Liberia Slashes Debt with $1.2 billion Buyback at Steep Discount

Buyback was completed at no cost to the citizens of Liberia

Liberia today announced that it had significantly reduced its foreign debt by buying back $1.2 billion in outstanding government debt at a discount of nearly 97 percent of face value, the steepest ever negotiated on developing country commercial debt.

The deal was concluded with the payment of $38 million to retire 25 outstanding commercial claims. The World Bank contributed half of this money through the International Development Association (IDA) Debt Reduction Facility, and Germany, Norway, the United Kingdom, and the United States contributed the other half.

“The successful resolution of this inherited debt, which had ballooned through interest and penalty charges during a period when my country was wracked by civil war, is an important step on our road to recovery,” said Liberian President Ellen Johnson Sirleaf. “This puts us on a firmer footing to attract investment and accelerate economic growth.”

“This buy-back significantly eases Liberia's heavy external debt burden and normalizes the country's financial relationships with the investment community,” said World Bank Group President Robert B. Zoellick. “The support to the buy-back by the Bank's Debt Reduction Facility is part of our commitment to help heavily indebted poor countries reduce their debt burden”.

This deal cuts Liberia's foreign debt to $1.7 billion, representing a reduction of more than $3 billion in the last two years. Most of the remaining debt will be cancelled when Liberia reaches its Completion Point under the Heavily Indebted Poor Country (HIPC) initiative, probably in 2010.

The bought back debt had been in default since the mid-1980s when Liberia was beginning to descend into civil war. During the intervening years, most of the debt was sold and often resold on the secondary market.

The Liberia deal, which had been in negotiation for two years, is the first successful debt buyback in which the vast majority of the debt was held by hedge funds and other distressed debt investors rather than by the original creditors. Creditors holding 97.5 percent of Liberia's foreign commercial debt participated in the deal, one of the largest rates of participation in a sovereign debt buyback in the last several decades.

Because of the support of the World Bank and the other partners, the buyback was completed at no cost to the citizens of Liberia. Liberia was assisted in the deal with legal counselors from Cleary Gottlieb in New York City, and financial advisors from Houlihan Lokey in London, both supported by the World Bank and the Government of Switzerland, alongside economic advisers from the Center for Global Development in Washington.

Sirleaf, Africa's only female head of state, was elected in 2005 after international intervention ended years of bloody fighting that devastated the country and destroyed the capital, Monrovia. As part of its recovery efforts, Liberia has worked with its multilateral, bilateral, and commercial creditors to rationalize its debts. In June, 2007, Liberia's foreign debt totaled $4.9 billion, equivalent to 700% of Liberia's national income, by far the highest debt-to-GDP ratio among developing countries.

In December 2007, the World Bank financed Liberia's clearance of its overdue debt service payments to the World Bank, resulting in a reduction in its debt of close to $400 million, and a similar operation with the African Development Bank led to a reduction of an additional $250 million. Negotiations with its bilateral creditors have led to cancellations of approximately $800 million.

Liberians are among some of the poorest people in the world, with an average annual per capita income of $150. More than half of the population of 3.5 million is under 25 years old, meaning that most Liberians had not even been born when the original debt was incurred. Liberia has recovered quickly since the end of the war in 2003. Economic growth has accelerated to nine percent a year, school enrolments have grown rapidly, and health facilities have re-opened across the country.