By Seltue Karweaye
As the 26th president of Liberia, Joseph Nyumah Boakai inherits an economy that is grappling with inflation, chronic unemployment, extreme poverty, an enormous infrastructure gap, insecurity, etc.
Liberia’s debt profile stands out among these problems like a sore thumb. The external debt stock – what it owes non-residents – was US$1.3 billion in 2022. Multilateral lenders accounted for almost two-thirds of Liberia’s debt. The World Bank and the IMF are Liberia’s two largest external creditors. The country’s public debt stock – what the government owes in total – was about US$2.21 billion at the end of December 2023.
External debts can become a significant burden for countries as they are denominated and serviced in foreign currencies, which can lead to fluctuations in interest payments due to exchange rate changes. For example, if the currency of a debtor country depreciates, it may increase interest payments, negatively affecting the country’s budget. Furthermore, interest rates may rise, making it even more difficult for the country to manage its external debt.
The country’s debt profile, which includes the amount and type of debt, as well as the interest rates and repayment terms, should be a concern for Boakai and his team as they work to revitalize the Liberian economy. However, this concern need not hamper their ability to implement policies that reduce unemployment. poverty rates, infrastructure deficits, etc.
Is the current debt level in Liberia sustainable?
When evaluating a country’s debt sustainability, economists have a range of indicators at their disposal, however, two of these metrics stand out as the most commonly utilized and reliable. One of the indicators is gross debt as a percentage of gross domestic product (also known as the debt-GDP ratio). In Liberia, it is 52.7% in 2024. The average for sub-Saharan African countries was 56%.
Debt begins to harm an economy when the debt-GDP ratio surpasses 77% according to a World Bank report. In comparing debt to GDP ratios, Liberia’s ratio is moderate and significantly lower than the stipulated threshold of 77%. For example, Ghana’s debt to GDP has crossed the dreaded 77% to 98.7% in 2022, the country’s unsustainable debt levels forced the government to go back to the IMF for another bailout in July 2022– despite the IMF deal – Ghana isn’t out of trouble yet, the country’s debt to GDP stands at 81.5% in 2024.
[bsa_pro_ad_space id=1]
Moderate increases in Liberia’s national debt will unlikely lead to insurmountable repayment burdens within the next few years; however, reckless financing schemes aimed at supporting unnecessary infrastructure endeavors must be avoided as they could have adverse fiscal consequences. Instead, measures are needed to create an enabling environment conducive to encouraging investor confidence while fostering tangible progress in economic growth, employment generation, and poverty reduction.
Although the United States and Liberia differ in various aspects, the former has demonstrated that a high debt-to-GDP ratio does not necessarily constrain economic vitality. Despite having a debt-GDP ratio of approximately 126.9%; the US managed to reduce the unemployment rate to 3.8% while keeping inflation at a stable level of around 3.1%.
The debt service ratio, another indicator of debt sustainability, measures the portion of export earnings used to repay borrowed funds. A healthy rate is below 18%. Liberia’s debt-service ratio was 6.4% in 2022 and 3.7% in 2017. The 2022 number shows Liberia is getting closer to the point where servicing its debt would become a problem. In the 2016/2017 budget, debt servicing amounted to US$30.2 million (6.1% of recurrent expenditure), and by 2023, debt servicing amounted to 99.91 million (15.72% of recurrent expenditure) in the budget.
To alleviate Liberia’s increasing debt burden, the Boakai administration must prioritize boosting the country’s revenue. With one of the lowest revenue-GDP ratios, Liberia registered 27.3% government revenue as a percentage of GDP. Unfortunately, average annual government revenue declined by 0.05% between 2015 and 2021.
Liberia’s reliance on iron ore and rubber as major sources of revenue implies that revenues will continue to fall with the prices of iron ore and rubber, given uncertainties in the global iron oil and rubber market. The economic growth of Liberia slowed down between 2022 and 2023, specifically from 4.8 percent to 4.6 percent, which also negatively impacted the country’s ability to generate revenue.
In addition, President Boakai stated in his State of the Nation Address (SONA) that government expenditure has been growing faster than expected, resulting in a significant budget deficit of over US$80 million as revealed by Revenue collection reported for 2023 standing at US$710.23 million while totaling expenditure was recorded as US$796.32 million.
In 2024, the International Monetary Fund (IMF) reported that Liberia’s debt-revenue ratio was 18.1%, which is a consequence of dwindling revenue leading to high debt-revenue ratios and creating an unending cycle of borrowing for government expenditures as more revenues are devoted towards servicing existing debts thereby increasing the overall debt burden. Liberia’s debt-to-revenue ratio might be lower, but the proportion of external debt service to revenue is alarmingly high. In the 2022 budget, Liberia spent $105 million on debt servicing which includes interest payments and principal repayment, however, $79.6 million was specifically utilized for settling external debts.
The Boakai administration must be mindful of the country’s debt profile and avoid exacerbating it through prudent management of Liberia’s debt, steering clear of the financial mismanagement that characterized the early 2000s when the debt-to-GDP ratio soared beyond 80%. To improve the current state of affairs, Bokaia’s administration must reduce governance costs and eliminate wasteful spending. This can be achieved by streamlining processes, cutting unnecessary expenses, and implementing more efficient systems. Additionally, measures should be taken to combat corruption while also exploring alternative methods for addressing economic problems that do not rely solely on perennial borrowing which can lead down a dangerous path towards unsustainable indebtedness.
Given the current low revenue and the numerous projects announced in his SONA aimed at promoting economic growth, employment generation, and poverty reduction in Liberia, the Boakai administration will have to continue implementing deficit spending policies. However, this approach is mainly financed by domestic and external borrowing. To change the prevailing narrative about the risks associated with investing in Liberia, the Boakai administration must prioritize introducing policies that strengthen the nation’s economic foundation and increase its attractiveness to potential investors.
In conclusion, a country’s debt stock, although often viewed as a critical factor in assessing its economic health, pales in comparison to the significance of the quality of its economic policies. Well-crafted and effectively implemented economic policies have the potential to generate budget surpluses that can be utilized to repay debts. Economic growth and expansion require a strategic approach that includes investment in physical capital like roads and electricity, infrastructure, and access to capital for businesses of all sizes. Moreover, prioritizing tourism and agricultural development can significantly contribute to the overall economy and lead to long-term success.
