Creating and Using Fiscal Space for Accelerated Development in Liberia

This paper presents simulations for the
period 2013-2030 of measures that permit increased spending
on infrastructure and human development, the priority areas
in Liberia's 2013-2017 "Agenda for
Transformation" and for its national vision, Liberia
Rising 2030. The simulations are carried out with a Liberian
version of MAMS (Maquette for Millennium Development Goals
Simulations), a Computable General Equilibrium model.
According to the results, among the key sources of fiscal
space, foreign grants generate the best outcomes followed by
improved government allocative efficiency. Taxes tend to
involve trade-offs since they reduce resources for private
consumption and investment, both of which tend to contribute
to stronger macro and Millennium Development Goals
performance. Increased foreign borrowing is less attractive
since, in order to make a substantial difference, it would
quickly add to the foreign debt, making the economy more
crisis-prone and less flexible. The preferred balance
between different uses of fiscal space depends on payoffs
from different government functions, typically unknown or
only appearing with a lag. Under the parameters used in the
simulations, determined in light of fragmentary evidence,
the outcomes were marginally stronger under a balanced
approach with scaling up of both infrastructure and human
development services. Balanced expansion may also contribute
to efficiency and be easier for political reasons. A final
finding is that it is possible to consider fiscal space
issues in isolation from the mining sector: simulations
suggest that the marginal effects of creating additional
fiscal space are very similar irrespective of the level of
mining export prices.