The latest World Bank report on Liberia’s economic growth paints a mixed picture of hope and despair. However, a concerted effort and the government’s commitment could transform hope into sustained economic growth.
By Othello B. Garblah
Monrovia, September 13, 2024/ Economic growth in Liberia is still fragile despite showing signs of a rebound, according to the 2024 Liberia Economic Update 5th edition released by the World Bank on Thursday, September 12.
The report says economic growth rebounded over the past three years but remained fragile due to increased macroeconomic vulnerabilities.
It acknowledged the industrial sector as the key driver of Liberia’s economic growth, particularly in 2023, but noted that structural issues continue to hinder Liberia’s economic diversification and resilience.
The report, Powering Growth with Reliable, Affordable, and Sustainable Energy Access, offers a comprehensive analysis of recent economic developments in Liberia and outlines the crucial role of reliable energy in fostering sustainable growth.
The update also highlights key advancements in the country’s energy sector, including notable progress in power generation and the expansion of energy access.
However, despite these gains, the country faces significant power shortages, calling for substantial investments to achieve reliable, affordable, and sustainable energy access for all Liberians.
World Bank Liberia Country Manager Georgia Wallensaid during the launch that “The National Electrification Strategy of Liberia, developed by the Government with support from development partners, sets out bold plans to achieve universal energy access by 2030 through a combination of grid expansion, densification, utility revenue protection programs, and off-grid solutions.“
“The World Bank is actively backing these initiatives, with strong focus on increasing generation capacity to reach Liberians nationwide and promote Liberia’s transition toward sustainable growth and development,” she added.
The report also mentioned the importance of strengthening fiscal discipline to ensure macroeconomic stability, citing it as a critical factor in attracting foreign and domestic investments.
“This stability – essential for improving the business climate – requires a comprehensive approach, combining legal, regulatory, and practical reforms to foster private sector growth,” the Bank stated in a statement.
“Ambitious reforms are essential to foster private sector participation in both the economy and the energy sector,” said Gweh Gaye Tarwo, Liberia Country Economist and lead author of the report. “Without transformative reforms to enhance the business environment and competitiveness, increased private sector involvement cannot be achieved,” he added.
Excerpts of the report:
Economic growth has rebounded over the past three years but is still fragile due to increased macroeconomic vulnerabilities.
Growth rebounded in 2021 and has hovered around 5.0 percent, but Liberia’s f iscal and current account deficits have been elevated.
In 2023, Liberia’s economy grew by 4.7 percent, primarily driven by the mining sector. Meanwhile, the country’s fiscal deficit increased by 0.5 percentage points of GDP to 6.1 percent, mainly due to reduced domestic revenue and overspending. Liberia partly financed this increased deficit through inflationary debt monetization.
The gap between savings and investment widened to an excessively high level, resulting in a current account deficit of 24 percent of GDP. This led to a decline in foreign exchange reserves and a depreciation of the exchange rate by 22 percent in 2023. Consequently, inflation rose to a double-digit rate of 10.1 percent, up from 7.6 percent in 2022.
The country’s gross external reserves decreased to USD 496 million (about 2.3 months of imports) from USD 644 million (3.0 months of imports) in December 2022. Noteworthy, Liberia remained at a moderate risk of external debt distress and a high risk of overall debt distress with a public debt ratio of 57.5 percent of GDP in 2023, up from 55.4 percent in 2022. The industrial sector has been a key driver of Liberia’s economic growth, particularly in 2023.
The industrial sector, comprising gold mining and construction, experienced a significant 16.4 percent increase in gold production, contributing 2.5 percentage points to the overall economic growth in 2023.
The construction, cement, and beverage sectors also played a meaningful role in boosting industrial output. The services sector, driven by improvements in financial, hospitality, trade, and transport services, grew by 3.8 percent.
However, the agriculture sector lagged with only 1.4 percent growth due to declines in cocoa, palm oil, and rubber production, influenced by global price drops and export restrictions.
The primary growth drivers on the demand side were private consumption, heightened public investment, and increased gold exports, which have shown resilience in the face of economic challenges.
Structural issues continue to hinder Liberia’s economic diversification and resilience. The weak performance iii of the agriculture sector in 2023 underscores the urgent need to address these challenges.
Global price drops for cocoa, palm oil, and rubber, export restrictions, and other structural challenges caused a decline in key agricultural production. The services and industrial sectors, while showing signs of improvement, still faces challenges in achieving sustained strong growth. Limited access to technology, poor infrastructure (i.e., road and energy), weak factor and product markets, and inadequate investment are significant issues that must be addressed to improve productivity and growth in these sectors.
Significant improvement in the overall business environment and investment in education emphasizing learning outcomes will also be critical for unlocking the country’s growth potential.
Sustaining growth also requires addressing macroeconomic and fiscal challenges. Amidst shifting overseas development assistance and global investment trends, taking concrete steps to address macroeconomic and fiscal challenges is necessary to generate the resources needed to support public investment for a better Liberia.
The implementation of the recently enacted value added tax (VAT) law will help boost domestic resource mobilization. On the expenditure side, the full utilization of existing systems such as the Integrated Financial and Management Information System (IFMIS) and the rollout of an electronic procurement system will help enhance expenditure management and improve governance in the near term.
On the monetary front, ending the monetization of the fiscal deficit and taking concrete steps towards de-dollarization would help enhance the effectiveness and credibility of monetary policy. In addition, significant improvement in the overall business environment, investment in education emphasizing learning outcomes, and accelerating the implementation of existing infrastructure projects, particularly roads and energy, will be critical for unlocking the country’s growth potential.
Achieving universal access to electricity remains a crucial challenge for supporting Liberia’s economic growth, public service delivery, and household well being. Recent achievements by the Liberia Electricity Edition No. 5 | June 2024 Corporation (LEC) are showing promising signs that the country is on the right path to achieve universal electricity access targets in a reliable, affordable, and sustainable manner. Over the past few years, the commercial losses have dropped substantially from about 47.7 percent in 2021 to about 31.4 percent in 2023. At the same time, the number of customer connections has almost doubled from 142,947 in 2021 to 282,505 in 2023. Despite these advances, urban-rural disparities persist, with about two thirds of the population still lacking access to electricity.
Efforts are ongoing to bridge these disparities. The National Electrification Strategy of the Government of Liberia, supported by development partners, lays ambitious plans for universal access by 2030 through a combination of grid expansion, densification, utility revenue protection program, and off-grid solutions.
The Liberia Electricity Sector Strengthening and Access Project (LESSAP) Phase 1 and the recently approved LESSAP Phase 2, financed by the World Bank, support these endeavors. The current generation capacity, however, is insufficient to meet the demand, often resulting in persistent blackouts that worsen during the dry months and have adverse implications on households and firms in terms of costs and productivity loss.
With a growing demand for electricity, driven by improved access and economic growth, development of generation plants through low-cost renewable sources is ever more critical for Liberia’s goal of achieving middle-income status by 2030. Liberia’s Priority Investment Plan includes expanding the capacity of Mt. Coffee hydropower plant, installing utility-scale solar photovoltaic plants, developing Saint Paul 2 hydropower plant, and improving grid infrastructure to ensure reliable and affordable electricity supply.
Concerted efforts and reforms are needed to sustain and advance these gains. The country has embarked on extensive legal and institutional reforms, including the establishment of the Liberia Electricity Regulatory Commission (LERC) in 2015 to improve governance in the sector and a successful transition from a Management Service Contract to a full-time local management team at LEC, which led to substantial improvements in its operations and management.
Liberia has also tripled its electricity generation capacity over the past decade, raising access from less than one-tenth to about one-third. However, challenges persist, such as weak financial health of the utility due to power theft and unpaid bills, which hampers its ability to maintain and develop infrastructure and attract private investments and capital needed to implement these plans.
The LEC’s financial instability and inability to cover operating costs and settle debts present a substantial fiscal burden for the government. Additionally, weak regulatory enforcement has limited private sector participation in the energy sector, further constraining opportunities for reliable electricity supply and access expansion.
Addressing the sector’s challenges requires a comprehensive action plan to enhance sector revenues, improve distribution efficiencies, promote private sector participation, and implement new energy projects. Ambitious reforms are needed for private sector participation in the economy and energy sector.
Aspirations of increased private sector participation in the economy and the energy sector cannot be realized without ambitious reforms to improve the business environment and sector competitiveness. Liberia’s infrastructure deficit presents opportunities for private sector investment from foreign and domestic investors.
As Liberia seeks energy security while considering climate and environmental goals, there is potential for investment in utility-scale solar energy generation. The global outlook is positive, with private sector investment in clean energy reaching $1,174 billion in 2022. With vast unutilized land, renewable energy potential, and favourable climatic conditions, Liberia is well-positioned to attract a share of the USD 10 billion investment in clean energy flowing into Africa.
Overcoming barriers to private sector investment in Liberia is imperative for future growth. Liberia can potentially benefit from the increased demand for critical minerals essential for clean energy technology, provided more data on its mineral assets are available. However, Liberia must overcome a relatively uncompetitive business environment to attract or expand private sector investment.
Key global indices indicate that Liberia’s business environment hinders opportunities for private sector investors to generate returns, further exacerbated by high finance costs, the weak financial position of the LEC, weak purchasing power, high start-up costs, inadequate public infrastructure, and a lack of required skills in the domestic labor market.
Leadership and coordination are essential for impactful reforms. Leadership, coordination, and prioritization are crucial for impacting the business environment and sector reform agenda. The government has expressed its commitment to private sector-led growth and leveraging private sector investment in key sectors, including energy. To transform this goodwill into tangible impacts, transparent leadership, a robust coordination mechanism inclusive of private sector representatives, and prioritization of reforms are needed. Improving Liberia’s business environment requires a mix of legal v and regulatory reforms and practical interventions to support the private sector.
Specifically, driving investment in the energy sector requires short, medium, and long term priorities: establishing laws, regulations, and institutions to support public-private partnerships (PPP); sustaining sector reforms to lower risks; investing in grid infrastructure; developing sustainable finance products and mechanisms; inclusive investment efforts for domestic investors; providing incentives to lower costs for renewable energy technologies; and maintaining a stable macroeconomic environment.
