Liberia - Second Petroleum Technical Assistance Project

The Wold Bank FOR OMCIAL USE ONLY RepIt No. P-3909-LBR REPORT AID RECOMMENDATION OF THE PRESIDENT OF THE INTRNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 2.7 M.LLION TO THE REPUBLIC OF LIBERIA FOR A SECOND PETROLEUM TECENICAL ASSISTANCE PROJECT March 8, 1985 rhib i.cmmtM ku a restricted dblribowh mii may be used by reipeitseul my in the peifoummiue of tbd oficalduffe lbs eCUutm may nt otherwis be adislsd wihu Worl Dank a0mboizatIu.  The ofEicial monetary snit is the L ;herim dollar, with par valb equa to that of the US dollar. The US dollar Is legal tender In Liberia. FISCAL TEMR July 1 - June 30 A3BREVIhTONS AND) ACRONYSII AlL Atlantic Resouces Limited Digicon Digicon Corp. of USA (Geophysical Company) EPEC Ecowouic and Fiunancal Management Comcittee LEC Liberia Electricity Company LPRC Liberia Petroleum Refinivg Company MLME ministry of Lands, Mines and Energy NFEC National Energy Co=iittee USAID United States Agency for Intervational Development GWh gigawatt hour kgoe kilograms of oil equtvalent mg megawatt toe tons of oil equivalent  FM OFFICIAL U. WONLY REPUBLIC OF LIBERIA SECOND PETROLEMN TECHNICAL ASSISTANC PROJECE CREDIT APD PROJECr SMeIAr * Borroer: sRepublic of Liberia Beneficiary: Ministry of Lands, Mines and Energy Amount: SDR 2.7 illion (US$2.6 million equivalent) Terms: Standard Project Description: Mhe project is a follow-up on a successful effort made under a first project to promote petroleum explaration in Liberia. Under the flrst project, Liber a was able to lease two thirds of Its offshore acreage on attractive texms. There is still free acreage however that could be of interest to the oil industry. To promote this acreage would require the acquisition of additional seismic data and the processing and interpretation of existing and new data -ith the latest techniques available. The proposed project would assist the GJwernment in thi6 task, whic- would include participation and funding by private companies. In addition, the project would continue vith the institutional strengthening initiated under the first project and assist in the formulation of rationai policies in the petroleum sector, particalarly -ith regard to the procurement and storage of petroleum p.roducts in the country. More specifically, the project includes: (i) the acquisition, processing, integration and interpretation of about 1,000 km of new seismdc data; (ii) a review, reprocessing, modeling and integration of existing seismic and other data; (iII) a gravity survey onshore, laboratory and sampling work; (iv) the services of consultants to help with the iuonitoring of oil company activities; (v) a regional technical study that could integrate data from Ivory Coast and Sierra Teone; (vi) preparation of a promotional package for the oil industry; (vii) construction of core storage facilities for well samples; (viii) acquisition of mi_rofiem!1g and laboratory equipment and vehicles; (ix) technical training for four Liberians in petroleum geology, geophysics, engineering and economics; and (x) petroleum product procurement and storage feasibility studies. This document ha a striced distributioo and may be used by recpients only i the perfonn*ce of their official dutes Its contents may not othrwse be disclosed without World Bank authorizautm  -ii- Bbeefits and Risks: The pro&ect's main benefit to Liberia would be to enhance the capacity of the petroleum subsector to attract further private capital to undertake hydrocarbon explorati,a on acreage that is still free. The project would also assist the Government find the means of reducing the cost of petroleu products sold in Liberia. The risk assor,ated with the project is that the prospects uncovered may not be attractive enough for oil companies to sign exploration contracts. In vim of the geological potential, the interest already expressed by some oil companies and the experience under the first project, the potential benefits outweigh the risk. Moreover, some of this risk would be borne by a private geophysical company %,aich has agreed to finance a part of the rosts of acquring and processing seismic data on the aL eage that is open.  Estimated Cost: (excluding identifiable taxes and duties) Foreign Local Total (-S'0OO)- Imstitutional Support 635 100 735 Offshore Exploration Promotion 1,585 - 1,585 onshore Exploration Promotion 120 110 230 *Procurement and Storage Studies 320 30 350 Baseline Costs 2,660 240 2,900 Physical Contingencies 170 20 190 Price Contingencies 270 40 310 Total Project Costs 3.100 300 3Z.400 Financing Plan: Foreign Local Total IDA 2,600 - 2,600 Government - 300 300 Digicon 500 500 Total 3.00 300 3.400 Estimated Disbursements: IDA Fiscal Year FY86 FY87 FY88 FY89 (us$' O)00)- Annual 1,000 700 500 400 Cumulative 1,000 1,700 2,200 2,600 Rate of Return: N.A. Staff Appraisal Report: None IBRD 18368  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECCM ENDAION OF THE PRESIDENT TO TIb EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF LIBERIA FOM A SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Liberia for the equivalent of a SDR 2.7 million (US$2.6 million equivalent) on standard IDA terms to help finance a Second Petroleum Technical Assistance project. The project would be cofinanced by Digicon, a private company, which would provide an equity investment of $500,000. PART I: THE ECONOMY 2. An economic report entitled "Liberia: Recent Economic Develop- ments and Medium-Term Prospects" (No. 4178-LBR) was distributed to the Executive Directors in December 1982. An updating of economic prospects, as well as in-depth analysis of special economic issues, was undertaken in the process of preparing and appraising a proposed structural adjustment credit to Liberia. The conclusions of this economic work have been inclu- ded in this report. An Energy Assessment Mission visited Liberia in February 1984 and its findings are set out in the report: "Liberia-Issues and Options in the Energy Sector" distributed to the Executive Directors in December 1984. Background 3. Liberia has a dual economy in which an enclave sector of foreign iwvestments, utilizing advanced technologies and skills, co-exists vith a traditional agricultural economy using rudimentary technologies. The wholly export-oriented enclave or "concession" sector includes iron ore mining, rubber production and forestry and provides about 83 percent of export earnings, generating about one quarter of the GDP. On the whole, the links between the concessions sector and the rest of the economy are weak. However, stronger links exist in the case of the rubber industry in the form of demand for labor services (about 7 percent of the labor force is employed by rubber concessions) and material inputs. Contributions by the concessions to Government revenues in the form of profit sharing provided the strongest linkage with the rest of the economy until 1976/77. Because of low iron ore profits since the late seventies, contributions to revenues now mainly take the form of royalties and income tax levied on employees, and Indirectly in the form of duties on imported inputs that are 1/ This section is substantially unchanged from the President's Report on the Second Water Supply Project (P-3865-LBR) of February 27, 1985.  not exempt under the term of the concession agreements. Revenues from the concessions sector, which historically accounted for about one third of total Government income, now account for a mere 2.5 percent. 4. Outside the enclave sector, Liberia is like other very poor African nations: about 66 percent of the population live in rural areas and depend for their livelihood on agriculture; the bulk of them are traditional farmers producing mainly rice and cassava for subsistence. Rubber, coffee and cocoa are the country's major cash crops, yet they contributed only 15 percent of monetary GDP and 22 percent of export earnings (1980-82). Almost all rubber is processed and exported by foreIgn companies. Non-agricultural productive activities outside the enclave sector are very limited; the largest of these, manufacturing, contributes about 5 percent of GDP. This structural imbalance in the economy between the modern, largely enclave sector and the traditional agricult-al sector is reflected in a sharply skewed income distribution. With a population of about 2 4illion, average per capita GNP in 1982 was estimated at about US$490. However, 80 percent of Liberia's households received less than 30 percent of total income. 5. The Liberian economy exhibits a number of other distinguishing features. Liberia's currency is the US dolar, and the economy operates in liberal trade and payments regimes. The economy has few price distortions. The private sector-both domestic and foreign-has continued to play a dominant role in the economy, encouraged by the Government's positive attitude, the open door policy towards foreign investments, and the con- vertibility of the currency. Agricultural pricing ts marked by the absence of interventions, except in the rice sector where the Government maintains producer prices to increase rice production. Libei a is endowed with a relatively abundant land resource base which has and ca !,rovide the basis for a growing agricultural sector with appropriate policies and adequate investments. 6. The effectiveness of Liberia's public institutions is severely handicapped by a scarcity of trained manpower at all levels. Though Liberia has some competent managers in public office, they are insufficient in Dnmber and their effectiveness is handicapped by a shortage of trained people for middle management positions. Organizational weaknesses further- more result in poor communications within the Government and its agencies and in duplication of effort. These inadequacies of public institutions are not only a bottleneck to the effectiveness of day-to-day government but to the public sector's development effort as a whole. The large number of unproductive workers on the public payroll has, especially in recent years, swelled the Government's current expenditures and prevented the accumula- tion of savings for an adequate investment effort. 7. With a crude birth rate of 50 and a crude death rate of 14 per 1,000 population, Liberia's annual rate of population increase of 3.4 percent is among the highest in Sub-Saharan Africa. The rate has risen from 3.1 percent during the 1960s and is expected to accelerate to  -3- 3.7 percent by the year 2000. Consequently, the current population of about 2.0 million is projected to almost double by the yea 2000. The high population growth rate has put pressure on social services, infrastructure, etc., and, in the light of a declining economy, unemployment has risen, especially in Monrovia where migration from rural areas accentuates the problem. Given the delayed Impact of family planning programs on popula- tion growth, an active family planning policy needs to be pursued i[me- diately. The authorities have recognized that Liberia's rate of population growth is a heavy burden on the country's development effort. The Ministry * of Health and Social Welfare, the Family PlAnning Association of Liberia and other agencies are now involved in family planning activities. The need for further efforts to reduce fertility and the rate of infant morta- lity, while Improving the health status of the population, is compelling. The Government has shown its receptiveness to assistance in these two fields, in which the Bank is currently preparing a project. 8. About 58 percent of Liberia's domestic energy needs were met by local fuelwood and charcoal in 1981, another 35 percent came from imported petroleum and its products and 7 percent from domestic hydroelectric power. Petroleum imports cost Liberia US$129.6 million in 1981, or 24 percent of export earnings, as compared to US$12 million or 5 percent of export earnings a decade earlier. Although the reduction of world oil prices since late 1982 has provided some relief, problems of paying for oil imports persist. There is a clear need to implement programs to promote more efficiency in the use of energy, seek adjustments in the use of imported oil by substituting domestic hydropower to the extent possible, promote petroleum exploration by private oil companies and revamp the operations of the power utility compary. 9. The country has a poorly developed economic and social infra- structure outside the enclave areas. An incomplete and inadequate road system is poorly maintained, but the Bank is providing assistance in this field through a road maintenance project approved by the Executive Direc- tors in December 1983. Only some 20 percent of the non-enclave population has access to dependable water supply, while education and training have been inequitably distributed and are of inadequate quality. The Bank is also providing assistance in this area through a fourth education project. The health status of the majority of Liberians remains poor-life expec- tancy at birth is 54 years, and morbidity and mortality are high. The infant mortality rate is 91 per thousand live births (1981). The existing health care system is inadequate and unsuited to the country's health problems. Moreover, maintenance of health-related facilities is poor and the supply of drugs to public hospitals is erratic at best. Poor health and malnutrition continue to plague vulnerable segments of the population, especially pregnant and lactating women as well as young children. 10. Liberia's military rulers which seized power in 1980 promised to return the country to democratic and constitutional rule in 1985. A new constitution was adopted through a national referendum in 1984 and the ban on political activity, which had been in effect since April 1980, was lifted in July 1984. A number of political parties are being formed with a  -4- view to contesting presidential and other national elections now scheduled for October 1985. In the meantime, the People's Redemption Council (PRC), which ruled the country since April 1980 and which was nostly composed of military personnel, has been abolished. Instead, an Interim National Assembly (INA), with broad membership but including some former PRC members as a minority, has been appointed by the %ead of State. The INA will deliberate and advise the Head of State on national policy during the transition period. Recent Economic Developments 11. MIacro-economic Performance. The military Government which took power in April 1980 inherited a sluggish and strained economy in which GDP growth had averaged less than 1.0 percent per annum between 1974 and 1979. The economy was suffering from the effects of a heavy oil import bill and a large debt burden at a time when demand for Liberia's major exports-iron ore, rubber and timber-was depressed. The commodity concen- tration of Liberia's exports aggravated the impact of the international recession. In addition, in its very early life the military government a de inappropriate policy decisions and took actions that reduced investor confidence. A doubling of the public sector minimum wage without regard to productivity and indiscriminate hiring into the already swollen ranks of the civil service and public corporations exacerbated the fiscal crisis. Capital flight, the exodus of experienced personnel, placement of inexpe- rienced people in public sector management positions, occasional harassment and interference in the running of private firms and Government agencies., and a severe shortage of public funds for investment, hurt the economy. Public enterprises were increasingly inefficient and subsidies to these enterprises became a drain on scarce budget revenues. The depletion of the banking sector deposit base restricted external credit lines and a general liquidity crisis made management of the economy difficult during the present administration's first two years of office and, to a large extent, still continues to plague economic managers. To meet its foreign currency obligations, the Government relies on off-shore tax revenues paid by concessions, the foreign exchange earnings of the Liberia Produce Marketing Corporation, maritime revenue payments and external grants and borrowings. These sources of off-shore funds have been eroding at the same time as external payment obligations, particularly debt service, are growing. Therefore, the public sector balance of payments has recently deteriorated to crisis proportions as the National Bank of Liberia no longer has ade- quate foreign reserves to meet the cost of oil imports, service debt and make payments for needed public sector imports. 12. There has been a decline in GDP each year since 1980. Between 1980 and 1982, real GDP declined by about 15 percent and real consumption by over 16 percent. The decline in the economy is mainly attributable to the continuing weak performance of exports. Exports account for a high share of GDP (56.3 percent in 1982). Between 1980 and 1982 export earnings fell by 20.5 percent, from US$600.5 million in 1980 to US$477.4 million in 1982. Export earnings declined further by 10.2 percent in 1983, to US$427.6 million, due primarily to the reduced earnings from iron ore.  - 5 - Prospects for export earnings in the short-run are uncertain due princi- pally to the depressed steel market, but look better in the medium term as the anticipated recovery in the OECD countries gathers momentum. However, in order to respond to stronger demand in the medium term, substantial investments will need to be undertaken in the export sector. 13. After deteriorating considerably in 1980 following the doubling of the minimum wage, fiscal performance improved as a result of expenditure restraints under successive stabilization programs supported by the IN. Total expenditures declined from US$391 million in FY82 to US$334 million in FY84. While expenditure restraint has been successful, revenue perfor- mmoe has been disap?ointing in part due to the deterioration in the economy Dut also due to poor tax adminii.tration. Revenue and grants totalled US$270.5 million in FY84 compared with US$277.3 million in FY82. 14. The domestic savings performance has declined since the late 1970s as a result of the general decline in the economy and high levels of Government consumption. The total domestic savings rate declined from 27 percent in 1979 and 1980 to 12.5 percent in 1982 and the national savings rate fell from 20 percent to 2.2 percent of GDP during the same period, primarily because of overexpenditure by the public sector. There have been negative public sector savings since 1978; all savings in the economy have come either from the private sector or from abroad. 15. The major reasons for the Government's poor savings effort are excessive expenditure on wages, large subsidies to inefficient state enterprises, and a growing debt service burden. Although revenue growth has slowed down since 1979, Liberia still has one of the highest tax to GDP ratios in Sub-Saharan Africa, at about 28 percent of monetary GDP or about 24 percent of total GDP. In a period of declining GDP, averaging about minus 4 percent over 1980 to 1983, the tax ratios have also declined to about 25 percent of monetary and 21 percent of total GDP respectively. However, they still remain high in relation to othe. Sub-Saharan African economies due to the continuing shift towards direct taxation of wages and salaries and the relative stability of maritime revenue which accounts for about 10 percent of total revenue. 16. The control and reduction of expenditures in recent years has been accompanied by significant changes in the structure of expenditure. Following the doubling of wages in 1980, wages and salaries rose from US$67 million in FY78 to $138 million in FY81, increasing their share in recurrent expenditures from 55 percent to about 60 percent, but have been reduced in FY84 to $126 million or about 50 percent. The share of debt- servicing (interest and amortization) has risen from 12 percent of total expenditures in FY82 to 27 percent in FY84. Non-wage and non-debt recur- rent expenditures have declined, resulting in inadequate maintenance of public assets because of insufficient materials and supplies and some accumulation of arrears to vendors to the Government. However, the brunt of adjustment has been borne by the level of development expenditures which declined from 20 percent of total expenditures in FY79 to 9 percent in FY84. Moreover, the composition of development expenditures has shifted to  -6- the detriment of expenditures on vital economic services (e.g., agricul- tural development, roads, transport and communication, etc.), which in FY78 accounted for 50 percent of total development espenditures but only repre- sented 36 percent in FY83. The proportion of total development exoendi- tures going to social and comiunity services has remained constant at about 18 percent, but there has been a sharp decline in absolute terms. Develop- ment expenditures on education and health, for instance, declined from $20 million in FY78 to $8.2 million in FY82. On the other hand, transfers to public corporations (some of which provide social services) including funds for investment as well as undetermined amounts to cover operating losses, increased their share of total development expenditures from 19 percent in FY78 to 33 percent in FY82. Transfers to three corporations alone-the Liberia Electricity Corporation, the Liberia Water and Sever Corporation and the National Port Authority-accounted for half the latter total in FY81 and FY82. 17. While the sharp decline in development expenditures in support of the productive sectors and social services is of concern given the negative impact that this could have on economic activity and the quality of life in the future, of more Immediate concern is the extent to which maintenance of public assets and the quality of services has been neglected. In reducing their current expenditures, many branches of Government and public agencies have been cutting down on expenditures for materials, spare parts, fuel, etc. needed for maintenance as well as for operating purposes, while maintaining the same number of people on their payroll. Those who are aseigned to maintenance (of the road network for instance) cannot carry out their tasks because of lack of materials and logistical support. A more appropriate balance between expenditures on materials and the payroll is clearly required. 18. The quality of investments in the public sector over the last five years has been mixed. Many investments with acceptable returns have been made in agriculture and infrastructure, usually in cooperation with external donors. However, heavy outlays of Government funds for the meeting facilities constructed for the 1979 Organization of African Unity (OAU) Conference as well as some recent urban-based construction projects, have had low or negative returns. 19. The composition of revenues has also undergone marked shifts, with the share of individual income taxation having risen from 15 percent of revenues in 1980 to 24 percent in FY84. Among indirect taxes, the level of import related taxes has fallen from US$76 million to US$54 million between 1980/81 and 1983/84, while export related taxes have fallen from US$10.2 to US$4.2 million over the same period. The most important reason underlying this poor performanc- of revenues is the general decline in the economy, which im turn follows largely from adverse international develop- ments in Liberia's export markets. However, a number of other factors are also at work, including the effect of the appreciation of the dollar on the competitiveness of Liberia's exports and on the valuation of Liberia's imports for the levy of import-related revenue charges; the unsystematic approach to incentives, and their effect on output and new investments in  -7- the rubber and timber sectors; the still cautious attitude of the private sector towards investment in Liberia; and generally poor tax administra- tion. 20. Liberia's use of the US dollar and its traditional open-door trade policies created a favorable environment for private Investment in the past. Since the economy was, and remains, an open one with little protection, there have been no gross misallocations of private investment. Since 1981, however, the balance of payments has deteriorated considerably and massive capital outflows have taken place. Since Liberia uses the US dollar which has appreciated against other currencies in spite of the adverse balance of payments situation, a distortion has been created in the * foreign exchange market. In addition, Liberia is further losing competi- tiveness vis-a-vis the rest of the world due to past excessive wage in- creases in the public sector which have affected wage levels in the economy as a whole. Thus, because of these factors the incentive to produce for export markets has been eroded. Moreover, excessive fringe benefits introduced in the rubber concessions at the Government's urging may also have worsened the competitive position of Liberian plantations relative to others in Asia where labor productivity is higher. 21. Relationship with the IMF. Since mid-1980, the present Govern- ment has pursued stabilization as its principal economic policy objective. IMF standby programs have been in force continually since then. Their principal aim has been fiscal adjustment through public expenditure con- tainment and borrowing ceilings, as well as new revenue measures aimed at offsetting the post-1980 decline in trade-related taxes. Liberia has successfully met the performance criteria agreed upon with the IMF, except for the May/June 1983 borrowing and foreign arrears targets. 22. The Liberian authorities have recently concluded negotiations with the IMP for a fifth consecutive standby program covering 18 months, from July 1984 to December 1985. This program was approved by the IMF Board in December 1984. Like previous programs, its principal elements are fiscal adjustment policies and measures to improve the external position of the National Bank of Liberia as well as the general financial environment. A critical feature of the program is a reduction of the Goverrment's wage bill from US$126 million in FY84 to US$115 million in FY85. The policy instruments for attaining this target are part of the structural adjustment reform program which will be presented for IDA support in the near future. 23. Liberia's record of five consecutive Standby arrangements attests to the persistence of the authorities in seeking economic stabilization since mid-1980. Total IMF resources outstanding as of October 1984 amount to 290 percent of quota, however, and the Fifth Standby Arrangement is for 60 percent of quota. As a result of these heavy past drawings, repayment obligations over the next five years will rise sharply. Even with the anticipated drawings under the Fifth Standby (SDRs 42.78 million over 18 months) net transfers from the IMF to Liberia will be negative by US$21 million commencing in FY85 and will be negative by US$47 million,  - ~ ~ ~ ~ ~ ~ ~ 8 US$72 million, and US$60 millicm in FT86, F87, and F88 respectively. These outflows are superimposed on an already difficult debt service Problem arising from past debts, stagnant export earnimgs and declining goverment revenue. 24. Creditworthiness. Liberia has experienced mounting debt service dIfficulties In recent years and the Bank Group was forced to suspend disbursements for brief periods In 1983 and 1984. The debt service problem is not apparent from the conventional ratio of debt service to export earfnings, hich was only 11 percent in 1982183. Since most of Liberia's debt is public while iach of export earnings are not channelled through the National Bank of Liberia under its payments regime, a better measure of the public debt service burden is the ratio of debt service to total public revenues. This ratio reached 22 percent in 1980. A major reason for this was that Liberia bad earlier obtained comercial bank loans to finance expenditures related to the 1979 OQU Conference. which was Losted by Liberia. 'hile debt service rechedulngs (discussed below) kept the ratio of debt service to Government revenue to 14 percent in 1983. this ratio is expected to be over 40 percent for FYB5 and around 55 percent for FY86 even after debt relief from the Paris and London Clubs, but Inclusive of ITF repurchases and charges. 25. External public debt outstanding and disbursed reached US$630.3 million at the end of 1982 and increased by 10.9 percent to US$699.1 million at the end of 1983. Ihe Bank Group's share of external public debt outstandig and disbursed was about 20 percent in 1982 and 1983 and was about 23_1 percent by the end of 1984. Payments to the Bank Group were about 22.6 percent of total debt service payments in 1982 and in- creased to 36.2 percent in 1983. They were about 24.1 percent by the end of 1984. 26. The Government obtained four rescheIulings under the Paris Club In recent years. In 1980. US$19.4 million of debts contracted before January 1, 1980 were rescheduled. In December 1981, the Paris Club granted further relief by reschedling debts amounting to US$24.8 million and aDturing between January 1982 and June 1983. Liberia's third request was considered in December 1983 when the Paris Club granted relief on official loans and insured export credits valued at US$23.6 million maturing between July 1, 1983 and June 30, 1984. Debt service falling due in FY85 was rescheduled in December 1984. The London Club agreed to reschedule private bank syndicated loans of about US$27 million in December 1982 and negotia- tions for further relief, which included settlement of arrears of US$26 million under a facility to purchase petroleum, were concluded recently. 27. Liberia's debt service capacity will depend on export prospects over the medium and long-term as well as on the quality of economic manage- ment and the Government's policy framework. The movement in world prices of Liberia's main export commodities between 1981 and 1983 was unfavorable and, moreover, the recent appreclation of the U.S. dollar, which Liberia uses as its currency, has adversely affected the country's competitiveness.  -9- Nowevr, growth in export earnings is expected to be higher iX tha medium- tem, minly beeause demmnd for rubber and timber is expected to streng- then. r ore, ongoing agriculture development projects that promote coffee, cocoa and palm oil cultivation as vell as exploration of mining resources, Including oil, may help diversify the economy and could accele- rate the rate of export growth during the next few years, provided that growth in the industrialized countries is maintained. 28. Even with improvements in export performance and economic manage- went and with the additional debt relief which Liberia way obtai- in the future, the country's debt burden will remain considerable in the short and medium-term. Debt service as a percentage of Government revenues, inclu- * sive of IKE repurchases and charges, is expected to Increase to about 70 percent by 1987, assuming no further Paris and London Club debt relief, and about 55 percent with debt relief. This is in part because previously rescheduled losma, as vell as debt to multinarional institutions such as the IMP, the Bank and IDA, are not subject to rescheduling. In view of the country's bigh public debt service obligations, assistance from the Bank Group will continue to be On IDA terms. Liberia also will require addi- tional debt relief from the London and Paris Clubs for the next few years as well as increased external assistance from other sources on concessional terms. PART II - BANK GROUP OPERATIONS IN LIBERIA 1 29. As of November 30, 1984 the Bank has approved 2.2 loans (including one Third Window loan) for projects in Liberia totalling US$155.2 million; there have also been 15 IDA credits totalling US$106.6 million and one technical assistance grant of US$20,000 for development planning. IYC has made three equity investments totalling US$703,000 In the share capital of the Liberian Bank for Development and Investment (LBDI). Annex II contains a sucmary statement of Bank loans, IDA credits, and IFC investments as of No'ember 30, 1984. 30. Up to the early 1980s, Liberia was eligible for Bank lending as well as IDA support and substantial assistence vas provided for projects in several sectors. Support was provided for six projects in agriculture, four in power, four in highways, three in education and three In industry, among others. With Liberia now eligible for IDA assistance only, Bank Group support has been more selective in recent years and has been concen- trated on c.mtiwnuing high priority development efforts in agriculture, highways and education and in projects that would improve the country's balance of ;,ayments. 1/ This section is substantially unchanged from the President's Report on the Second Water Supplv Project (P-3865-LBR) of February 27, 1985.  - 10 - 31. Over the past months, Implementation of most Bank Group assisted projects has been affected by a shortage of Government counterpart finan- CiDg due to the sharp deterioration of public finances discussed in Part I of this report. The National Iron Ore Company (NIOC) Rehilitition project, which has required much greater Government contributions than expected because the Company's earnings bave been depressed by adverse developments in international markets, has been affected in particular, and NIOC was forced to auspend operations in October 1984 because of insuffi- cient working capital. The Government is discuzsing permanent closure of the mine with the Bank and its cofinanciers. To facilitate the execution of ongoing projects. the Bank and IDA have introduced revolving accounts to provide working capital to executing agencies and in some cases reduced the scope of projects to decrease claims on Government resources- Bank Group disbursements have fluctuated between 32.5 percent of credits and loans outstanding at the beginning of the fiscal year in FY81 to 18.1 perceat in FY83. Disbursements in FY84 were equivalent to 26.3 percent of credits and loans outstanding at the beginning of the period. 32. Given the decline in Liberia's exports over the past few years and the deterioration of public finances-which does not allow the Govern- ment to make an adequate development effort-the principal objectives for Bank Group operations for the imuediate future are: {a) to strengthen institutions and improve policies in the public sector so as to improve the efficiency with which public resources are used, with special emphasis on the quality of public investment; (b) to consolidate development programs in sectors that are vital to the growth of the economy, giving particular attention to those that could improve the balance of pay- mets; gc) to help maintain and/or rebabiitate the country's more important physical assetrs; (d) to continue improving the country's human resources. 33. A proposed structural adjustment program, with its complementary technical assistance project, is the principal means by which the Bank Group is seeking to bring about an improvement in the efficiency with which public resources are allocated in Liberia. The program would set in motion institutional arrangements to improve the use of resources in public corporations by making the Government's oversipght practices for such corporations more systematic and focussed and setting specific operational and financial targets for the managements of corporations to achieve. This macroeconomic approach to improving the performance of public enterprises is to be complemented by Bank Group involvement in projects that would seek to improve management practices at the level of the firm in selected public corporations. Thus, Bank Group support is visualized for the LWSC and the SPA, two enterprises that have performed poorly over the past few years and  - 11 - which could have to cease providing services that are vital to the cow- nity if nagement practices are not improved. }azk Group involvemet would focus on upgrading internal controls and accoumting, reducing costs to eliminate operational loses e=d impraving regular maintenance of physical assets, while providing spare parts and replacements so as to reduce the risk that services be interrupted because of equipment failure. The general results of these projects would be to reduce the claims which the corporations make on central Government resources and to improve the quality and reliability of services to the public. 36. If Liberia is to overcome its present economic difficulties, it will be necessary to revitalize its productive sectors to reestablish the * country' s capacity to earn foreign exchange. Bink Group strategy will be focussed on continuing a dialogue with the authorities on policies affect- ing the perforumce of export sectors, continuing support for ongoing development programs that are export oriented and seeking to diversify the sources of Idberia's export earnings, such as through the proposed project to promote petroleum exploration and production. The structural adjustment program provides for detailed reviews of policies affecting the performance of the country's principal export subsectors-iron ore, natural rubber and timber. Some policy adjustments, by which tax rates have been adapted to present circumstances in international markets, have already been made in the iron ore sector as a result of preparatory vork for the structural adjustment program. Similar dialogues will be pursued in the context of sectoral and project assistance_ The Bank Group has long been involved in the promotion of export crops in Liberia and future assistance for agricul- ture will seek to capitalize on the gains made under ongoing projects in improving the technology for rubber, cocoa and coffee cultivation and introducing new export crops, most notably oil palm. Sector issues that might affect farmer response to these development efforts-such as the adequacy of farmgate prices and the institutional mechanisms for marketing and processing farm output-will receive growing attention and will be pursued with the authorities as central issues to future support for agriculture. An agricultural services project and a second rubber develop- ment project are in preparation and will be appraised iu FY86/FY87. 35. While efforts to diversify exports by promoting agricultural products are promising, there is urgent need to find substitutes for iron ore exports, which have traditionally accounted for between one half and two thirds of the country's gross foreign exchange earnings. Not only is iron ore facing vwak demand in international markets with little prospect of recovery over the immediate term, but, over the medium term, Liberia's export volume is likely to decline as established ore reserves are deple- ted. In an effort to find a substitute export commodity in the mineral sector, the Bank Group has been assisting the Liberian Government establish the necessary legal and institutional framevork to encourage exploration for petroleum. These efforts have had initial success as an international oil company has undertaken an exploration program. The objective of the proposed project is to promote a broader exploration effort in order to increase the prospects of locating commercial quantities of petroleum in Liberian territory. While it is too early to tell what the results of  - 12 - these efforts might be, it is clear that, if tney are successful, the balance of payments constraints to Liberia's long-term growth prospects will have been removed to a large extent. 36. The deterioration of public finances and the poor finanrial performance of public corporations over the past few years have resulted in Inadequate maintenance of some of Liberia's wore vital public assets. Highway maintenance was recognized to be inadequate by the Government in 1983 and Bank Group assistance was requested to preve-t a turther deterio- ration of the main highway network, which would hava depressed agricultural output and further deteriorated the country's balance of payments. IDA is providing assistance for a highways maintenance and rehabilitation project that is helping establish routine and periodic maintenance procedures in the M4instry of Public Works and ensuring that sufficient resources are allocated to highway maintenance. Inadeanate maintenance of the port of Monrovia, which haindles over half the country's exports and over 80 percent of its imports, could also have serious consequences on the national economy unless a rehabilitation project is undertaken soon to prevent an interruption of port services. A project to this effect, that would emphasize mangement improvements as well as the rehabilitation of physical assets, is to be appraised in the coming months for possible Bank Group support. 37. While the Bank Group is emphasizing the resolution of Liberia's more immediate economic problems in its operations. it cannot neglect addressing some of the country's more fundamental long-term development problem. One of Liberia's chief development constraints is a shortage of skilled manpower at all levels. It vill not be possible to raise the productivity and income of the majority of the population to any signifi- cant extent without raising knowledge and skill levels, and for this more and better basic education is required. The Bank Group has provided assistance for four education projects that supported the Government's efforts to extend and improve primary and technical education. These have helped to better match education and training to the country's manpover requirements. However much remaism to be done: the gross primary enroll- ment ratio for the country as a whole is still only 66 percent. In order to continue the institution building tasks initiated under previous Bank Group assisted projects and improve cost effectiveness in the sector, a fifth education project is in preparation for appraisal in FY88. 38. Liberia has high population growth and infant mortality rates. Given this demographic situation, efforts to deal with the high rates of mortality should be linked to efforts to deal with fertility so as to reduce the possibility of accelerating population growth, as this would have a negative impact on the country's long-term development efforts. A potentially effective health delivery system exists but needs to be streng- thened through training and logistical support. A maternal and child health care and family planning project that would help the Government develop and carry out appropriate policies for the sector iS In preparation and would be appraised in FY86.  - 13 - PART III: TEE ENERGY SECTOR Enerfy Resource Base, Production and Demand 39. Liberia is relatively veln erdowed with energy resources. It is Almost unique in the Vest Africa Region in that more than half of its 43,000 sq. miles is covered with dense rain forest and that for the great majority of the rural population there is no fuelsood crisis. It is estimated that three million tons of fuelvood vere consmed in 1981 and another 2.1 million tons converted to charcoal. The residential sector consumed vlrtually all the fuelvood and charcoal produced in 1981. In spite of the fact that vood fuels are abundant, serious questions have been raised about whether the country's forests are being optimally exploited. For example, the most attractive sources of vood fuels that could be tapped are retired rubber trees. 40. The other significant indigenous energy resource is hydroelectric power, although of highly seasonal flows, and the expense of water storage is a major problem. At present, hydroelectric generating capacity amounts to 68 Mg and accounts for 27 percent of the electricity generated. Substantial hydroelectric potential could be developed. The principal options for large-scale development are the St. Paul and Nano River propo- sals, but there appears to be no economic justification for their develop- ment for at least a decade. 41. There are no known hydrocarbon reserves in Liberia although exploration work done to date suggests that Liberia has attractive geologi- cal proapects. Serious exploration was initiated by Amoco in 1984 (paras 60-61). 42. In 1983, 0.9 million tons of oil 2quivalent (toe) were used by various sectors of the economy. Of this total energy demand, 23 percent was met by petroleum products, all of which was imported, 8 percent in the form of hydroelectric power, and 69 percent in the form of fuelvood and charcoal. Liberia's economy has been in decline since 1979 and prospects for future economic growth are uncertain. While Liberia's present per capita energy consumption of 438 kgoe per year is wel' above that of its neighbors, this level of consumption is not likely to continue. In effect, the Liberian energy econawy is evolving In the opposite direction of most developing econoziei., vwere the share of modern fuels in the total energy source mix increases as urbanization and industrialization proceed. The major reason for this is the uncertain prospects for the iron ore sector, the output of vhich could decline sharply over the next decade, greatly reducing the base and level of economic activity and modifying the pattern of energy consumption in the fnture. In Liberia, the overall growth in energy supply over 1984-1993 is expected to be 3.6 percent p.a., or mar- ginally higher than population growth, and its source is expected to be almost exclusively woodfuels. The table below shows the present and projected pattern of final energy consumption:  - 14 - Ibbe 1: FNAL NMMW= (Actual ad projected ('00 toe) FmU Mectriiy I/ Petroleu Total 1983 1993 1983 1993 1983 1993 1983 1993 fi1__ActAa Pkoted Acl Pme A Pmd lUnin and Otber ilstry 4.4 10.2 55.9 3.5 46.4 2.2 106.7 15.9 TciNPort - - - - 147.6 175.2 147.6 175.2 Aodalbzre - - 1.9 1.9 5., 9.1 7.6 11.0 Ehbdleol 625.7 845.9 9.0 14.3 4.5 6.7 639.2 866.9 Cinrce/Goenuinet - - 12.0 17.9 4.2 4.5 16.2 22.4 Total 630.1 856.i 78.8 37.6 208.4 197.7 917.3 1091.4 Sb