Only Liberians Can Save Liberia
By: Jeff Bante Blibo
The Perspective
Atlanta, Georgia
Posted April 18, 2008
Indeed, our problems are enormous and at times seem insurmountable. The physical, social and economic infrastructures all require major investments. Solving these challenges will require the efforts of all Liberians at home and in the Diaspora. Liberians must play a leading role if our development efforts are to be sustainable. The notion that we should look to the US, EU, the UN and other international organizations to lead the reconstruction efforts would be no different than displaced Liberians expecting foreign governments to build them houses to their individual preferences upon their arrival in a host country. The US and EU can help and they are helping. However, the heavy lifting must be done by us, Liberians.
Last April, I returned to Liberia to start a business. Today, Union Strong Group, my company is up and running. We are helping to solve some of our infrastructure problems, albeit slowly. Transportation in Liberia is a nightmare. This is evident by the thousands of citizens who have to wait for several hours each morning and evening for basic transportation. We are trying to solve the transportation problems by bringing quality vehicles, tires, batteries and spare parts into the country where more than half of the vehicles on the roads (my observation, not scientific) are defective. We are helping to solve the energy problems with the introduction of our deep cycle batteries that are used to provide electricity to individuals and businesses without degrading the environment. This July, we will be introducing solar panels along with inverters and chargers to form a fully integrated solar power system. These efforts are incremental but we are succeeding. Listen to an in-depth discussion on Star Radio’s “Business World” with Oratio Bobby Willie at http://www.starradio.org.lr/content/view/7281/391.
Our success has not come without major headaches. One major headache is FREEPORT. Many of my colleagues have stories of their experiences trying to clear their goods from the Freeport. Whether fair or unfair, Freeport suffers from an image problem – a culture of pervasive corruption and everything inefficient. And for many Liberian entrepreneurs, Freeport is where their dreams end. Some of my colleagues have abandoned their shipment of goods due to the high tariff. Frustrated, they have vowed never to return to Liberia.
To the casual observer, some of my colleagues included, it is easier to blame the workers at Freeport for all our problems. But, the problems go beyond the Freeport as the port encompasses only enforcement functions. The culprit is the “Revenue Code of Liberia Act of 2000” which is still in effect today. As the Revenue Code is broad and covers many tax issues, I will limit my discussions to the tariff portions of the code.
The Revenue Code of Liberia Act of 2000 by design and implementation was meant to generate tax revenue as quickly as possible without regard to economic consequences. It is widely known that during this period, the international community had pretty much shunned the government of Charles Taylor blocking access to the global financial markets. Thus, the Revenue Code became an important conduit for generating income for the Taylor regime and the proceeding governments. The Revenue Code with regard to import tariff is summarized below:
Tariff = (GST * (Taxable Import + (Import Tax * Taxable Import))) + (Import Tax * Taxable Import) + (ECOWAS Tax * Taxable Import)
Where,
GST = Goods and Service Tax. It is 7% on every Taxable Input into Liberia
Taxable Import = Value of your goods. Custom uses market value not transaction price to determine the value of your goods plus the cost of freight and insurance (CIF Value)
Import Tax = The rate at which a particular good is taxed
ECOWAS Tax = Tax on goods from non-ECOWAS country. It is 1.5%
There are two reason why this tariff valuation posses serious and significant problems for businesses and the economy. First, the Goods and Service Tax, GST is a consumption tax that when applied at the port of entry significantly raises the tariff and that in term, raises the overall price levels of imported commodities. Why then would the Taylor government impose a consumption tax at the port of entry and not at the point of sale? Simple – to collect revenue now, otherwise, the government has to wait to collect revenue when a sale is made. In fact, the government could earn more revenue when sales are brisk, slower revenue when sales are slow and no revenue when there are no sales for a given period – which would be a fair system. However, by collecting consumption taxes in advance, the Revenue Code transfers all the “sales risks” to businesses. Importers, adjusting for these “sales risks”, are forced to raise prices higher.
The Revenue Code further extends this “REVENUE NOW” mentality to business income tax – the so called “Turnover or Presumptive Tax”, Section 200 of the Revenue Code. The code requires a business grossing less the $5,000,000 LD for a tax year to pay 4% tax on sales revenue payable on a quarterly basis in lieu of income tax. For a business that has gross income of $5,000,000 LD or more in a tax year, it is required to file an income tax and to pay a flat income tax rate of 35% or a 2% “presumptive tax” whichever is higher. The 2% presumptive tax is, however, payable on a quarterly basis and creditable against income tax for that year.
With capital as the life blood of every business enterprise, a business is thus forced to adjust its capital structure to account for these frequent and re-occuring tax outlays. The cost of capital for the early payment of these tax outlays, which can be derived from the discount rate of the enterprise in question, must be accounted for as well. In other words, someone has to pay for the opportunity cost of paying tax revenue before it is due – and it usually always is the consumer in the form of higher prices.
The second reason that tariff valuation causes serious and significant problems is in the method used to determine the cost of an imported good. Liberia’s Custom does not use transaction pricing to determine the value of a good. Instead, Custom uses the Brussels Definition of Value (BDV). BDV uses notional pricing, the so called market price, defined as “the price a good would fetch in an open market between a buyer and seller independent of each other”.
A bit of history is necessary here. In 1947, WTO through the General Agreement on Tariff and Trade (GATT) adopted through Article VII an agreement on the standardization of customs value, GATT VII. Following this agreement, BVD was developed in 1953. Since its inception, it has caused widespread dissatisfaction among traders because it does not reflect price changes and other economic conditions until the notional price was adjusted by the custom offices over a certain period of time. New products are sometimes not on the list, and in the case of Liberia, valuing used goods posses additional challenges.
In 1979, the Agreement on Implementation of Article VII of the GATT developed the Tokyo Round Valuation Code (TRVC). The TRVC is based on the price actually paid or payable for the imported goods. It is based on the “transaction value”, and it is intended to be fair, uniform and a neutral system. In 1994, The TRVC was replaced by the WTO Agreement on Implementation of Article VII of the GATT following the Uruguay Round. It is interesting to note that this Agreement is the same as the TRVC. The Agreement stipulates that “customs valuation shall, except in specified circumstances, be based on the actual price of the goods to be valued, which is generally shown on the invoice”. The invoice price, plus adjustments listed in Article VIII (mainly, cost of freight and insurance) equals the transaction value, which constitutes the first and most important method of valuation referred to in the Agreement.
In cases where there are no transaction values or where transaction values are not acceptable as the customs values because of price distortions, the Agreement provides alternative methods for valuation, namely, transaction value of identical goods, transaction value of similar goods, deductive method, and computed method.
As the BVD is based on notional valuation, it is non-transparent and arbitrary. Couple this with the excessive tariff valuation which is grounded in the statutory 2000 Revenue code of Liberia, and we end up with an environment in which corruption thrives.
Many customs officers as well as traders recognize that tariff is excessively high. The anecdotal evidence is clear – traders fearing high valuation of their goods, grossly under declare their goods and/or create distorted invoices. Thus, traders and custom officers operating outside official channels work out modalities to bring valuations into harmony. This process is what we call corruption and as everyone knows, it takes two to tango. Those who refuse to play by these unofficial rules see their goods sit at Freeport for months accumulating charges that ultimately they cannot afford. They watch as their goods are auctioned off and with them their dreams of contributing to re-building their country. While others pass on the excessive tariff to the Liberian consumers who are paying a heavy burden – limited choices, expensive and sub-standard products, etc.
To fix these problems, tax policy makers must begin comprehensive reform of the tax code towards the goal of overall reduction in taxes as a fiscal stimulus to the economy. These should include converting from the BDV system to the 1994 WTO Agreement on Custom Valuation, and lowering and applying GST at the point of sale and not at the port of entry. This will create fairness, uniformity, neutrality and transparency.
Fairness and transparency are the basic tenets of tax policies. Fairness implies affordability and it minimizes and, in some instances, eliminates the “tax avoidance tendencies” exhibited by those who bear the burdens of such policies. Many people have began to disengage from doing business in Liberia complaining that the process is too expensive and frustrating while others are employing extraordinary measures to get their products to Liberia. Some of my colleagues are beginning to export trucks and other equipment into Guinea and driving across the border into Liberia. I am afraid that these activities will greatly increase unless the tariff issues are addressed soon. Lowering the tariff will greatly reduce the need to under declare goods or distort invoices for tax purposes. In addition, the volume to imports will rise thereby increasing the overall tariff revenue. Transparency would mean that tax authorities, traders and any reasonable person could readily come to the same conclusion regarding the valuation of a good. With no group having an advantage over the other, there will be less need to operate outside of official channels thus reducing or eliminating the culture of corruption.
Reforming the Revenue Code of 2000 is not only about reducing tariff and corruption, but rather, it cuts into the heart of our developmental challenges. With the country at 85% unemployment and growing, what is needed is massive stimulus to generate economic activities within the private sector. Government cannot rely on tax revenue alone to achieve its developmental goals at the expense of the private sector. Instead, it must provide incentives to the private sector in order to stimulate job creation. The are some within the Sirleaf government that say, “government needs the money” as their argument for the status quo. This is a false argument. The question is “what is the best strategic option that the government should pursue to raise income for its developmental goals?” There are no disagreements among economists that incentives matter. To paraphrase Adam Smith, “It is not from the kind hearts of the butcher and baker that we get out meals, but from their own selfish interests.” Individual households, private enterprises, and the public sector respond purposefully and predictably to incentives. Clearly, there are numerous fiscal stimuli that can be achieved by reforming the tax code. But this must be done in a comprehensive way not a piece meal fashion.
The rebuilding of Liberia demands of us that we ourselves must take the lead. We cannot mortgage our land and treasures to multi-national corporations while expecting them to act in our interests. While we welcome Mittal Steel, Mr. Mittal cannot save us from the crisis we face. Furthermore, we cannot begin to attract multi-national corporations other than those in the extractive industries unless we begin to tackle other challenges – the lack of an educated and highly skilled workforce and adequate infrastructures. Instead, we need to re-direct our focus to developing and nurturing a vibrant small and medium business sector. The economic backbone of every developed nation is its small and medium enterprises. Most of today’s goliaths come from very small beginnings. Thus, there is no better way to develop a nation’s “capacity”, one of the most over used words in the UN lexicon, than through the boot camps of small and medium enterprises. This is why I believe that reforming the tax code is paramount. This is necessarily important as debt cancellation or obtaining HIPC status from the World Bank. The former is premised on channeling our limited but collective resources for national development while the later is to continue the dependency on foreign governments and institutions for our national survival.
Following the inauguration of President Sirleaf, many of us in the Diaspora were over taken by this nationalistic zeal - a strong and euphoric desire to return home and help in the rebuilding of Liberia. I was part of that in initial wave. To date, I have spent over $400,000.00 USD in my efforts. My initial investment was $75,000 USD for a land for real-estate development projects. I am not alone. For those of us who have traveled this journey, we face an uphill battle on all fronts. Access to credits for investment in Africa is very limited. So, many of us use our personal wealth and other creative strategies to raise funds for projects at home. With limited capital we watch in awe and frustration as our capital quickly dwindle due to the difficult and expensive process of setting up and doing business in Liberia. We get no special treatments and have limited and no access to decision or policy makers. Some joke that it is a disadvantage being a Liberian and doing business in Liberia. Yet, we press on. Lately though, I am beginning to see the euphoria wane. And this is troubling.
Meanwhile, global inflation is beginning to have a severe impact on the Liberian economy. From basic and essential commodities to building materials, the Liberian consumers are feeling squeezed. This is exacerbated by the huge unemployment number which continues to worsen the wealth/income disparity. Unless we address these disparities, no fence no matter how tall can save us from those at the bottom of the economic rung. Do we as a society want to live behind prison walls? Our history is this, first, it starts with envy, then it leads to anger and frustration, then chaos and rebellion and finally - war. At the moment, the government seems paralyzed in addressing these inflationary pressures. Listen to Commerce Minister’s interview on Star Radio’s “Business World” with Boddy Willie at http://www.starradio.org.lr/content/view/7573/391. The government has reverted to price control mechanisms although the efficacy of such stabilization policy is limited and doubtful. Price control does not work. Yet, we keep violating the basic law of economics – price is determined by supply and demand. The focus it seems to me should be on providing fiscal stimuli to the private sector thereby increasing aggregate demand which will have a net positive effect on employment.
Our greatest national resource remains our human capital yet it is the most under utilized asset to date. The only silver lining in our 30 years civil conflict is this - that as the consequence of war, many Liberians have had the opportunities to gain valuable educational and professional experiences whether in the US, Europe, Nigeria, Ghana and other parts of the world than would have been possible. These Liberians can make significant contributions in our national efforts. The government must make a fervent effort to attract these Liberians not for government jobs but within the private sector.
In addition, both Liberians at home and in the Diaspora can begin to organize around our developmental challenges so as to help the national government develop strategies and policies. From the judiciary, healthcare, education, banking and finance, to economic, social and physical infrastructures all require the efforts of Liberians. The government cannot do it alone. We must begin to engage the government in genuine and deliberative ways in order to formulate policy solutions to our problems. Such engagements must be apolitical although national policies often have political dimensions. Those in government that are responsible for policy decisions must be willing to work with such organizations. Furthermore, these policy leaning organizations must guard against the “lack of civility” that too often characterizes discussions on the internet and creates deep suspicion, distrust and resentment on all sides. Through collaborative engagements we can find common solutions to many of our problems, and together, we can begin to build a better Liberia.
Jeff Bante Blibo is a Liberian entrepreneur. He is CEO of Union Strong Group in Liberia. He holds a BSC in Engineering from University of Alabama and an MBA from Boston College. He can be reached at jblibo@hotmail.com
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