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  • Writer's pictureMarie S.

Analysis Of Liberia's Heavy Reliance On Foreign Aid To Finance Its Budget & Its Implications


Liberia heavily relies on foreign aid to finance its budget, which exposes it to external shocks. To reduce this reliance, it is essential to analyze the country's revenue mobilization efforts to increase domestic resource mobilization.


Liberia's dependence on foreign aid to finance its budget has raised significant concerns about the country's economic stability and resilience. Despite the announcement of several financial aids over the past twelve years, poverty levels in Liberia remain high, and providing basic social services for all Liberians remains a challenge. Aid alone cannot address the economic challenges of Liberia, and it is imperative to recognize the need for deepening domestic tax revenue mobilization[​1]


The Domestic Resource Mobilization Strategy, developed by the Pro-Poor government, aims to address several challenges, including low revenue share of GDP (around 14.3% of GDP excluding grants), stagnating domestic debt (around 2% of GDP), declining grants (2% of GDP), low donor transfers (from 60% to 16% of GDP), and public debt at middle to high distress levels. The strategy also acknowledges the volatile net remittance flows, with a net outflow of US$ 50 million in 2013​[2]


Key policy reforms anticipated under the 4-year Domestic Resource Mobilization Strategy include addressing revenue losses by reducing tax holidays from Concession Agreements, Executive Orders, and Tax Credits. Revenue loss is estimated to average more than US$ 100 million annually. Additionally, Liberia is transitioning from Goods and Services Tax (GST) to Value-Added Tax (VAT) while maintaining a rate of 10%​[3]


Tax Administration Reforms under the strategy include introducing electronic and mobile tax systems to reduce compliance costs, expanding access to Liberia Revenue Authority (LRA) services, and strengthening LRA's capacities in international tax audit, large tax enforcement, and natural resource management. The strategy also emphasizes the importance of market-led agriculture, agro-pole introduction, and incentivizing youth as "agri-preneurs" to mobilize resources in the Agriculture, Fisheries, and Forestry Sector. Furthermore, it proposes the establishment of Precious Mineral Marketing Corporation (PMMC) to add value to precious minerals and organize artisanal miners for tax purposes​[4]


However, Liberia faces challenges that impede revenue mobilization, such as taxation of the informal economy, complex tax codes, high compliance burdens, and administrative constraints. The lack of skilled staff and the inability to fight abuses of transfer pricing by multinational enterprises are also significant impediments​[5]


In 2021, foreign aid accounted for 41% of the government's budget (World Bank, 2022). This reliance on foreign aid exposes the country to external shocks, such as changes in donor priorities or economic conditions. In order to reduce its reliance on foreign aid, Liberia needs to increase domestic revenue mobilization. Domestic revenue mobilization is the process of collecting taxes and other government revenue from within the country. In 2021, Liberia's domestic revenue mobilization was only 17% of GDP (World Bank, 2022). This is well below the average for low-income countries, which is 20% of GDP (World Bank, 2022).


There are a number of challenges to increasing domestic revenue mobilization in Liberia. These challenges include:

  • A weak tax administration system. The Liberia Revenue Authority (LRA) is responsible for collecting taxes in Liberia. However, the LRA is a relatively new institution, and it has been hampered by a lack of resources and capacity.

  • A large informal economy. A large portion of economic activity in Liberia takes place in the informal economy, which is difficult to tax.

  • A low level of economic development. Liberia is a low-income country with a small and underdeveloped economy. This makes it difficult to generate a large amount of tax revenue.

Despite these challenges, there are a number of opportunities to increase domestic revenue mobilization in Liberia. These opportunities include:

  • Modernizing the tax administration system. The LRA needs to be strengthened and modernized in order to collect taxes more effectively. This could include increasing the number of tax collectors, improving the use of technology, and strengthening the LRA's enforcement capacity.

  • Expanding the tax base. The LRA needs to expand the tax base by bringing more people and businesses into the formal economy. This could be done by simplifying the tax code, reducing tax rates, and providing tax incentives for businesses to operate in the formal economy.

  • Improving tax compliance. The LRA needs to improve tax compliance by ensuring that everyone pays their fair share of taxes. This could be done by increasing public awareness of tax laws, strengthening the LRA's enforcement capacity, and providing taxpayers with better service.

Increasing domestic revenue mobilization is essential for Liberia to reduce its reliance on foreign aid and achieve sustainable economic development. The government of Liberia has taken some steps to increase domestic revenue mobilization, but more needs to be done. By addressing the challenges and opportunities identified above, Liberia can increase its domestic revenue mobilization and build a more resilient economy.


In terms of tax administration, the Liberia Revenue Authority (LRA) plays a central role in the government's efforts. Supporting the LRA includes strengthening its capacities in international tax audit, large tax enforcement, and natural resources management. Additionally, the informal economy in Liberia poses challenges to tax collection, as informal workers and businesses operate outside the reach of public administration, resulting in untapped revenue potential. To address this, the government aims to broaden the tax base and incentivize small enterprises to formalize​


Moreover, the extractive sector, which previously provided significant revenue for Liberia, has experienced a decline. To diversify revenue sources, the government is shifting its focus to the agriculture, fisheries, and forestry sectors, emphasizing market-led agriculture for food security, high-value horticulture, and cash crops. In the precious metal sector, the establishment of the Precious Mineral Marketing Corporation (PMMC) aims to add value through polishing diamonds, developing the precious metal sub-sector, and withholding taxes from buyers and sellers​


The implementation of a dual currency regime is also being reconsidered, with proposals to use Liberian Dollars exclusively to reduce losses to the US Treasury and combat capital flight averaging about US$ 1 billion a year. To complement these efforts, the government is considering the introduction of various financial instruments, including Treasury Certificates, Diaspora Bonds, Liberia Stock Exchange, Venture Capital, and Investment Trusts​


In conclusion, Liberia's heavy reliance on foreign aid underscores the importance of enhancing domestic resource mobilization to achieve economic independence and resilience. By addressing the challenges and implementing effective revenue mobilization strategies, Liberia can diversify its revenue sources, reduce aid dependency, and foster sustainable economic development.


Samora P. Z. Wolokolie (September 22, 2022) Enhacing Liberia’s Domestic Resources Mobilization. Retrieved from https://website.frontpageafricaonline.com/opinion/ehnacing-liberias-domestic-resources-mobilization/ on December 12, 2022.


World Bank (2022). Liberia Economic Update: Sustaining Recovery and Inclusive Growth. Washington, D.C.: World Bank.

 

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