The Government of Liberia last Friday concluded a three-day economic dialogue funded by UNDP and supported by other partners including European Union, ECOWAS, World Bank etc., aimed at reaching a national consensus on feasible short and medium-term policy measures, strategies, programs and a time-bound road map to strengthen economic recovery, growth, peace and reconciliation. The purpose of the Dialogue, the conveners said was to stimulate a broad-based national conversation on the state and fate of the Liberian economy; and collectively find ways that would situate Liberia on a path of rapid economic recovery and growth. A pre-Dialogue press briefing featured that discussions will be built around Public Finance Mobilization and Management; Investment Promotion and Private Sector Growth; Youth Unemployment and Skills Development; Peace and Reconciliation for Sustained Economic Growth. Amongst national economic management actors that have addressed the dialogue are the Minister of Finance and Development Planning Samuel Tweah and the Central Bank of Liberia’s Executive Governor Nathaniel Patray. Mr. Patray, in his address to the forum, the CBL boss gives reasons for the economic recession; says the bank is evolving Policies to improve the situation. The ANALYST has been flipping the pages of Governor Patray’s address and reports.
Reasons for Recession
The National Economic Dialogue started at the Ministerial Complex in Congo Town on September 4, 2019 with Governor Patray as one of the key speakers that addressed the forum. The CBL’s Executive Governor pointed to factors such as the inadequacy of Liberians to engage in agriculture and manufacturing activities, the deadly Ebola scotch that invaded the country in 2014 -2015, the departure of UN Mission in Liberia that has infused a huge amount of currency in the economy to salient amongst factors have resulted to the current economic doldrums.
The Governor said more sustained efforts have been slow in promoting economic activities in manufacturing and agriculture, as well as reducing the importation of basic consumables that the country can or has the capacity to produce.
“Productivity has been low in agriculture and manufacturing, reflecting less than 3.0 percent growth on average from 2006 to 2014. Economic activity remains significantly concentrated around the enclave sector with limited linkages between the concession sector and the downstream economic activities for the enhancement of value chain production and job creation,” the governor told the gathering of local and international economic experts.
The vulnerabilities of the economy, he said, became evident by the drastic decline in economic activities as a result of the effects of the Ebola health crisis and the global commodity price slump and exacerbated by the departure of UNMIL. From 2014-2016, investments and other economic activities were subdued with economic growth recording a contraction, from the seemingly impressive growth trajectory of 8.0 percent to negative 0.3 percent.
He pointed out that the current pressures on the Liberian dollar is explained by the departure of UNMIL and the slow recovery in prices of goods and services and the slowdown in donor assistance to the country.
Patray explained that prevailing situation has applied significant stress on the economy, which grew by an estimated 1.2 percent in 2018, from a revised growth of 3.2 percent, and is expected to further slowdown to 0.4 percent in this year; which indicated, is partly explained by the lukewarm policy response to address the hidden pre-Ebola vulnerabilities.
“Today, inflationary pressures have heightened to almost 30.0 percent, whilst the volatility in exchange rate is rapidly increasing, being the highest in the sub-region, adversely contributing to the increasing socio-economic challenges,” Governor Patray stressed.
He said the exchange rate dynamics has emerged as the most predictable drivers of prices in several developing countries, including Liberia. By this the Central Bank governor was saying that high prices of goods and services in the sub-region, especially in Liberia is determined by increased depreciation of the local currency to the United States dollar.
At present, the rate of USD to the Liberian dollar is at most 1USD to 210LD on the exchange market while the prices of basic consumable goods have unaffordable increased – for instance a gallon of gasoline which was at LD350 to LD400 by 2017 is now costing LD600 dollar; an ordinary mosquito coil that the ordinary person purchased for LD5 to LD10 at that time is now costing LD25 to LD30.
Highlighting some of the key drivers of exchange rate depreciation in Liberia, the governor named the growing demand for foreign exchange to facilitate imports saying that the demand for Foreign exchange (the USD) as a substitute for total amount needed to facilitate import payments for the first half of 2019 was US$525.2 million, (which he noted constituted the imports value, CIF for first half, 2019) of which only 16.91 million (3.2 percent) was met through the CBL intervention; the remaining was acquired from the parallel market, thereby causing pressure in the market.
The Senior Economic Management Team (EMT) member also told the dialogue that low domestic production in basic food and manufacturing to substitute for basic imported consumables is a key drivers of exchange rate depreciation in Liberia; increased injections of Liberian dollars in the economy as a result of fiscal and monetary operations is another key drivers of exchange rate depreciation in Liberia; low supply of foreign exchange due to low export earnings and capital inflows is another; and speculative factors driven by market perception about the future value of the Liberian dollar, thereby leading to a self-fulfilling “prophecy” another.
The Governor insisted that a safe, sound and stable financial system is critical to macroeconomic stability and sustainable economic growth, and pointed out that it is a major objective of the CBL. “Despite the challenging macroeconomic environment, the banking industry remains relatively resilient, reflective of profitability, liquidity and capital. However, the high level of non-performing loans above the tolerable limit of 10 percent remains a constraint on the operations of the banking industry, and by extension credit to the private sector. The shallowness of the banking system, however, poses limitation on the effectiveness of monetary policy implementation,” he said.
Notwithstanding, he pointed out that monetary policy has also been leveraging on other financial instruments to manage liquidity. “As a way of increasing the fiscal space for short term cash needs of the government, the treasury bills have been operational with total issuance of 843 million Liberian dollars from January 2018 to end-June 2019 at an average yield of 4.38 percent per annum for 91 days.
Besides he explained that as a means of attracting retail investors into the money market, the CBL introduced its debt instrument called the CBL Bills, indexed against the exchange rate at a nominal rate of 7.0 percent per annum. The major challenge associated with operationalizing these instruments is the high rate of inflation vis-a-vis the yield on the instruments.
Let me reaffirm that the Bank remains supportive of the Government’s Pro-Poor Policy, especially the pillar emphasizing “Financial Inclusion.” At the moment, access to financial services is estimated at 36 percent, significantly driven by mobile money. The Central Bank is in the process of strengthening efforts at promoting digitization of the financial system.
He reaffirmed that the Bank is at an advanced stage in the finalization of important regulations, including rural financial services, mobile money, consumer protection, microfinance institutions, and payments system. All these policy initiatives are expected to deepen financial inclusion for the realization of stable financial environment and improved welfare, saying that low financial access and services have continued to impose constraint on the implementation of monetary policy; hence the need for greater efforts to deepen the financial system, which is a matter of priority to the bank.
He however outlined impediments impacting effective monetary policy implementation in Liberia.
The Executive Governor of the Central Bank of Liberia (CBL), Mr. Nathaniel Patray has outlined changes impacting effective monetary policy implementation in Liberia, saying that the dual currency regime of the country limits monetary policy implementation by the CBL coupled with the shallowness of the financial system, as reflected by the lack of functioning financial markets where policy instruments are traded.
Governor Patray also named other key impacting challenges as excess liquidity outside the mainstream banking system, which he said is undermining intermediation; limited foreign reserves, that have thus inhibits the CBL’s ability to adequately respond to potential external shocks to the economy and help smoothen exchange rate volatility; and the high imported cost push inflation that has adverse implications for real purchasing power.
The CBL Governor also pointed to low credit to the private sector, especially agriculture and manufacturing; high cash driven economy which increases the costs of financial transactions and risks; and high non-performing loans which undermines the real liquidity positions of banks and the economy in general, which could negatively affect the real economy as some of the key challenges impacting effective monetary policy implementation in Liberia.
CBL evolving remedies
However, he noted that the CBL has been implementing the a number of actions that are intended to mitigate the challenges, saying that the Bank is currently in the process of reviewing its existing Act to strengthen its operational and goal independence, including governance; and that the Bank has developed a new Monetary Policy Framework and Charter to guide the operationalization of its Monetary Policy Committee (MPC).
This institutional structure will serve as a platform for the formulation and implementation of a forward-looking monetary policy and create the necessary condition for effective assessment of macroeconomic conditions.
The CBL boss said the new Monetary Policy Framework also seeks to give greater attention to the use of Liberian dollar as a currency of choice as part of the overall de-dollarization strategy; pointing out that the Bank, in collaboration with its development partners, is developing Forecasting and Policy Analysis System (FPAS). It is important to note that a result predictable and forward-looking monetary policies are guided by central forecasting systems that help quantify economic outlook.
Besides, he pointed out that the CBL is also strengthening its data warehouse to enhance the conduct of empirical analysis and provide evidence-based policy advice; collaborating with other Government institutions and development partners to ensure strengthening and full implementation of the de-dollarization Roadmap through a more market and financial based approach; and is working with its partners, fiscal authority, the banking sector and other key actors to ease the liquidity pressures using a mix of money market instruments, such as the standing deposit facility, CBL’s bills, CBL’s Auctions and reserve requirement ratio, among others through the development of appropriate interest rate corridor.
Furthermore, the CBL boss said the bank remains committed in the implementation of policies that would support the building of foreign exchange reserves to serve as buffer for the economy; and continues to work to restore public confidence in the financial sector and to attract money into the banking sector. This requires continual engagement with all stakeholders in the financial sector and strengthening our communication strategy; while at the same time working toward full digitization of the financial system in order to enhance the provision of inclusive financial services and ensure financial deepening.
“We are also working toward deepening credit intervention programs in the microfinance and agriculture sectors to enhance the capacity of local farmers and encourage investments in cash crops,” Governor Patray said amongst others.