Selling off the family silver

The chairperson looked around the table and asked for a vote from each representative from the various participating ministries. An overwhelming majority voted against. I breathed a sigh of relief - the Ministry of Finance had won the battle this time round, and the companies in question will not be granted the unreasonably high levels of tax exemptions they had asked for. We had spent some time at the Ministry analyzing these companies and had found little rationale for them to be given government support. None of them were planning on making large capital investments in the economy, nor were they taking on any risk to diversify into new economic activities. Simply put, these are profit-making companies that want to escape the obligation of paying taxes so they can make even more profit.

The creation of private sector employment opportunities constitutes the core of Liberia’s growth strategy, and it is important for the government to create a competitive business environment to attract foreign investment into the country. It is also the case, however, that the government needs a sustained source of revenue in order to improve the provision of basic services to the public. Whilst tax exemptions may help attract investment, which in turn generates higher incomes and broadens the economy’s tax base, they may also reduce government revenues, since they effectively act as subsidies to companies. The net effect of tax exemptions for a particular company would therefore depend on the macroeconomic benefits generated by the investment, measured against the revenues lost.

A similar balance needs to be struck when the government negotiates concession contracts with the private sector for natural resource extraction. Liberia is a land endowed with rich natural resources such as iron ore, diamonds and timber, and if managed well, these resources have the potential to spur economic growth in the country. In particular, mining and panning activities are expected to expand rapidly in the next couple of years, growing from near zero production in 2005-06 to more than $110 million in production in 2010, or to about 12 percent of GDP. However, it is sadly the case that in their urgent effort to attract foreign investment, developing countries often ‘sell off the family silver’, signing away their natural resources on highly unfavourable terms. The Liberian government is making big efforts to avoid this. In addition, it has recently started to focus more on the social responsibilities of concessionaries in their negotiations. By requiring companies to provide basic services such as health and sanitation, education, transportation, and social safety nets in the local communities where they operate, it is hoped that benefits from natural resources may be widely shared. This inclusive and equitable growth will be the key to sustained peace in Liberia, helping to avoid the atrocities that had so devastated the country in decades past.