The recent pronouncement by President George Weah that his administration will embark on several emergency measures to stabilize the free fall of the Liberian economy needs some intrusive review so that the lay person can grasp some understanding of how this approach will directly impact them.
The pending $25 million USD infusion into the Liberian economy through the Central Bank to buy back the excess Liberia dollar circulating will impact the availability of hard currency on the market. The presumption is that the ordinary Liberian person will now change their preference in the way they split their money between holding cash or making a deposit in any of the commercial banks with the expectation that they can withdraw as much USD as they would like at any given time. As it stands now, the economy is flushed with depressed Liberia dollars including counterfeited currency.
This also pre-supposes that there is a sudden elevation in the confidence of the public in banking institutions. Comparatively, when there is an increase in USD deposits deposits, there will be an increase in the quantity available to banks to service various requests from the ordinary person and businesses. Again it is a presumptuous and naive stance to think along these lines.
The Central Bank of Liberia (CBL), by statute, is the highest monetary monitor of the West African country and plays a pivotal role in money regulation to maintain stability of the currencies value. However, stability of value of currencies, especially the Liberian dollar, is not just the only motive or goal which underlie the monetary policy framed and managed by the CBL. There are various factors like inflationary pressures, status of Liberia’s exports and overall economic development which drive policy measures.
So, to what benefit is the infusion of $25 million USD in a struggling economy? Is government prepared to fully bail out the economy with additional hard currency infusion without a plan, investments or long term positive returns?
Why has there not been a stress test undertaken to test the financial viability of the Central Bank, commercial banks and insurance institutions – all who undertake major financial interactions that impact the ordinary Liberian?
According to Trading Economic website, “Liberia recorded a government debt equivalent to 28.80 percent of the country’s Gross Domestic Product in 2017. Government Debt to GDP in Liberia averaged 224.79 percent from 2004 until 2017, reaching an all time high of 720.73 percent in 2004 and a record low of 17.80 percent in 2014.”
It is evident that the Liberia dollar depreciation is based on local and international supply and demand and a preference for the stable US dollar which is used for imports. The Extractive industry which generates hard currency is under pressure from global factors and Liberia has not re-positioned its expectations and resources to absorb the shock of this loss of much needed hard currency.
There is no national economic innovation or vision from the Executive branch down to the ordinary person and who, by the way, is dependent on effective government policies.
In a capitalist society as Liberia, the goal is to make a profit off any business endeavor. Money changers play a vital role in foreign exchange monetary transactions.
Since the ordinary person or business cannot confidently go to the CBL or most commercial banks and have their requests for foreign exchange adequately serviced, they resort to the informal sector or un-regulated money changers. The risk of investment in the foreign exchange business by individuals means that they see themselves as serving a need that a weak government and Central Bank cannot adequately service; the provision of hard currency. The attending pressure on the Liberian dollar and its free fall against the US dollar is one consequence of the un-regulated regime of doing business as a money changer.
Because of the scarcity of USD, the petty trader and medium-to-big business “buy” US dollars or the equivalent in Liberian dollar for the purchase of goods and services internally and outside the country from the un-regulated money changers and are forced to increase the price of goods in order to recoup their capital and make a small profit for subsistence in the economic theater.
A lot of currencies float outside of the banking system and the domino effect is that “everyone” suffers from the high prices of commodities all around. Since the monetary black market is alive and well, there are suggestions that Government institute some verifiable and licensing for authorized money changers, hotels, RIA, the National Port, etc like they do for Western Union, Money Gram and commercial banks. But the efficacy of licensing money changers is only as good as implementation, incentives to the public and enforcement and credibility of the CBL and government.
If it is convenient to go to a money changer hidden in the dark economy or black market, then the public will do so; the money changers will thrive and the high rate of the currencies disparity will persist.
If the Liberian government doesn’t understand the pinch and bind of the ordinary person, it means that they are un-prepared to address the declining state of the economy. and there will be consequences.
What the Liberian government has not fully explained is how the “buy back” of the depressed Liberian dollars will occur. Will the ordinary Liberian or businesses be able to walk into a commercial bank and exchange their Liberian dollars for US Dollars and at what rate? What policies and systems are there to discourage the external and physical flight of US Dollars once they leave the vaults of the commercial banks and the CBL?
In a report issued November, 2017 by the <em>International Monetary Fund (IMF) entitled, Seventh and Eight Reviews Under The Extended Credit Facility Arrangement , And Request for Waiver of Non-Observance Criteria – Debt Sustainability Analysis, the organization concluded that “…Continued debt vulnerabilities call for a prudent debt management policy, a credible path of revenue mobilization and fiscal consolidation, and structural reforms to promote growth and economic diversification. The DSA shows that Liberia’s risk of debt distress remains moderate. The authorities agreed with staff’s assessment and share staff’s concerns about debt vulnerabilities. The authorities emphasize the importance of strengthening much-needed infrastructure while respecting the debt limits under the ECF. To keep the debt distress risk at moderate, they intend to continue prioritizing grants and concessional loans for pro-growth projects. Moreover, to enhance debt management capacity, (i) information flows between thelegislature, the President’s office, and the DMU of MFDP need to improve; and (ii) DMU needs to build capacity to do their own debt sustainability analysis and to update a medium-term debt strategy (MTDS) as needed. As Liberia remains vulnerable to external shocks (e.g., commodity price shocks) as a commodity exporter, the authorities need to be committed to a prudent borrowing strategy, the prioritization of pro-growth projects, and the diversification of the economy to make it more resilient to external shocks. Creating much needed fiscal space to meet social and development needs (one of the main pillars of the ECF-supported program) remains important and efforts on fiscal consolidation and revenue mobilization need to continue. While fiscal consolidation will be needed to keep a sustainable debt trajectory, the nature of the fiscal adjustment should not jeopardize critical spending for poverty reduction and productivity.”
The IMF’s signal to Liberia in that report, and in effect to the Weah Administration, is that no new loans would be forthcoming due to the risk of some potential debt distress. Liberia needs a serious approach to international borrowing and management of its resources.
Credit Rating Impact
Major investors, credit rating agencies and sovereign wealth funds, as part of their best practices and due diligence, undertake the review and use of credit ratings; Liberia being no exception. The credit rating of the country has a huge impact on its borrowing facilities and costs. Sadly, Liberia’s credit rating as cited by Standard & Poor, Moody’s, Fitch and DBRS is at 15; between 100 (riskless) and 0 (likely to default).
The rating is described as “speculative”. This designation is a red flag for investors and international borrowing facilities. The direct impact of a “speculative” designation is impacting the cost of food in Liberia.
According to website Trading Economics, “the cost of food in Liberia increased 20.10 percent in April of 2018 over the same month in the previous year. Food Inflation in Liberia averaged 10.97 percent from 2007 until 2018, reaching an all time high of 39.24 percent in August of 2008 and a record low of -4.24 percent in August of 2009”.
The CBL in its 2017 Annual Report admitted that “…the accompanying increase in the prices of petroleum products and food (rice) are likely to increase payments towards imports, possibly outweighing the increase in export prices, and inducing biflationary pressure…”
Other factors which impact the ability of Liberia to attract serious notice include the prevalence of graft in all sectors of society, a weak judiciary system, lack of major and reliable economic infrastructures, lack of technical and human capacity and poor financial structures and policies.
These complex and relative issues discussed mean little for the ordinary Liberian except what he/she wants change to happen quickly; economic change that puts food on the table and supports thrivability in tough economic times.
But The “Weah Economic Team” has not successfully communicated in lay terms what these challenges are nor do they have a rough blue-print on how the lay person will make it through the end of this week.
By Emmanuel Abalo
West African Journal Magazine