External Debt and Political
Chaos: Future of Liberia's Economic Policy
By Geepu Nah Tiepoh
Liberians should be mindful of two important forces that now affect both their present economic reality and the future of their economic development policies. Huge external debt overhang and increasing domestic political paralysis have now combined to not only prevent current development opportunities but also endanger the domestic autonomy and direction of economic policy in Liberia. In the present context of global economic adjustment, excessive external debt always entails the danger of the imposition of international policy prescriptions that often overlook critical domestic economic, social, and human development concerns. This has already been experienced in most African and other developing countries, where the persistence of external debt crises in the last two decades has facilitated the enforcement of international economic policy regimes that have in large part failed to protect human and socioeconomic development. This negative influence of external debt crisis on the domestic control of economic policy is not homogeneous across countries. Its actual effect depends on the quality of the specific domestic political context. Under stable and capable political regimes, governments are able to utilize and expand existing spaces in their relations with international institutions, thereby achieving the capacity to extract relatively meaningful policy concessions and autonomy from international institutions. But when inept and fragile regimes, like the current political situation in Liberia, are combined with external debt crisis, this creates a recipe not only for widespread economic deprivation but also for the abandonment and mortgaging of national economic policy.
It is true that the distinction between what may be termed "domestically" and "internationally" determined economic policies has blurred over the years, especially in light of the process of economic globalization. However, in terms of the degree of influence exercised by domestic authorities in designing economic policies and the controllability of policy outcomes, one could theoretically distinguish fiscal and monetary policies as domestically 'fully controllable', while those macroeconomic policies falling in the areas of foreign trade and capital movement could be considered as 'partially controllable'. Domestic autonomy of national economic policy could also be measured by the extent to which citizens and 'civil society' groups of a country have the freedom and capacity to effectively decide the economic policy direction of their country. This latter measure of policy autonomy is very important since domestic government authorities and the larger civil society may have divergent policy preferences, and therefore a greater control of economic policy by domestic authorities may not necessarily represent real domestic policy autonomy in the broader sense of the word. Notably, there is a great deal of interdependence among the above classifications of economic policy control. But the central argument here is that the combination of excessive external debt and political vulnerability and chaos, as in the current Liberian situation, tends to cause countries to not only suffer economic deprivations in the present but also lose greater control over the destiny of their economic policies.
Since the first half of the 1980s when Liberia sought and obtained four Paris Club and two commercial bank reschedulings, the national debt problem has virtually been pushed under the rug, with no effective government plan to address the growing debt burdens of the country. Consequently, according to an IMF Staff Country Report (April 2000), arrears on the external public debt quickly accumulated, reaching as much as US$50 million in 1984 and further rising to US$863 million in 1988. By 1988 the total external debt stock of the country had risen to US$1.8 billion (or 164 percent of GDP), from US$726 million (or 75 percent of GDP) in 1982. Over the same period (1982-88), the country's debt-service payments had ballooned from US$45 million (9 percent of export earnings) to US$197 million (40 percent of export earnings). The outbreak of civil war in the 1990s further worsened the national debt profile, as successive interim and provisional governments virtually abandoned debt-service payments, resulting in the fast accumulation of arrears. Apart from the rare occasions, such as the grand payment of one million dollars made to the IMF in 1994 by the LNTG government, the country virtually avoided the debt problem. The Taylor government has been paying only US$50,000 monthly to the IMF. As a result, the external public debt rapidly accumulated and climbed to US$2.6 billion at the end of 1999. This figure (US$2.6 billion) was derived by the IMF Staff and Liberian government officials as a provisional estimate pending a complete loan-by-loan review of the external debt. Current sources now put the country's debt at US$3.5 billion. Another key fact to remember about the debt is that almost all of it (US$2.3 billion) represents accumulated arrears, and not new loans. This makes the debt problem even more urgent since it means that most of the debt is already overdue.
Whatever the precise amount, Liberia's external debt has now become highly unsustainable and problematic. By the way, for the sake of the general reader, we should make a quick detour to clarify that what we are talking about here is not the Government of Liberia's domestic debt of US$120 million, 22 percent of which (or US$26 million) is said to be owed to the defunct National Patriotic Reconstruction Assembly Government of president Taylor. We are talking about the appropriately US$3 billion that Liberia owes to foreign entities (over 50 percent to multilateral institutions; about 30 percent to bilaterals; and 15 percent to commercial banks). This level of external debt, given Liberia's low income, has made the debt indicators of the country worse than the average indicators of all sub-Saharan African (SSA) countries and those of the Heavily Indebted Poor Countries (HIPCs). For example, the country's 1999 debt-GDP ratio of 570 percent was five times the average debt-GDP ratio (111 percent) of all SSA countries, and it was more than 10 times that of the HIPCs (which was only 53 percent). Second, Liberia's external debt per capita of US$1,064 for 1999 (i.e. the external debt of each Liberian) was three times the average for either the SSA or HIPC countries. This level of per capita external debt is exceedingly high given the fact that Liberia's per capita income for 1999 was only US$187. Moreover, in terms of the amount of export earnings that debtors must commit to debt-service payments, Liberia is again in the worst situation. For 1999 her Debt Service-to-Exports ratio was 70.8 percent, compared with the averages of 28.9 and 10.7 percent for all SSA and HIPC countries, respectively.
Such a dismal external debt profile, as outlined above, is intrinsically bad for the health and autonomy of a country's economic policy. Even the most stable, capable, and serious-minded governments must work very hard under such intense debt pressures to extract any meaningful debt relief and economic policy concessions from international creditor institutions and foreign governments. However, those African governments with some semblance of stability, effectiveness, seriousness, and national purpose are at least able to consistently engage international creditors and foreign governments in negotiating possible solutions for their debt and other economic problems. Based on their political, administrative, and technical capacities, they are more likely to be viewed as credible in international negotiations than those without such capacities. No doubt, the solutions and policy concessions derived by these governments from engaging with international bodies are not the best possible solutions. But they represent important and serious efforts on the part of these indebted countries to manage their debt crises and hopefully maintain some level of domestic control over the direction of their economic policies. On the other hand, when extreme political chaos, vulnerability, and ineffectiveness are superimposed on deep external debt crisis, then such debt crisis is not only compounded but also becomes the instrument for the demise of the domestic autonomy of economic policy. Many African countries, including Liberia, have virtually lost or are in the process of losing control over their economic policies in this way.
One may argue that it is insane to even expect the current Liberian government to worry about control of economic policy when the country is deeply indebted to international institutions and foreign governments, and when the government is now facing domestic armed insurgence and the possibility of international sanctions. But this is exactly my point. I am saying that because of these problems of excessive external debt, domestic political insecurity, international isolation, and ineffective management capacity, this government is highly vulnerable to external forces and therefore incapable of effectively engaging and negotiating with foreign creditor institutions and governments. In such a fragile political environment, Liberia's debt crisis is likely to worsen from lack of effective management, and it is more likely to serve as an instrument for increased international economic policy conditionalities in the country.
For seven years (1990-97), war and political chaos deprived the country of available international debt management initiatives, including the most recent and current HIPC Initiative. While these international debt relief schemes are far from being satisfactory, some African countries have utilized and somehow benefited from them. Countries like Uganda, Mozambique, Cote D'Ivoire, Burkina Faso, and Mali have either reached their 'decision' or 'completion' points in the HIPC Initiative. Burkina Faso, whose current government is sponsoring mercenaries of war and mineral theft in West Africa, has managed to extract some debt relief benefits from the international financial community, in the form of a 14 percent reduction in the net present value of its external debt. On the other hand, Liberia, whose current regime receives protection from these mercenaries, has not even appeared on the HIPC horizon. The country's relations with external creditors are so weak that one of the conditions set in the latest IMF Staff-Monitored Program (January-June 2000) is for the government to improve such relations with the Fund and other creditors. Now, should the US threat of sanctions against the Taylor government becomes active, it is almost certain that Liberia's relations with these creditors would further deteriorate. This would negatively impact on the management of the debt crisis. Mind you that any minute wasted in attending to this debt automatically translates into higher interest charges on the stock of arrears. The creditor institutions and governments do not waive these charges unless they feel mercy on your country and offer debt relief. But you have to keep talking to them and do exactly what they want you to do before getting such relief. That is the pity of our reality!
With Liberia squarely gripped by such external debt crisis and now facing continuing political paralysis and institutional management crisis, the prospect for a meaningful domestic control of national economic policy is dim. Can a government whose own bloody past has caught up with it, and which now faces armed dissidents within its borders and is fast becoming an international outcast, find the time and strength to worry about the direction of Liberia's economic policies? No. And even if this government had the ability to control national economic policies, would its policy preferences be any better than those offered by the international institutions? No. In my view, the IMF Staff-Monitored Programs (SMPs) now being implemented by this government are naturally the only policy prescriptions Liberia can now settle for, given the political, financial, and institutional incapacities of the government and the traditional monetarist policy philosophy of these international financial institutions. Such tight fiscal and monetary policy prescriptions (depending on where the axes are falling and the belts are tightened) are not necessarily what the broader Liberian society needs at the moment. But given the extent of external debt and the kind of government and fragile political environment we now have, it is clear that this is the only fate and direction of economic policy that Liberia can now travel, until such time when we have put our political house in order and restored international credibility to the Liberian state and economy.
Geepu Nah Tiepoh is a development economist and consultant with ACLAD Development, Canada.
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