Monrovia, Liberia- April 15, 2019: The worsening economic reality in Liberia needs no amplification.
President George M. Weah of Liberia
In the local parlance, “People are sucking air”.
In a recent video shared widely on Liberian social media sites, desperate marketers openly voiced frustration with the Weah Administration and its inability to curb the economic downward spiral; especially the declining Liberian dollar. The marketers are simple and good indicators of the local strength of supply and demand which drive the economy.
No one is “buying” because of the lackluster economic environment and the diminishing purchasing ability of the ordinary Liberian.
The sentiment of economic disappointment expressed by the marketers is a reliable representation of the view held across all sectors of the Liberian society that the hard time is too much.
It is reasonable to establish that Liberians are making the effort to speak to President Weah and his Government about their concerns; whether it is through angry marketers, the position of Coalition of Opposition Parties, peaceful marches and protests, mob violence or silence.
The fundamental question is whether Government is listening and, if so, what is its response.
What is baffling to Liberian citizens, and perhaps to the international community of economic observers is the “loud silence” from President Weah to the “status quo” of frustration, hard time and hopelessness ordinary citizens are enduring under his Administration.
In challenging times, citizens expect leaders to step up and inspire, motivate and lead. The President is not speaking nor is he motivating or leading.
This business of the Administration’s silence is clashing with confidence in Government. That confidence was the “Hope For Change” and blank check that some desperate Liberians, who, against their better judgment, as it is becoming evident, gave to the ruling Congress for Democratic Change (CDC) and President Weah when they elected him in December, 2017.
The blank check of “political capital” that the CDC led Government obtained from the people of Liberia, was, in the real sense, a “credit” which needed to translate to tangibles that will put food on the table, a job and escape from poverty.
The crises of confidence in Government are not just localized to the home theater. International business analysts and observers see a direct correlation between poor governance and Government’s inability to attract investments and infrastructures which are critical drivers of any economy; Liberia being no exception.
Liberia is identified by the International Monetary Fund (IMF) as one of several sub Saharan countries with slower growing countries and where “there is a need to pursue reforms to facilitate economic diversification, and address remaining economic imbalances, many of these cases, private investments remain weak, and a strong focus is needed to address the constraints that are holding such investments back…”
A successful Liberian international business executive Mr. Sage Thomson, in an analysis of the Liberian situation, says, “…with our current inflation rate north of 30%, my goodness… why would any investor or bank want to do business with us? We don’t have a great story to tell the world. The President is jetting off without a serious business pitch. And that pitch starts with stability in your country. But guess what…food inflation is at 31% as of December 2018 and it is fair to say that it is very much higher currently in Q2 19.
Basically, government officials consume our GDP without understanding that you cannot run a nation or have any serious currency without productivity! Growth is driven by capital, labor and productivity… and productivity is 60% of what determines if a country is going to succeed or not.“
Thomson also cites the contributory challenge of uncontrollable “urbanization”. According to him, “another area of massive concern is urbanization.. Monrovia is tremendously overcrowded without any plans, for a secondary city for people to migrate to, for example, Ganta, Nimba County, Gbarnga, Bong County, Zorzor, Lofa County, etc…”
He attributes this uncontrollable factor to the frantic free -fall situation that Liberia is experiencing.
The series of anti-government protests in the last two years are indications that non- Administration supporters are effectively controlling the narrative to the disadvantage of Government. Control of the narrative that the Administration is corrupt and ineffective is winning over independents and some supporters of the Government who see confirmation everyday of some of the questionable actions or inaction by Government.
The once popular CDC is being openly challenged in debates in the public square and electoral contests for public office. Some Liberians are even accusing the Weah Administration of choosing to violate the Constitution rather than face the public embarrassment of losing by-elections due to its declining popularity; case in point being the delay in formally informing the National Elections Commission (NEC) about the vacancy in the Senatorial seat in Montserrado County in order to trigger preparation for and holding of a by election.
While it may be true that the Weah Administration may have simply forgotten to inform the NEC of the vacancy, equally, so, they’ve created room for opposition and independents to point to ineffective governance. This lapse contributes to sustained erosion of confidence and the desire to find an alternative leadership to the present Government.
It is no secret that political and social tensions and divisions are rising due to the economic malaise. And the creeping realization is that Liberians are slowly but surely reaching the point of no return when they would rightfully and peacefully call for a change in Government by invoking Articles 1 and 7 of the Constitution.
Article 1 says,
“All power is inherent in the people. All free governments are instituted by their authority and for their benefit and they have the right to alter and reform the same when their safety and happiness so require. In order to ensure democratic government which responds to the wishes of the governed, the people shall have the right at such period, and in such manner as provided for under this Constitution, to cause their public servants to leave office and to fill vacancies by regular elections and appointments…”
Article 7 maintains that, “…freedom and social justice enshrined in this Constitution, manage the national economy and the natural resources of Liberia in such manner as shall ensure the maximum feasible participation of Liberian citizens under conditions of equality as to advance the general welfare of the Liberian people and the economic development of Liberia…”
The Weah Administration must “speak” credibly to citizens and begin to lead in all areas. It will require making some difficult choices which would include discarding some entrenched economic and political positions, realization that government critics are not “enemies of the state” but patriots; and even adopting some solutions offered by the opposition bloc.
If Liberia wins in the end, regardless of who is in the Executive Mansion, it will validate that Liberia is greater than any one person or political party.
Mr. President, citizens are trying to get your attention. They are suffering! Speak to them!
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.
The ECOWAS Civil Union on Monday diffused a growing protest called by the Student Unification Party(SUP) at the state-runned University of Liberia demanding reduction in the high prices of basic essential commodities in the country.
Knowing how protests sparked by UL students can become potentially contagious with domino effects, our correspondent in Monrovia reports that the ECOWAS civil society Union recognized the concerns of the students as “genuine”, but urged them to observe caution and pursue their grievances through dialogue with government authorities.
Protesting University Students in Liberia
In a statement, the ECOWAS Civil Society Union advised President George M. Weah to act swiftly to avoid any conflict in Liberia where peace is still fragile.
But a talkshow host at the Freedom Radio which is sympathetic to the Weah government dismissed the protestors as “academic failures and disgruntled elements of opposition parties.”
The aggrieved protestors had gathered on their Capitol Hill campus in central Monrovia chanting “Let the high exchange rate come down; let high prices on the market come down;” let the high prices petroleum products come down”; let high transportation costs come down.”
Similar cries have become a daily refrain on dozens of community radio stations throughout the country.
The exchange rate between one USD and the local currency, the Liberian Dollar is 155 in Monrovia and much more higher in difficult to reach areas outside the capital where prices are even much higher.
During a sampling survey in the eastern suburb of Barnesville Monday, our correspondent observed several housewives complaining of being confused whenever husbands give them only LD500 to cook at home.
“So, last Saturday I urged my husband to buy the grocery in the market for me to cook,” Madam Victoria Kollie narrated.
“But my husband returned without buying anything saying total cost of what he wanted to buy was LD850 while the LD500 he had was not enough,” she noted, and urged other housewives to expose their husbands to harsh realities on the food market too.
Liberia Dollar Rate Conversion Posted
But the continued failure of the Weah-led government to pronounce a roadmap for economic recovery–bread and butter issues–was painfully confounding Liberians.
Liberia is one of the poorest countries in the world with 64 percent of its citizens living on less than a $1 per day. Latest available Human Development Index (HDI) rates Liberia at 0.427. Comparatively, Norway which has the world’s highest HDI ranking is rated at 0.949. According to the Atlas method in (current US$), Liberia’s GNI per capita is recorded at $370 annually. (World Development Report, Liberia At A Glance – Economic Growth Data, 2015 -2017).
As the country forges ahead in a post-Ellen Johnson Sirleaf era, the challenges of economic recovery will require adopting both short and long-term reform measures. This dissertation outlines some of these crucial challenges and offers structural reform alternatives that are worth considering.
According to the United Nation Development Program (UNDP), the Sustainable Development Goals (SDGs), referred to, in short, as the “2030 Agenda”, is a universal call to action to end poverty, protect the planet, and ensure that the citizens of the world enjoy peace and prosperity.
Building on the successes of the Millennium Development Goals (MDGs), the 17 goals of the SDGs seek to address the issues of poverty; hunger; health and well-being; quality education; gender equality; clean water and sanitation; affordable and clean energy; decent work and economic growth; industry, innovation, and infrastructure; reduced inequalities; sustainable cities and communities; responsible consumption and production; climate change; life below water; life on land; peace, justice, and strong institutions; and partnerships for the goals. (UNDP – Sustainable Development Goals; 2015). The possibilities of success in tackling these goals are based on the adherence to good governance and building strong economic systems.
Liberia, being a fragile post-conflict nation is facing a plethora of these challenges and would do well in achieving successes in each of these categories.
The Liberian economy like those of many developing countries in Sub-Saharan Africa is dualistic. It is characterized by a formal and an informal economy. Beyond this dichotomy, the Liberian economy is largely controlled by foreigners. Multinational companies and foreign wholesale and retail businesses are the major importers and exporters.
As a consequence, they contribute the largest share of taxes to the government. The informal economy comprises of a mix of rudimentary economic activities and transactions. They include menial labor and other forms of subsistence livelihood including village farming, hunting, and petty trading. These economic activities are neither taxed nor regulated by the government. For the most part, activities in the informal economy are not included in the Gross National Product (GNP) or the Gross Domestic Product (GDP).
According to World Bank data, Liberia recorded a GDP of 2.101 billion (US$ dollars) as of 2016. The real GDP of Liberia contracted by -1.64 percent in 2016 and grew at approximately 2.1 percent in 2017. Reports by the Central Bank of Liberia (CBL 2017 Annual Report), reveal that the projected expansion in real GDP is attributed to significant increase in output in the mining and panning sectors as a result of anticipated rise in industrial gold production and manufacturing. (CBL 2017 Annual Report)
Based on data from the Liberia Labor Force Survey and Trading Economics, Liberia’s national workforce is recorded at 1.6 million and comprises of workers between the ages of 16-65. Of this amount, 195,000 or 12.18 percent represents the wage-earning employment workforce and 87.82 constitutes the vulnerable unemployed.
The formal economy is characterized by a heavy reliance on the extraction of non-renewable natural resources such as iron ore and gold; as well as renewable natural resources such as rubber and oil palm. Such a resource dependent economy or otherwise referred to as an “enclave economy” that depends on the extractive sector produces fewer jobs. The mining sector in particular doesn’t induce much employment growth.
The recessionary trends in the economy came about as a backdrop to the 2014-2015 Ebola epidemic and came closely on the heels of the precipitous decline in global prices for iron ore and rubber; Liberia’s two primary exports.
By the end of June 2016, the Ebola outbreak had further decimated an already fragile economy. The Sirleaf administration had admittedly failed to diversify the country’s productive output through the introduction of labor-intensive industries that would have expanded the domestic production of goods and services.
As a result, we have witnessed an increase in inflationary pressures. The annual average headline inflation in 2017 was 12.4 percent from 8.8 percent at period ended 2016, mainly underpinned by a 24.5 percent depreciation of the Liberian dollar. Reflectively, there was an exchange rate decline of
L$125.50/US$1.00 in December, 2017 compared with L$100.80/US$1.00 in December, 2016. These economic trends have led to an increase in the cost of living. (CBL 2017 Annual Report)
According to Trading Economics, Liberia recorded a current account deficit of 25.10 percent of the country’s GDP in 2016. Then latest reports by the Central Bank of Liberia,reveal that the current account balance deteriorated by 6.5 percent to a deficit of US$346.5 million during 2017, from US$325.4 million deficit reported in 2016. It is stated that the deterioration in Liberia’s current account deficit in 2017 was due to a sharp deterioration in net secondary income owing to a 43.6 percent projected reduction in receipts.
However, the latest current account deficit when compared to the US$852.3 million deficit recorded in 2015, did register an improvement of 59.
The need for a robust economic stimulus program
While the recent election of 2017 brought with it opportunities for a newly elected government to infuse dynamism into the affairs of government, it has also brought to the forefront some of the intractable challenges that the Liberian economy has been faced with in recent years.
As such, I’m of the opinion that the economy will require major reforms in the real and financial services sectors along with an ambitious infrastructural development program. The broad goals of economic diversification, inclusiveness, and sustainability should form the primary goals of structural reforms.
Although the government’s much heralded Pro Poor Agenda has garnered a high degree of anticipation, it has yet to be comprehensively adopted. Such an agenda will need to be well-crafted. In addition, it must provide specific core policy objectives, targeted capacity building programs, and a set of well-defined outcomes.
By all indications, the Liberian economy is not producing adequately to meet current budget demands or to support a 4.02 percent growth in real GDP that has been forecasted for 2018. Many of the earlier forecasts however did not account for a deteriorating terms of trade condition and the accompanied liquidity crisis that we have recently witnessed. According to recent reports, amidst the need for rigid austerity measures, the government released its recast national budget for FY 2017/2018.
According to the release, the recast budget is registered at US$536.2 million, a decline of US$27 million from the original budget that had been signed by the former president Ellen Johnson-Sirleaf of US$563.5 million. (Henry Karmo, FrontPage Africa, “Executive Presents Revised Budget to Legislature with Major Austerity”, March 9, 2017)
Austerity measures and the current recast budget
The government recently announced a set of austerity measures. While an important initial step, US$27 million doesn’t seem to go far enough. Much of this amount is already captured based on the sluggish budget performance witnessed in the last two quarters of 2017. Hence, it appears that at minimum, there is a need for 30 percent of additional cuts in wasteful spending particularly of recurrent expenditures. With a downturn in business activities, it is further expected that the government will experience a major challenge to raise the tax revenues of US$401.4 million which represents 71.2 percent of the recast budget.
If appropriate measures aren’t taken in the short-term to go beyond the existing cuts earmarked in the recast budget to further strengthen fiscal management and curtail waste and abuse, the government may find itself running an intractable budget deficit by the close of FY 2017/2018.
Import Substitution and Export Diversification
Along with drastic austerity measures, the government will need to institute a robust short-term stimulus program. These measures should revolve around monetary and fiscal policy adjustments that are aimed at jump-starting growth within the economy.
In my dialogue with colleagues, I have laid emphasis on the broad goals of instituting import substitution measures alongside a gradual diversification of exports. We’ve already noticed that the options available in an already tight liquidity situation will require adherence to a well targeted set of initiatives that would include the streamlining of trade barriers and expansion in capital formation. In addition, authorities would need to seek external support to recapitalize a select number of banks with the aim of financing growth in agriculture and agro-based industries.
Additional capital will also be required to enhance growth in labor-intensive low-cost manufacturing.
Expanding agriculture and agro-based industries with an emphasis on mechanized rice production
Discussions and actions taken so far around an attempt to reduce the price of imported rice have been gravely inadequate. Observably, with the economy spending on average of approximately $US240 million per year on rice imports, this is one area where import substitution policies could work. The Central Bank of Liberia (CBL) reports that the international price of rice has witnessed a rising trend from the beginning of 2017. At end-2017, the international price of rice was projected to rise by 3.5 percent to US$401.9 per metric ton, from US$388.3 per metric ton recorded at end-2016 and by 5.7 percent when compared with the value per metric ton recorded in 2015.
The estimated rise in the price of the commodity during 2017 was significantly occasioned by scarcity amid increased demand mainly from the Asian region. (CBL 2017 Annual Report)
Agriculture as a major sector of the Liberian economy is worth 38 percent of GDP and employs 70 percent of the population. Unfortunately, much of this production is at subsistence level and provides very little contribution in the way of tax revenues to the government. Liberia has a climate that is favorable to farming with vast forested land and abundance of water. Notwithstanding, the low yield from food production including rice has precipitated the importation of 60 percent of the food that the population consumes. This has led to a significant loss of foreign exchange.
As such, any actions taken to introduce mechanize farming to increase food production and expand agricultural exports will not only markedly reduce the country’s high import bill but also lead to growth in tax revenues through a boost in trade and employment activities.
Liberia’s reliance on foreign imports has placed a burden on our foreign exchange position. Thus, the government should work along with the Central Bank of Liberia (CBL) which is the fiscal agent of government to institute an expenditure-switching macroeconomic policy. The aim of the policy would be to balance the country’s current account by altering the composition of expenditures on foreign and domestic goods.
Consequently, the Ministry of Finance and Development Planning needs to develop some revenue-and-expenditure-switching policies in order to expand the revenue base and reduce expenditures on activities that provide limited socio-economic returns. This will also include controlling corruption and waste of financial resources.
The main challenge to this undertaking is that Liberia’s current financial system is still very underdeveloped despite the expansion of the banking system within the last 12 years. There is still a lot of room for the legitimate application of capital and portfolio investment that could be harnessed to spur home-grown economic development.
To start, the CBL will have to get more involved in open market operations which is supposed to be one of its cardinal roles; the buying and selling of government issued bonds. We are learning that there is movement toward that endeavor but more transparency is required to promote participation and bring about positive results. Such a move would cause adjustments to short term interest rates and impact money supply levels.
Without such capacity, the CBL will have limited influence over adverse pricing conditions or to expand and contract money in circulation. It is also evident that the Liberian financial sector needs to undergo a major policy shift by instituting structural reforms that would enable the central bank to operate as a full-fledged monetary authority. Without such reforms of the financial system, the goal of achieving long-term price stability in Liberia will continue to be elusive.
Liberia’s ongoing development paradigm has led to a huge import bill to meet the needs of heavy-duty capital equipment that was required to jump-start the operations of many large multinationals that started to operate in the country during the Sirleaf administration. Also, the drive to construct new roads, rebuild the energy grid, and meet the demands for housing expansion etc. has placed pressures on demand for hard currency. This is going to be a trend for some time to come if expenditure-switching along with import substitution policies are not embarked upon.
Therefore, the Ministry of Finance and Development Planning along with other government stakeholders need to analyze imports to evaluate where out-flows of US dollars to pay for non-essentials can be curtailed or taxed upward and where through the switching of tax rates, government can generate more revenue of hard currency from certain types of for-profit foreign-emanated services i.e. bank transfers, insurance etc.).
In short, we need to be smarter in managing the demand for foreign consumption and expand access to domestic production.
Monetary policy and banking reform
The primary role of a central bank is to manage a nation’s financial system and promote long-term conducive pricing conditions. There are several instruments that should be at the disposal of a central bank in order to achieve these goals. In Liberia’s case, due to the uniqueness of its monetary system, the central bank has never operated as a “bank of issue “. This happens to be an important role of a full-fledged monetary authority. Owing to the fact that Liberia decided many years ago to adopt the use of the US dollar as a legal tender, the country’s monetary system has depended to a large extent on its political and economic relationship with the United States.
This also meant that the domestic economy has been traditionally subjected to the negative impact of exogenous currency shocks.
During the period before the global oil crises of the mid-1970s when Liberia experienced relative stability and good relations with the United States, the country did benefit from what I would call a pseudo sense of economic and financial stability by its use of the US dollar as a national currency. The very sustenance of the economy was driven by foreigners mainly the United States for which Liberia promoted by adopting an Open-Door Policy during the Tubman Administration. Unfortunately, this policy arrangement kept the economic base unrealistically small and placed a heavy fiscal reliance on foreign multinationals (i.e. Firestone, LAMCO, LMC, Bong Mines, etc.).
The ruling class did not capitalize on our special political and economic relationship with the United States in order to expand and diversify the domestic economy, strengthen the productive base, or harness the adoption of a national currency backed by strong external reserves.
I call this period a very lazy approach toward national economic management. In essence, the structural and managerial deficiencies of the Liberian economy was being covered up by us using the world’s most convertible currency. As such, the US dollar stood as a type of guarantor of Liberia’s monetary and financial system. (William Ponder, “The Macroeconomic Challenges of Adopting a Realistic Exchange Rate Regime for Liberia”; Liberia Studies Journal, XXII, 2 (1997).
Reports however suggest that after the spiraling events of the 1970 oil-crises, the Tolbert Administration had begun to hold talks with authorities at the United States Federal Reserve and with the IMF to gradually institute a national currency regime for Liberia that would’ve been backed by a strong US dollar external reserve position. Unfortunately, that was short-lived as the 1980 coup derailed those possibilities. Everyone knows that the political and economic conditions in Liberia which prevailed between 1943 and 1980 did not last.
Since 1982 when Liberia first found it necessary to introduce the Liberian five-dollar coin as a solution to addressing the devastating deflationary effects of capital flight; the drawbacks from a de-facto application of the US dollar as national currency has become evident. I once stated in a paper that proponents of what I then referred as the “dollar myth concept” view the US dollar as a panacea to all of Liberia’s monetary and trade problems.
I also recommended at the time that Liberia needed to adopt an official national currency within a framework and a timetable that would allow for the strengthening of the domestic currency by building strong external reserves. Unfortunately, that was in 1997, and everyone knows what was politically pertaining in Liberia during that time.
Whereas I wouldn’t blame the current financial sector administrators for the structural limitations of the relatively weak monetary system which they’ve inherited, I would believe that immediate attention should be made toward adopting a comprehensive set of new policies. These policies should be geared toward curtailing the impact of a currency system that is vulnerable to external shocks. We must come to the realization that we can’t and will never again return to the days when Liberia depended solely on the United States and its currency as a guarantor of domestic economic stability.
And even today, to place a heavy reliance on foreign direct investment driven by the new wave of multinationals like China Union and Accelor Mittal as an approach toward alleviating the employment crisis; is just sheer policy laziness in my opinion. This indicates that even today there are some Liberian economic managers who are relying on approaches and policies of the past which had kept the economy small and under-productive and largely driven by external factors.
Lastly, I would like to state that several central banks particularly those going through financial crisis have adopted “inflation-targeting policies” as a pragmatic response to the failure of other types of monetary policy regimes. To be brief, “inflation targeting” is an economic policy in which a central bank estimates and publishes a projected, or “target” inflation rate and then attempts to steer the actual inflation level toward the targeted inflation rate. The Liberian central bank should consider inflation-targeting as a significant policy objective in controlling inflation.
Again, it would go back to my earlier statement of operating as a full-fledged central bank. But I remain convinced that inflation-targeting measures are necessary for the Liberian economy which continues to exhibit a heavy demand for imported goods and services.
Mobilizing domestic savings through the introduction of mobile banking has taken-off on the continent of Africa. In the last decade, mobile money services have expanded in several African countries with particular diversification of activities in Kenya and Tanzania. The mobile money has proven to be an accessible tool for payments. Moreover, other financial services, such as credit, insurance and savings have been rolled out in a number of markets, allowing people to better manage financial risks and household shocks. Credit services enabled by mobile money, in particular, have proliferated in the region: from six services in Kenya in 2011 to 39 services in 11 other countries in 2016.
The inclusion of mobile money has led to expansion and growth of formal economies and has introduced new ways of tracking transactions and markets to promote the growth of banking and insurance. Utility companies have also been able to introduce mobile money in their attempts to institute digital billing and payment arrangements with clients in remotest regions of these countries.
I would thus recommend that Liberia expands its drive to institutionalize mobile money platforms in the country. The critical tasks of safeguarding the telecommunications infrastructure and setting up the regulatory and legal framework to protect consumers and users, would be the major challenge. Moreover, the government should seek external training for those involved in this emerging industry.
External Debt Sustainability and Re-basing of GDP
The World Bank and IMF establishes that a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.
A Debt Sustainability Analysis (DSA) conducted by the IMF in November 2017 revealed that Liberia’s external debt stocks have been increasing rapidly due to a scale-up of infrastructure spending and to deal with multiple adverse shocks. The report however concluded that the country’s risk of debt distress is moderate. Concomitantly, since September 2016 to June 2017, the total debt stock has increased from US$597 million to US$736 million comprising mostly of multilateral loans.
Meanwhile, the 2017 GDP projections deteriorated as a result of a lower-than-expected impact from the draw down of UNMIL and the continuing effects of a sluggish performance of exports. (Liberia: Debt Sustainability Analysis: IMF Country Report 17/348, November 1, 2017).
Given these underlying economic trends, there can be only limited reasons for which the government would try to justify exponentially acquiring new loans at higher than concessional terms at this time.
During the 2018 Spring Meetings of the IMF and the World Bank Group, I heard the Minister of Finance and Development Planning, Mr. Samuel D. Tweah Jr through a podcast, reveal that the government is anticipating the re-basing of GDP. Re-basing of GDP occurs when a country that has long neglected to undertake the statistical work required to maintain accurate GDP figures finally awakens to the task and comes out with numbers that are completely out of line with its previous estimates.
It can lead to marked distortion of historical data and trend analysis. This has remained largely an African problem. In 2014 alone, Kenya, Nigeria, Tanzania, Uganda, and Zambia all completed rebasing exercises. (Amadou Sy, “Are African Countries Rebasing GDP in 2014 Finding Evidence of Structural Transformation?”: Brookings Institute; March 3, 2015)
Minister Tweah alluded to the goal that Liberia will seek to rebase GDP so it will provide additional fiscal space to accommodate new debt and other financial obligations in order to grow the economy. GDP rebasing also provides a clearer look at the economy, and in particular it should capture from which sectors most of the growth in the economy is coming from. While rebasing might be necessary, it doesn’t tell the full story.
Liberia will require more than GDP rebasing to stimulate the economy. While it is important to have up to date statistics, rebasing GDP will not of its own lead to economic prosperity or change the reality concerning the high levels of poverty. The revised GDP statistics may have changed but the reality of poverty and income inequality remains the same. Therefore, if the economy doesn’t grow in real terms, the upward adjustment in GDP will not lead to better economic outcomes.
The need for targeted reforms to achieve growth cannot be overemphasized. Once the implementation of policies is geared toward expanding and redistributing income such that the lowest percentile of income earners is lifted out of poverty, the aim of a pro poor agenda would become achievable. Furthermore, if growth can be accompanied by the bridging of the gap between the formal and informal economies and adding of more wage-earning jobs, Liberia’s path to promoting sustainable economic recovery would be guaranteed.
However, these goals cannot be achieved by mere happenstance. It will require the political will and fiscal discipline to substantially reduce waste and corruption. Concomitantly, the government will need to target a robust set of short-to-medium-term policies several of which I’ve enumerated on in this paper.
Amadou Sy, “Are African Countries Rebasing GDP in 2014 Finding Evidence of Structural Transformation?”: Brookings Institute; March 3, 2015
Central Bank of Liberia, (CBL) Annual Report, 2017, CBL (Highlights and Statistical References), January 23, 2018
Karmo, H. FrontPage Africa, “Executive Presents Revised Budget to Legislature with Major Austerity”, March 9, 2017
Liberia: Debt Sustainability Analysis: IMF Country Report 17/348, November 1, 2017
Ponder W. “Macroeconomic Stabilization and the Budgetary Implication for Liberia in Post 2017”. Published in the Global News Network (GNN) online magazine – August 27, 2017
Ponder W. “The Macroeconomic Challenges of Adopting a Realistic Exchange Rate Regime for Liberia”; Lead Article – Liberia Studies Journal, XXII, 2 (1997) – Published by the Liberia Studies Association
Ponder W. “My Response to Developing an Inclusive Financial Sector: By – William F. Ponder, Liberia’s Case Study”, Presenter – African Studies Program, 2001 , Association Lecture, Series, Boston University African Studies Lecture Series
Report on the Liberia Labor Force Survey 2010, Liberia Institute of Statistics and Geo‐Information Services (LISGIS)
World Development Report, Liberia At A Glance – Economic Growth Data, 2015 -2017, the World Bank Group
About the author:
Mr. William Ponder is a graduate of the University of Liberia where he earned a BSc in Economics and from Boston University where he earned an MBA in Public Management.
Mr. Ponder has over 30 years of work experience as a public policy specialist and banker. He once served as an economic researcher with the National Bank of Liberia (NBL), the precursor to what is today, the Central Bank of Liberia (CBL). More recently he worked for several years in private banking and investor services with the Brown Brothers Harriman and Company, the oldest private banking firm in the United States headquartered in Boston, Massachusetts, USA.
The author is an avid researcher and has published several articles major among which includes, “The Macroeconomic Challenges of Adopting a Realistic Exchange Rate Regime for Liberia” a 38-page leading article published in the Liberia Studies Journal, XXII 2, 1997.
Mr. Ponder’s research interests are centered around structural reform and economic diversification, achieving debt sustainability, and adopting an inclusive environment for the growth of small and medium-sized businesses.