external borrowing over the period 2012-17 (from 1.6 percent of GDP in 2011 to 5 percent in 2015, before declining to 2 percent in the medium term) to finance infrastructure development.

Leveraging concessionaires’ contribution will be critical to effective infrastructure development. Concession contracts are expected to contribute significantly to infrastructure development in the medium to long term. Out of the US$8 billion to be invested by the mining companies under current MDAs, about US$5 billion is for infrastructure, power and transport in particular. In comparison, the government’s annual investment spending averaged US$90 million in the recent years, and was well below budgetary allocations, mirroring limited public capacity for project management, and procurement issues related to the limited number of private contractors bidding to execute the projects. The review of MDAs indicates that they retain the principle of third party access to surplus power, port and rail infrastructure developed by mines. Grid connection of mining sites would allow a number of alternative power supply models to be developed. In particular, mines could each sell surplus thermal power to the Liberia Electricity Company (LEC). Or alternatively, a single cost-effective large scale thermal or hydro plant could be developed to supply all mines, with a built in surplus to be sold to LEC. The government is currently working on establishing an effective institutional framework for promoting public-private partnership, but the integration of public and private infrastructure plans under the PRS2 period is not yet fully-fledged.

Liberia’s medium term macroeconomic framework is subject to several uncertainties. A first uncertainty relates to UNMIL (UN security forces) future engagement in Liberia. UNMIL transfers to Liberia amount annually to US$600 million. An abrupt and unprepared reduction of UNMIL presence would have important macroeconomic implications on the Balance of Payments, on economic activity (given the currently large multiplier effects, through demand for domestic goods and services) and on fiscal accounts, given the need to find alternative source of financing – most likely domestic – for security services. A second uncertainty relates to the forthcoming revision in national accounts, GDP in particular, which is expected to portray a richer Liberia, and could thus (i) increase borrowing space and (ii) re-focus policy attention to domestic resource mobilization efforts. Lastly, the lack of stabilization mechanisms against commodity price volatility (e.g. natural resource fund, foreign currency reserve management policy tailored to address commodity price fluctuations) could expose the economy to sharp correction needs, which generally affect primarily investment plans. So far, Liberia’s budget was insulated from energy-related price volatility given the very low level of energy consumption in the country. But ambitious electrification plans, and increased reliance on mining revenues will render Liberia more vulnerable to commodity price fluctuations.

The government’s instruments for liquidity management are limited. Maintaining a stable macroeconomic environment in the face of increased foreign capital inflows will be challenging. The latter could lead to increased supply of broad money (M2) in the short term, which if not sterilized, could to lead to inflation pressures on non-tradable commodities in the economy. This could be a possible threat to government’s objective of maintaining single digit inflation over the medium term. The Central Bank of Liberia (CBL) is currently limited in terms of monetary policy instruments because the Treasury bill market has not yet been established. Monetary policy is restricted to weekly interventions in the foreign auction market. The management of money supply is further constrained by the highly dollarized nature of the economy (the dollar accounts for 70 percent of broad money supply).

Risks and impact of exchange rate appreciation are moderate. World Bank analysis<sup>22</sup> conducted for the preparation of the PRS2 suggests that risks of lost external competitiveness in tradable sectors – the

> 22 See Lofgren et al. (2011).

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