Liberia: Country outlook for 2003

PRESS RELEASE (January 15, 2003)
©  2003 The Economist Intelligence Unit Ltd.

Economist Intelligence Unit - ViewsWire - January 14, 2003

OVERVIEW: The military situation may improve as the government gains the upper hand in the war with Liberians United for Reconciliation and Democracy. Real GDP growth will contract by 8% in 2003 and 4% in 2004, as the war continues. Owing to the weak exchange rate, inflation will remain high, averaging 20% in 2003 and 25% in 2004, if the war drags on.

DOMESTIC POLITICS: The military situation is improving somewhat as the war recedes into upper Lofa (in north-western Liberia). However, the threat that the rebel group, Liberians United for Reconciliation and Democracy (LURD), may regroup and relaunch attacks is still very much present and a large area of the country (around one third) continues to be affected by the immediate impact of war. This part of the country will remain insecure and there is a strong possibility that fighting will resume as LURD purchases more arms and supplies and enlists more recruits.

INTERNATIONAL RELATIONS: In 2003 the government's relations with the West will continue to be affected by the advice of the UN's panel of experts on Liberia. Their recent report contained evidence of continued violations, particularly of the arms embargo, as well as further criticism of the government's lack of accountability. The report recommended the maintenance of existing sanctions on arms and diamond sales and of a travel ban on government officials; these measures are likely to remain in place for at least the next six months and probably beyond.

POLICY TRENDS: Fiscal constraints on the government will intensify as the economy contracts owing to the civil war and sources of domestic revenue diminish. In addition, the lack of IMF assistance (or any other donor support apart from humanitarian aid) will constrain economic policy; there is very little chance that IMF funding and policy advice will resume because of the large amounts of unpaid interest and principal arrears. Efforts to increase tax revenue will be stepped up in order to equip and pay troops.

ECONOMIC GROWTH: We estimate negative growth of 5% in 2002 and forecast an 8% contraction in 2003. If the war wanes and confidence improves in 2003, this could result in some increased growth, but the continuation of the conflict and the increasing illegality of economic transactions associated with the violence make this doubtful. As the war may stretch into 2004, a contraction of the economy is likely, though at a rate of around 4% owing to the past reduction of productive capacity.

INFLATION: Prices of the main commodities have settled somewhat, particularly since the recent stabilisation of the exchange rate at L$65:US$1 in November, but in 2003 the average rate of inflation is forecast to remain high at 20%. If, as we expect, the war drags on into 2004, this will continue to destabilise the economy, one result being continued high inflation, which is forecast at 25% as essential items become scarcer.

EXCHANGE RATES: The exchange rate remains weaker than at any other time in the post-civil war period (since February 1997), and is expected to average L$75:US$1 in 2003, just below the current rate of L$70:US$1. We are forecasting that in 2004, the Liberian dollar will weaken to L$85:US$1. The currency will be prevented from falling further in both years by weak demand for some goods and services.

EXTERNAL SECTOR: In 2003-04 the current-account deficit will narrow to around 10% of GDP, from an estimated 13% in 2002. This is a guideline figure as the government produces no data on the services, income or transfers accounts (in addition, imports of arms and supplies by both sides are unrecorded, so the true value of total imports is unknown). The fall will be caused, in part, by the narrowing of the trade balance (it narrowed by almost 50% in the year to March 2002, according to Central Bank data).

© Robert W. Kranz  January-2003