<u>Expansion in infrastructure financed from a combination of taxes, efficiency gains, and foreign grants (</u> _<u>inf+mix</u>_ <u>). Instead of expanding both infrastructure and HD spending, the spending</u> expansion is here limited to infrastructure; apart from that, this scenario is identical to _infhd+mix_ , including the fact that it relies on a mixture of three sources of fiscal space (taxes, efficiency and grants). Compared to the preceding simulation with mixed financing ( _infhd+mix_ ), the outcomes are quite similar. _inf+mix_ generates small improvements in terms of macro growth (including absorption, GDP and household consumption) and poverty reduction, while doing marginally less well in terms of HD (Figures 3.2 and 3.3). As expected, among production sectors, this scenario features a strong growth acceleration for government infrastructure services (Figure 3.4).

<u>Expansion in HD financed from a combination of taxes, efficiency gains, and foreign grants (</u> _<u>hd+mix</u>_ <u>). On the other extreme, the government may allocate all of its fiscal space gain to HD</u> instead of infrastructure, the option that is captured by _hd+mix_ ; among the government sectors, growth accelerates rapidly for HD instead of infrastructure (Figure 3.4). Compared to _inf+mix_ , this leads to a growth slowdown for most macro aggregates, including absorption, GDP, and household consumption (Figure 3.2), slower non-government GDP growth, less poverty reduction, but better performance for non-poverty MDGs (Figures 3.3-3.4). On the other hand, compared to _infhd+mix_ , _hd+mix_ does worse or no better according to all indicators that have been considered.<sup>10</sup>

# _THE MINING SECTOR AND FISCAL SPACE_

Efforts to increase fiscal space take place against the backdrop of considerable uncertainty about the future of Liberia’s mining sector. This is a major concern since it adds to uncertainty regarding a wide range of variables, including government revenues. In order to get some sense of possible magnitudes, the scenario _pwemin-sd_ was constructed: it is identical to _base_ except for that, starting from 2014, real mining export prices are 29.6 percent lower – this represents a price cut of one standard deviation (computed on the basis of real world prices 2007-2012).

A permanently lower mining export price has a significant negative impact on most key indicators. GDP growth slows down by 0.4 percentage points due to slower capital accumulation and slower productivity growth (ultimately also due to slower capital accumulation since the endogenous productivity component largely depends on growth in government capital stocks, especially in the infrastructure area) (Figure 3.2). The decline in domestic absorption growth stronger (a loss of 0.6 percentage points) since, due to this loss in terms-of-trade, Liberia is forced to reduce its trade deficit via some combination of larger real exports and smaller real imports, an outcome that is induced by additional depreciation of the

> 10 In additional simulations, we tested the impact of using financing from a single source (taxes, foreign grants or efficiency) for expanding spending on either only HD or only infra. The findings were similar to what emerged from the comparison when financing came from a mix of sources ( _infhd+mix_ , _inf+mix_ , and _hd+mix_ ). – infrastructure does better in terms of growth and poverty reduction but less well in terms of other MDG indicators; the scenarios that spread the spending increase over both HD and infrastructure generate intermediate results.

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