# **3. BASE SCENARIO**

The base scenario is designed to represent a plausible projection for Liberia’s economy for the period 2012-2030; it also serves as a benchmark for comparisons with alternative simulations. 2012 is treated as the starting point since the analysis focuses on the impact of the MTGDS, which starts in 2013. Our presentation of the base scenarios starts with the key assumptions, followed by an analysis of its simulation results, with a focus on two sub-periods, 2013-2017 and 2018-2030, as well as the full period 2013-2030.

## **Key Assumptions**

The macro aspects of MAMS under the base scenario are consistent with the perspective of the IMF’s fiscal framework (2011a and 2011b). The assumptions for the mining sector are also based on the IMF (2010). As noted in Section 2, GDP growth is endogenous, determined by factor accumulation. Growth in capital stocks is endogenous while exogenous growth is imposed for labor and other factors (for labor determined by growth in the population in labor-force age). TFP growth has an endogenous component, related to positive productivity effects of government capital stocks, while an exogenous component, which represents improvements in productivity due to other causes, is assumed to grow at 1 percent per year. The mining sector deviates from these assumptions in that growth in its sector-specific capital stock is exogenous, set to grow at the same rate as the expected rate of output growth for the sector.<sup>11</sup> As noted, government budget and (off-budget) donor-financed activities are integrated under the government heading, reflecting the fact that on- and off-budget spending in different areas serve similar purposes and often are complementary (e.g., with the government covering a larger share of O&M [Operation and Maintenance] and donors a larger share of investments). The integration underlines the need to align and harmonize their activities.<sup>12</sup> The government receipts include direct taxes (from households and mining capital), indirect taxes, and non-tax 11 Mining capital earns most of the sector’s value-added (the sector is very capital-intensive) and the elasticity of substitution between capital and labor is kept at a low level (0.3). Given this, the actual rate of output growth closely replicates the exogenous growth rate for the capital stock. FDI to the mining sector is also exogenous, evolving according to the same scenario for the sector. In order to maintain exogenous evolution of both the capital stock and FDI in the sector, the stock and the investment flow were decoupled.

12 The distinction between on- and off-budget aid is important for some purposes. However, keeping the two separate in the MAMS database would impose an additional data requirement and complicate the analysis given that these two activity types are complementary. For example, the government carries out the bulk O&M for infrastructure while donors are responsible for most new investments. At the same time, it would not yield any significant insights, in particular given limited knowledge about how input structures and output quality differ between donor- and government-operated activities.

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