The ‘Budget Shortfall’ jitter and Myth

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The Central Bank of Liberia’s annual report for 2018 showing that the country recorded a fiscal deficit of US$225.5 million (7.0 percent of GDP) has been received with mixed reactions.

Some politicians’ interpretation of the report is that the George Weah’s administration has destroyed the economy, the current fiscal budget (2018/2019) has collapsed and that massive stealing is the reason behind the growing deficit.

Those interpretations are pure politics and not economics. Fiscal deficit here means the difference between total government’s expenditure and revenue recorded in a calendar year (January- December) and not the 12-month accounting period used for the national budget (1 July -June 30).

But the real news here is that Liberia’s fiscal deficit will increase beyond its current size in years ahead. Why? One, two, three, four five: the country has a huge public debt stock of US987.8 million acquired in previous years representing 30% of GDP; revenue sources including taxes on international trade, grants are shrinking; government will borrow again to finance the deficit; the new borrowing will create the problem of repayment of loans and payment of interest. Payment of interest raises the revenue expenditure, which leads to higher revenue deficit.

Between 2016 and 2017 the fiscal deficit grew by US$32.6 million and increased by US$25.9million from 2017 to 2018. This explains that no specific administration has been deliberately widening the deficit but compelling economic and financial forces..

As the CBL report shows it has been a combination of economic factors shooting out of real life situations in relation to government wants and needs and the state of its revenue base.

The Bank said the deficit was a result of fall in total revenue and grants receipts during the year. Compared with 2017, the size of the deficit in net fiscal operations widened from 6.1 percent of GDP.

“Government revenue (including grants) amounted to US$402.2 million (12.5 percent of GDP), reflecting a 12.7 percent decline compared with 2017. The fall in revenue (including grants) during the year was occasioned by shortfall in both tax revenue and non-tax revenue. Tax revenue fell by 14.9 percent due to declines in taxes on international trade, sales taxes on goods and services, and taxes on income and profits. International trade taxes fell by 20.7 percent to US$154.0 million as a result of drop in collection of taxes and duties on imports, while taxes on income and profits fell by 5.2 percent to US$129.9 million due to slowdown in tax receipt on households’ income and profits.”

The CBL report is fair assessment of the national economy. Authorities should formulate working solution to the growing deficit. Follow-up and conclusion of satisfactory terms of the mineral swipe deal with China or any interested parties could reduce the possibility of borrowing. Proper management and accountability of national resources like gold, diamond and timber should also be considered.