2017 (the AfT period) and 2018-2030 (the rest of the period covered by Liberia’s vision of the future).

# <u>Key Assumptions</u>

The key assumptions of the base scenario reflects that this period is expected to be eventful for two main reasons: strong expansion in the mining sector (with associated consequences in terms of exports, FDI, government revenue, and profit remittances) and the virtual elimination of the United Nations Mission in Liberia (UNMIL) (reflected in a drastic decline in transfers from abroad, UNMIL consumption, much of which is made up of imports). Both events are expected to take place during relatively brief time periods. In other respects, the base scenario is less eventful; among other things, government spending and (non-mining) taxation are assumed to reflect a scaling up of the current situation without drastic structural change. One key feature of the base scenario is that, as opposed to all other scenarios, it treats GDP as exogenous.<sup>6</sup> GDP growth and other aspects of macro performance under the base scenario (including foreign grants, foreign borrowing, and mining developments) are primarily based on IMF (2012), including the World Bank – IMF debt sustainability analysis up to 2033 that is included in this source. This information is complemented by other sources, among others drawing on IMF (2010) for mining developments beyond 2015.

The receipts of the government include direct taxes (from households and mining, the latter imposed on the operating surplus of the sector), indirect taxes, and non-tax receipts. The direct tax rate on mining capital VA changes over time on the basis of data on projected mining sector government revenue and mining capital VA. Other tax rates – direct taxes on households, and indirect taxes on market sales, activity gross revenues, and imports – are based on the Social Accounting Matrix (SAM) and do not change over time. Among non-tax receipts, domestic transfers, domestic government borrowing, grant aid, and (concessional) borrowing from abroad are exogenous, either as shares of GDP or in real US dollars; changes in levels and GDP shares are fine-tuned to be consistent with IMF projections up to 2015 as well as World Bank – IMF debt sustainability analysis.

On the government spending side, interest payments depend on the levels of the government foreign and domestic debt stocks (the evolution of which depends on net foreign and domestic borrowing) as well as the levels of real interest rates, which are exogenous. Transfers to households are an exogenous share of GDP (like the transfer that goes in the opposite direction). Government final demands (consumption and investment) are disaggregated by function; for the functional disaggregation of the government, see Table A2.1. For each function, the government capital stocks and consumption grow in tandem. Given this, an expansion of consumption (a measure of service provision) must be preceded, in one or more

> 6 Technically, the level of GDP is fixed, removing one variable from the model for each solution year. At the same time, a variable that introduces a uniform adjustment in TFP in each production activity is flexed, assuring that the exogenous GDP level is reached and that the model continues to have an equal number of equations and variables. For non-base scenarios, the GDP level is flexible whereas the productivity adjustment variable is fixed.

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