Liberia’s private sector shows promising signs

The Liberian economy shows great potential for growth in the private sector, but obstacles such as weak institutions and poor infrastructure stand in the way. Will the government take steps to solve these issues?

Last week, Liberian Finance Minister Amara Konneh delivered a report on the state of the country’s economy. Konneh remarked that Liberia’s economy has grown since the end of the conflict in 2003, but issues of unemployment and weak infrastructure remain fundamental challenges. In the light of Konneh’s remarks, it is worth examining the current state of Liberia’s economy and current obstacles to private-sector development.

Private sector industry grows

Natural resources play a crucial role in Liberia’s economy. Liberia has significant mineral wealth, including around 2 to 5 billion metric tones of iron ore reserves. With the development of three more mines by 2015, the industry is expected to contribute around 20% of GDP and employ 10,000 people. With the involvement of Arcelor Mittal, a multinational steel-manufacturing corporation, Liberia’s industrial and manufacturing sector expanded in 2012 by operationalizing the Yekepa mine. Companies such as China Union and BHP Billiton will start in the same line of work in 2015, making the mining, industrial and manufacturing industries show great potential.

Timber and logging activities also significantly contribute to Liberia’s economy, as the country is home to the largest rainforest in West Africa. An area for great potential growth is oil. The government has leased a number of offshore oil blocks and is working toward making a few exploratory wells commercially viable.

There are some institutional legal frameworks that have allowed for this activity to take place, such as a Minerals Management Law (2000) and a Public Procurement and Concessions Act (2006), the latter of which regulates the bidding process for concessions. Liberia has a National Investment Commission that works to negotiate concession contracts that also include provisions for local employment and infrastructure.

Obstacles to private sector development

While Liberia has shown positive growth despite its post-conflict environment, there are many obstacles that impede Liberia’s pursuit of robust economic growth and private-sector development. A crucial problem is weak infrastructure. Liberian industries, particularly logging, are unable to take full advantage of the resources available in the country due to extremely deficient roads, ports and rails. Roads and basic transportation routes are essential for both large industrial companies and smaller businesses to access markets, trade with other countries and expand value chains.

Access to a cheap sources of power is another infrastructural issue that hinders growth in the manufacturing sector. Electricity costs over $0.54 per kWh, which is more than three times the average in Africa. The high input costs that result from weak infrastructure hold back private sector development and prevent Liberian industries from achieving their full economic potential.

There are also several institutional weaknesses that hinder private sector development in Liberia. In general, an historical and societal distrust of the rule of law in Liberia has led many people to utilize the informal customary justice system. This has led to a high level of informality in the economy and has harmed productivity. The customary justice system, while relatively more trustworthy, lacks protection, financing and long-term capital, all of which multinational companies rely on when deciding to operate on a foreign country.

Scandals involving the government and corruption also contribute to institutional weakness and impede private sector growth. In the forestry sector, there has been widespread abuse of Private Use Permits (PUPs). Twenty-five percent of Liberia’s land had been contracted for logging mostly through falsified deeds and without the knowledge of local communities. As a result of this scandal, a moratorium was placed on PUPs and the head of the board of the Forest Authority was suspended.

Similarly, there have been reports of corruption within the oil industry. Companies such as Nigeria’s Oranto Petroleum and the Liberian oil-sector regulator (the National Oil Company of Liberia) have been accused of paying lobbying fees to the Liberian legislature so that it would ratify various oil contracts.

The ‘Agenda for Transformation’ shows promise

While there are several obstacles for Liberia to overcome when it comes to private sector development, the Liberian government has made a concrete effort to address infrastructure constraints as well as other developmental goals such as youth employment.

Launching the Agenda for Transformation (AfT) in 2012, Liberia has made ambitious plans to remove structural obstacles through an estimated $32 billion program. At least half of this fund will be dedicated to improving roads and reducing energy costs. The plan also includes allocating funds for social inclusion of youth and improvements in governance and public institutions. As a major first step in implementing the AfT, the government has secured the funds to revive the Mount Coffee Hydropower Plant, which will provide substantial amounts of power to Monrovia.

A recent working paper published by the International Monetary Fund found that for Liberia, an increase in public funds will “increase private investment growth in the long term, but in the medium term, the authorities must decide how to finance investment without increasing debt to unsustainable levels and within their legal framework.” The AfT then serves as a great starting point for private-sector development.

To sustain private-sector development, however, the Liberian government must work on advancing structural transformation by passing legislation that would allow for both resident and non-resident companies and businesses to grow. Such a transformation would include ensuring compliance with regulatory regimes and reducing corruption across major industries. These tasks will ultimately require strong political will across the government.

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Categories: Economics, Sub-Saharan Africa

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