are reached, it will be critically important to exploit the virtually unlimited global demand for resource-based products. But, with its limited human and financial resources after 15 years of war, Liberia needs to have a well-focused strategy.
4. The challenge is to manage the rehabilitation and expansion of these resource-based industries better and differently than in the past. All components of Liberian society must participate directly through employment or indirectly through the distribution of rents. Government must see that the tax revenues it collects are used for the benefit of everyone, but also that the rules of the game ensure that private companies work with local communities, smallholders and local suppliers. It will need to invest in the infrastructure and education necessary to promote competitive value-added activities.
5. This study lays out a comprehensive pro-poor trade strategy in support of the medium-term growth agenda of Liberia. It places special emphasis on tree crops as their development could benefit some 450,000 households, which is equivalent to almost one-half of the rural population today. More specifically, six key elements deserve attention:

• Strong support to outgrower schemes in rubber and oil palm through institutional and regulatory mechanisms;
• Promotion of the smallholder cocoa sector;
• Assistance to small-scale miners to improve productivity, working conditions and their share of the benefits;
• Careful management of the relationship between local communities and concession holders in mining, tree crops, and forestry;
• Encouragement of finance for micro, small and medium enterprises owned and managed by farmers, processors, and traders;
• Transparent management of resource rents from large-scale mining, forestry, and fisheries, to ensure that government receives its fair share and that it uses them for the benefit of the poor.
• The new Poverty Reduction Strategy (PRS) for Liberia recognizes all this. Indeed, this Diagnostic Trade Integration Study (DTIS) and the PRS were developed in parallel and with considerable cross-fertilization. A joint workshop was held on the productive sectors in February 2008. The role of this study is therefore to reinforce the message contained in the PRS, deepen the analysis, and offer some practical next steps.

Macroeconomic policy, trade and growth

1. Economic growth has picked up strongly since the end of the civil war, reaching an estimated 9.5 percent in 2007. This is what one would expect as peace enables businesses to reopen, homes to be rebuilt, and farmers to return to their land. Much of this growth has been driven by the basic needs for goods and services in the domestic market, including demand generated by peacekeeping operations, foreign aid, and remittances. Exports have played a modest role, notably rubber which has accounted for over 90 percent of total exports in the past four years, and quadrupled in value during this period. There is still much room for expansion in services and efficient import-substitution as the economy returns to a more normal level of operation. However, soon the limitations of the small and poor domestic market will start to bind, and exports will play a critical role in sustaining the high rates of economic growth necessary to fight poverty. It is important to lay the foundations for successful export development today.
2. Sound macroeconomic management is always the first component of competitiveness. It encourages domestic and foreign investment by controlling inflation, limiting interest rates, maintaining taxes at reasonable levels, and preventing dramatic swings in the real exchange rate. The Government of Liberia is rapidly gaining the respect of donors and investors for its fiscal and monetary prudence, and its commitment to reform. While there remains a long list of measures still to be taken, the Government is aware of most of them and has plans to deal with many.
3. Two key issues emerge from our analysis: management of the exchange rate, and the choice of the currency standard. A modest appreciation of the real exchange rate of the Liberian dollar relative to the U.S. dollarappears to be taking place, but this is not surprising given the inflows of foreign aid and the expansion of exports. This trend will probably continue as foreign investment and exports accelerate, notably with the development of iron ore. This is unlikely to hurt the traditional exports of Liberia as they are all commodities and most of these are enjoying significant increases in their world market prices. Any appreciation in the real exchange rate will, however, reduce the price which can be paid to farmers and employees. It will also have an impact on the competitiveness of import-substituting activities. Therefore, it will be important that foreign aid serves to improve the efficiency of export and import-competing industries, and is not devoted exclusively to expenditures which increase local demand and, hence, inflation.
4. The second important issue is whether to move to a complete US dollar standard or to try to decrease the importance of US dollars in the economy relative to Liberian dollars. There are a number of arguments on both sides. Liberia does not need to formulate a strategy at this stage; there are far more important items on the public sector agenda. What is important is for the government to monitor underlying trends in the holding of US and Liberian dollars through its liquidity monitoring framework, build on the smaller denominations of Liberian dollars as an important component of the demand for this currency, and examine other ways in which the availability of Liberian dollars provides services to Liberian citizens and especially the poor. What the government should not do is to try to promote the holding of Liberian dollars through regulatory interventions that distort the currency market. A preferable approach would be to allow the situation to evolve naturally based on people’s preferences and to give them as much choice as possible regarding the currencies they choose to hold, receive, or pay out. Such an approach is consistent with the government’s goal of building confidence in the Liberian dollar.

Financial Services

1. Financial services are critical for many actors involved directly or indirectly in export supply chains. Larger firms have relatively good access to capital from their own resources, overseas banks, and local banks. It is small entrepreneurs that face the greatest obstacles. The financial sector in Liberia remains weak. The commercial banks depend heavily on non-interest sources of income, and do little lending. The two microfinance institutions are small and, like the banks, mostly limited to Monrovia. The regulatory status of other financial institutions is uncertain, and in some instances they may be undermining the development of the financial sector by providing credit on highly subsidized terms.
2. There is an urgent need to define clearly the legal status of microfinance institutions. This will provide a regulatory structure and permit the establishment of deposit-holding microfinance banks that can mobilize savings as well as extend credit. Development of financial services requires the establishment of linkages between the various institutions. Today the sector is not well integrated and, in many ways, it is far from sustainable. Access is very unequal, with rural areas, the poor, and small and medium enterprise (SME) at a particular disadvantage. The increased involvement of banks with retail banking involving microfinance is encouraging. However, bank refinancing of microfinance institutions will have to wait until the latter are no longer able to rely on cheaper NGO funding of their loan capital and operating costs.
3. Another issue is the relationship that exists between other types of non-bank financial institutions and the commercial banks. When the Liberia Enterprise Development Finance Company (LEDFC) was first established, there was concern that it would compete unfairly with the commercial banks, thus undermining the development of the banking sector. This issue was resolved when LEDFC agreed to route some of its lending via the commercial banks. However, other non-bank financial institutions are lending at zero or highly subsidized rates of interest, often paid for by donors or international NGOs, thus undercutting the commercial banks and microfinance institutions.
4. A profitable and sustainable financial sector is good for economic growth and poverty reduction. Unfortunately, there is still a strong sentiment that poor people cannot afford to pay high interest rates – that they need to receive grants or highly subsidized loans. But accumulated experience has shown that poor people need to be able access capital when they need it, and they are willing to pay for it. Furthermore, the development of a viable financial sector depends on being able to cover all costs, including those associated with taking risks and administering many small loans. It is important that financial sector development not be subverted by unfair competition from subsidized lending programs. All lending programs should therefore come under the oversight of the central bank or another supervisory authority to assure that they do not undermine the development of a sustainable financial sector.
5. The financial sector in Liberia could evolve simultaneously in two different directions. One would involve the presence of international and regional banks that would compete less with local banks than with overseas banks. At the same time, the local banks, in collaboration with microfinance institutions, credit unions and other associations, could develop their comparative advantage in servicing SMEs and in extending financial services into rural areas. The government needs to consider this option, consult with existing banks and other financial institutions, and then establish the necessary legislation.

Investment Climate and Institutions