Budget Surplus or Budget Deficit? Fmr. Min. Kamara Takes on Min. Tweah Intellectually

Liberia: Fiscal Year Uniqueness And Other Complexities

This article attempts to show Liberia’s unique fiscal year compared with the rest of the regional member countries of the Economic Community of West Africa (ECOWAS), highlight the contentions that arise on the treatment of revenue collected after the fiscal year ends on June 30, and propose a way forward on what seemingly appears to be ambiguous in the Public Financial Management Law (PFM) on reporting of budget surplus or deficit.

It also attempts to shed light on few areas of the FY2020/21 draft budget including trends in domestic revenue and external loans, the cash carry forward from the just ended 2019/2020 fiscal year, the payment of domestic arrears and provide suggestions. It will also help to bring clarity on the issue of budget surplus being discussed by the general public as reported by the Ministry of Finance and Development Planning (MFDP) in the proposed draft budget now before the Legislature for passage, and may set the stage for an amendment to the PFM law.

Fiscal Year Uniqueness

Liberia is the only country within the 15-member ECOWAS bloc in West Africa with a 4-quarter-fiscal year starting July 1 of a given year and ending June 30 of the following year, while the rest of the member countries’ fiscal years are on the basis of a calendar year, January to December. The choice of this type of fiscal year in Liberia is mainly because a large proportion of Government’s revenue is collected during the dry season[1] and the preference to have 3rd and 4th quarters revenues to be the strongest of the year. I am of the view that choosing to be a member of the ECOWAS bloc obliges us to realign our fiscal year with the rest of the sub-regional countries.

By doing so, comparison of macroeconomic convergence criteria with the other ECOWAS member states becomes easier and makes reporting of development assistance from the donor community less cumbersome for MFDP since almost all the donors operate on a calendar basis.

Budget Surplus or Budget Deficit?

In the context of a general definition, a government budget is an itemized accounting of the payments received by government (taxes and other fees) and the payments made by government (purchases and transfer payments). A budget deficit occurs when a government spends more money than it takes in, while the reverse holds true for a budget surplus. Section 16 of Liberia’s Amended Public Financial Management (PFM) Act of 2009 on “Budget Surplus or Deficit” found on page 16 states “The National Budget shall show any proposed budget surplus or deficit, being the difference between the total revenues excluding new borrowings and total expenditures. The National Budget should stipulate the purpose to which the budget surplus will be applied, and, in the case of budget deficit the means of financing it and shall be subject to legislative approval.” In other words, as per the PFM Law, the formula for budget surplus/deficit is: BUDGET SURPLUS/DEFICT = TOTAL REVENUE – NEW BORROWINGS – TOTAL EXPENDITURE. When the difference is positive, we have a budget surplus; when the difference is negative, we have a budget deficit which may require financing.

What does this suggest about the calculation of the “budget surplus” for the past fiscal year (FY2019/20) and the new fiscal year (FY2020/21)? It means, for example, the US50.0 million loan disbursed by the IMF on June 5, 2020 (see https://www.imf.org/en/Countries/LBR) to help Liberia address the COVID-19 pandemic and other expenditure pressures during the just ended fiscal year FY2019/20 should be considered as a new borrowing. According to the PFM law, it should be excluded from total revenues for the period ended for the purpose of determining the budget surplus or budget deficit.  The Draft FY2020/21 shows that the total resources generated in the last fiscal year (FY2019/20) was US$525,522,000[2]. It also shows that the estimated total expenditure forthe last fiscal year (FY2019/20) was US$513,043,563[3].  Applying the formula above, we end up with the following:

               US$525,522,000 – US$50,000,000 – US$513,043,563 =-US37,521,563

Since the difference is in negative, it means that the last fiscal period may have registered a budget deficit of US$37,521,563 assuming that the US$50 million borrowed from the IMF was the only new borrowing undertaken by the Government during the last fiscal period. If data proves that there were more new borrowings, then the deficit figure is more likely to be higher than US$37,521,563. The illustration is intended to help inform the budget hearing deliberations. One can see how a generalized statement of cash carry forward tends to trivialize the hard thinking that goes into deriving revenue projections.

The PFM Law also requires a calculation of the anticipated budget surplus/deficit for the new fiscal year (FY2020/21), ceteris paribus. The total resource envelope estimated for FY2020/21 is US$535,452,000 which equates to the estimated total expenditure. As can be seen in the Revenue Fiscal Table on page xxxv of the draft budget, the Government intends to borrow a total of US$103,000,000 (US$65 million from World Bank IDA and US$38 million from the IMF).  Now let us calculate the expected Budget Surplus/Deficit for the new fiscal year = (Total Revenues – New Borrowings – Total Expenditure = US$535,452,000-103,000 -535,452,000 = – US$103,000,000. In other words, the Government has tabled a draft budget for FY 2020/21 that shows an expected budget deficit of US$103,000,000, which it intends to finance fully by borrowing from the World Bank and the IMF.

Cash Carry Forward and Prior-Year Revenues Collected at Start of a New Fiscal Year

The projected revenue of US$535 million in the draft 2020/2021 Budget includes a “Cash Carry Forward” in the amount of US$10 million. Having a cash balance in the Consolidated Fund (the Government account at the Central Bank of Liberia) at the end of the fiscal year, June 30, is normal. In fact, it is extremely unlikely that the Consolidated Fund would report a zero balance at the end of the fiscal year.  Often, the end of year cash balance is encumbered, meaning that there are expenditure commitments before the end of the year which will have to be serviced from the cash balance in the Consolidated Fund. So, cash carry forward on account of point closure does not necessarily equate to a budget surplus. There has been some confusion about how to treat revenues budgeted in previous fiscal year but collected few days into the new fiscal year.

During my stay at the Ministry of Finance between May 10, 2016 and January 22, 2018, the issue of how to treat government revenues collected after the fiscal year expires was contentious between MFDP and the Liberia Revenue Authority (LRA). We at MFDP then, argued that revenues associated with a particular fiscal year even though collected immediately few days in early July of the new fiscal year do have expenditure claims and MUST NOT be counted as a budget surplus. On the other hand, the folks at LRA were of the view that it is cash brought forward and should be counted as revenue collected within the new fiscal year. Our reliance and action then on the matter was guided by the principle of prudent and credible fiscal management bearing in mind the responsibilities given to the Minister as contained under Section 11 Count 1 of the PFM Act. The decision reached in concert with the President was to consider cash-carry-forward revenues already tied to unsettled commitments as approved in the budget as ENCUMBERED and NOT FREE CASH. Thus, it was instructed that escrow accounts in both Liberian and US dollars be opened at the CBL for the cash carry forward to settle outstanding expenditure commitments from the previous fiscal year. This was the accounting treatments at end FY2015/16 and FY2016/17. In view of what appears to be ambiguity in the treatment of cash carry forward, I am proposing an amendment to Section 16 of the PFM Act to address how cash carry forward should be treated.

Additionally, for clarity and to advance the cause of transparency, I recommend the following:

  1. that MFDP disclose to the Legislature the various balances in all accounts (Liberian and US dollars) of the Consolidated Fund as at June 30, 2020;
  2. that MFDP disclose the total amount of outstanding commitments as at June 30, 2020, as it is the netting off of this figure from the June 30 cash balance which gives the unencumbered cash balance that may qualify for inclusion in the revenue estimate as budget surplus; and
  3. that the Legislature critically review the list of outstanding commitments as at June 30, 2020, with the view to satisfying itself that critical expenditure items including expenditures for health, education, and agriculture budgeted in the last fiscal year but did not get paid before the end of the fiscal year are indeed included on the list of outstanding commitments; meaning, they did not lapse[4]or have been budgeted or reprogrammed in the Draft FY 2020/21 Budget. If this is not done, many critical expenditure items will be left in limbo only to cause unnecessary imbalances in the budget process later during the year with the MFDP facing competing expenditure pressure.

Domestic Revenue & External Loans

Under “Macroeconomic Outlook and Context” in the preface to the draft FY 2020/21 Budget, the Government states that “the Liberian economy faces emerging and existing challenges that undermine delivery on the Pro-poor Agenda for Prosperity and Development (PAPD), ensuring effective macroeconomic management, debt stability, and smooth recovery from shocks.”  Other challenges identified by the Government include “constricted revenue base, poor private sector development, limited public service delivery, and the adverse impact of COVID-19”.  Considering these challenges, the Government states “real GDP growth over the course of 2020 is projected to contract by 2.5%.

The economic performance or strength of a country is proxied mainly by the growth of its gross domestic product (GDP), which is reflected directly through the growth in domestic revenue (tax and non-tax revenue). When the economy expands, domestic revenue also expands. When the economy contracts, domestic revenue also contracts. Due to the endogenous and exogenous factors cited by the government, domestic revenue in Liberia has been on a declining path over the past few years. A review of the Revenue Fiscal Table in the Draft FY 2020/2021 Budget (page xxxiii) shows that the Government raised US$469 million in domestic revenue during FY2018/19.  The table also shows that Domestic Revenue is estimated to drop by US$51 million (or 10.9%) to US$418 million for the FY 2019/20 Budget, which ended on June 30, 2020. For the FY2020/21 Budget, the Government projects that Domestic Revenue would drop from US$418 million to US$407 million, a drop of US$11 million or 2.63%.

In a bid to cope with the declining domestic revenue performance, the Government resorted to external borrowing (a loan of US$50 million from the IMF) before the end of FY 2019/2020 and is expected to borrow an additional US$103 million (World Bank IDA Loan of US$65 million, IMF Loan of US$$38 million) or 19.3% of the total budget of US$535 million (see the Revenue Fiscal Table in the Draft Budget).  Are the loans or borrowings being efficiently used to guarantee optimum economic returns? Light manufacturing through targeted policies should be prioritized to enhance private sector investment for job creation. Labor-intensive light manufacturing is proving to lead economic transformation in many of the most successful developing countries. Liberia’s youthful population is a blessing in disguise which needs to be properly harnessed to strengthen the human capital base of our nation, a key ingredient (i.e., human capital formation) required for any nation to catch up with more prosperous emerging-market and developing economies. I recommend Ghana, Rwanda, among others as good examples of success story for Liberia to emulate.

Another issue is that the Government has tagged US$112 million in external resources (World Bank Loan of US$65 million, IMF Loan of US$38 million and a possible European Union grant of US$9 million as “Contingent Revenue”, which means that the Government believes that the probability of raising such resources is not high. The issue of serious concern here is that while the Government is designating US$112 million as “Contingent Revenue”, it has not taken a similar action on the expenditure side of the budget. In other words, the Government considers all the US$535 million appropriations on the expenditure side of the budget as ‘Core Expenditure”, meaning they all qualify for payment once the Government starts to raise revenue in the new fiscal year. The inherent risk in not ranking, ex ante, the  expenditure items in the budget as “Core” and “Contingent”, as has been done on the revenue side of the budget, is that in the event where “Contingent Revenue” is not raised, either in total or in part, the Government would have already spent on expenditure items that are not of high priority from the “Core Revenues” raised during the beginning quarters of the fiscal year, thus disadvantaging high priority expenditure items during subsequent quarters of the fiscal year.

Proposed Payment of Domestic Arrears

It is commendable that the MFDP has budgeted US$45.1 million (see page xxx of the FY2020/21 Draft Budget) for the payment of domestic arrears. Payment of domestic arrears has the positive effect of helping to stimulate the economy, especially during this period of the COVID-19 pandemic. This appropriation could not have been timelier.  My professional advice is that in order to ensure transparency, equity, and accountability in the payment process, the Debt Management Committee (DMC) of Government comprising the MFDP, the Ministry of Justice, and the Ministry of State (I am told the CBL has been removed) should draw up a robust Domestic Arrears Payment Plan/Strategy which spells out the criteria for inclusion on the domestic arrears payment list, the potential payees, as well as the proportion of the total claims each payee is expected to receive in this fiscal year.

Also, it will be a welcomed idea for MFDP to commence as soon as possible, a forensic audit of the Debt Management System (DMS) and the Integrated Financial Management Information System (IFMIS) of the Government, a process which begun but could not be completed because the Sirleaf Administration ended. The General Auditing Commission (GAC), in concert with an international firm, conducted the first audit and recommended the need for a forensic audit/investigation of the systemsIf this is done, it will be a monumental achievement for Minister Tweah and the WEAH Administration, and a clear demonstration of transparency and accountability.

TAKEAWAY

The time for all Liberians to put our nation first for our own good is now. We must confront and meet the foe with valor unpretending. The foe of our economic backwardness is the old economic model which relies mainly on exportation of raw materials, especially iron ore and rubber with no emphasis on economic diversification, which usually paves the way for industrialization of an economy. An outside the box thinking suggests that the Extended Credit Facility (ECF) Program with the IMF must go side-by-side a robust coordinated and integrated framework that maps out where resources are to be spent for optimum results. The new economic model which should resonate with all Liberians, especially policy makers is the phrase “MADE IN LIBERIA: YES, WE CAN TOO” by giving the private sector center stage in policy decision-making as the engine for growth and development.

The time has come to move away from government being the largest employer to the private sector as the anchor for job creation. Government’s policy should intentionally support domestic value-addition with Liberian entrepreneurs leading the charge. In this regard, the Government should work with our developments partners to ensure that development assistance be aligned with our national development plan. A big thank you to our development partners for the continued support to our government and people. Tangible investments largely in agricultural value chain where smallholders of farms are supported will be a good start. This is the soft side from my perspective. The heavy lifting of Liberia’s structural transformation can only be guaranteed when most of the borrowings go towards addressing the binding constraints of high cost of electricity and limited paved roads, especially along the growth corridor; and strengthening the shallow financial system as proxied by low level of credit to private sector-to-gdp ratio of 14.0 percent and very high spread between savings and loan rates (on average); savings rate, 2.1 percent and lending rate, 12.4 percent (see the CBL 2019 Annual Report, pages 37 and 38). The absence of a capital market in Liberia is another problem of raising needed capital for development, something which requires more attention by the Government. We must know what we want, agree on what we want, and market it together. The Government’s well thought-out PAPD is the place to begin.

President Weah, I humbly call on you to do your absolute best in uniting us as a nation. As head of the nation, please ensure that the rights of all Liberians are respected irrespective of tribe, creed, or political affiliation. Economic growth and prosperity can only take place in an environment that is stable.

[1] Liberia lies within the tropical rainforest with 2 major seasons, the rainy that runs mostly from mid-May to November and the dry running largely from December to early May.

[2]  See the Revenue Fiscal Table in the Draft Budget, page xxxv.

[3] See 1.6: Economic Classification on page xxxviii of the Draft FY2020/21 Budget

[4] “Lapsing” is the technical term used to refer to the forfeiture of a claim on government resources because a budgeted expenditure item was not approved for payment by the MFDP before the end of the fiscal year.

 

 

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