Liberia’s Exchange Rate: IMF Blames Central Bank Of Liberia, Etc.

By J. Yanqui Zaza
Economic Editor

Central Bank of Liberia

What factor(s) continue to depreciate the Liberian currency against the American currency? The rate was LD 54 to the US $1 in 2005; LD 131 to the U.S. $1 in 2017; and now it is LD160 to the US $1 in 2018. Former Governor of the Central Bank of Liberia (CBL), Mr. Milton Weeks, during a Press Conference in 2017, asserted that the outflow of $144 million remittances was the culprit. In 2016, former President Ellen Johnson Sirleaf implied that a decline in the global commodity prices was the reason behind the fall in government revenue, and by extension the Liberian Exchange rate.

Adding to the two factors, the International Monetary Fund listed ULMIL drawdown, reduction in inflow remittances, a sharp reduction in donors’ grants and the political uncertainty in 2017. Additionally, the IMF, in its June 8, 2018, Report No. 18/172, accused CBL of abandoning its responsibility to stabilize Liberia’s exchange rate. “The CBL has not attempted… at providing the funds needed to intervene in the foreign exchange market to smooth the depreciation path of the LD against the USD,” explained by the author of the Report.

Interestingly, within the same Report, the IMF acknowledged that CBL did not have the liquidity to intervene and mitigate the depreciation of the exchange rate. CBL is cash trapped because it was undercapitalized, and it continued to lend money to the government. For instance, CBL, in the last six months, lent two separate loans to the national government. In addition, CBL had managed poorly, resulting in overrun of expenses and budget deficits, the Report added.

Consequently, CBL did not pay debts owed to commercial banks and local merchants, contractors and, or fund budgetary allotments to intergovernmental agencies, universities, state-owned entities, etc. And, of course, the non-payment of debts owed has added pressure on Liberia’s exchange rate.

Was the IMF unaware of Liberia’s liquidity problem in 2013 when the CBL reported a negative cash position, according to CBL’s 2013 audited financial statements? Guess what, IMF benefits when its client is bankrupt. In any case, does the chart below support the views that the decline in global prices generated minuscule revenue, for example in 2017?

ITEM	2016		2017	2018	2019	2020
TOTAL REVENUE	USD $1.07B		USD $1B	USD$949M	USD$974M	USD$1.0B
REV. EXC. GRANT	452		464	436	467	520
Income Tax	117		114	109	117	130
Custom Tax	91		76	80	88	93
International trade	185		185	175	185	220
Other Tax	8		10	9	11	13
Other Revenue	51		79	64	67	83
TOTAL REVENUE
GRANT/FOREIGN		624	542	513	507	494

SOURCE: (www.imf.org/~/media/Files/Publications/CR/2018/cr18172.ashx)
Contrary to the views that revenue was down, it was up by USD $12M in 2017 from USD $452M in 2016 to USD $436M in 2017, according to the IMF Report No. 18/172. True, grants were down by USD $82M in 2017. Yet the difference between 2016 and 2017 was not a sharp reduction as claimed by the IMF. Specifically, tax collected from international trade (import and export) was USD $185M in 2016 and USD $185M in 2017.

Again, on page # 47 of the same Report, the author identified Current Account as one of the three approaches that is used to determine an exchange rate, if my understanding is correct. And this model focuses on the saving-investment gap. “The CA model looks at determinants of national savings and investment since when the former falls short of the latter, the country has to borrow from abroad.” This theory helps me to understand why, with a revenue of USD $80M in 2005, the exchange rate was LD 54 to the US $1, but it depreciated to LD130 to USD $1 in 2017, with a revenue of US $436M. To put it in a simple way, old folks usually say, it is not how much salary you make, but how well you manage or how much of the salary you save. 

On page # 48, the author discussed the mechanism, economic fundamentals, variables and the use of assumptions to calculate the exchange rate. For now, let us review some of the factors that can help to increase the savings-investment gap. The IMF stated that the government overestimated its revenue projections. This overestimation of revenue had encouraged and lured administrators to hire contractors and undertake projects that could not be funded. Contractors, trusting that the country could honor its contracts and reimburse contractors, went and borrowed money from commercial banks. Non-payment of debts contributed to the loss of confidence in CBL.

Corruption was another factor that contributed to the country’s poor savings-investment gap. During former President Sirleaf regime many profiteers such as concessionaires, non-governmental agencies, contractors, IMF, the World Bank, wanted to do business with administrators who would accept bribes. This is because these institutions, like any profiteers, have to grease the wheels of business in order to make profits. So, the former President appointed subordinates who could not challenge her, thereby, ensuring that they (subordinates) implemented the wishes of profiteers. That was part of the reason why Liberia signed 66 fraudulent concessionary agreements, resulting into an increase in the savings-investment gap.  

A third factor that has an impact on the savings-investment gap (exchange rate) is productivity. The savings-investment gap decreases if a country increases its productivity. For instance, an increase in rice production would reduce investment in the importation of rice. So, yes, productivity and a reduction in the saving-investment gap is important, but who takes the lead. Preceding the April 12, 1980 coup, the government created the Agricultural Development Bank and the Liberian Bank of Development and Investment for profiteers to increase productivity. Unfortunately, profiteers failed to increase productivity.

The story is the same today. The 2017 loan portfolios of the commercial bank indicate that agriculture accounts for less than 2% of the loan portfolios of the commercial banks. Manufacturing accounts for less than 7%. Instead, they invest in the country’s lucrative assets without adding values. So, until the private investors can see good profits prospect in producing rice, livestock, etc., the government should take the lead, which could help the public to save and also reduce the savings-investment gap, the economic fundamentals used in calculating an exchange rate, says the IMF.

The Report detailed many measures on how best Liberia can manage its debt, the fourth factor that affects the savings-investment gap. Yet, the IMF is encouraging Liberia to use a higher denominator (USD $3B), thereby, resulting in a lower ratio (25%) of debt to Gross National Product. Even though the real debt ratio to the real gross national product is 73% (i.e., dividing the public external debt of $739 by USD $1B), the government could use the 25% ratio to obtain more debt.

Similarly, for Liberia to appear attractive to creditors, the IMF has and continues to allow CBL to include non-current assets (i.e., GOL USD $245M debt to CBL) to calculate Liberia’s international foreign reserves. However, CBL External Auditor excludes such assets in calculating current assets ratio and the IMF Official Guidelines prohibit the inclusion of such assets in calculating international foreign reserves.

Why is Liberia’s economic adviser (IMF) encouraging its client to violate the principles of Generally Accepted Accounting Principles and the IMF Official Guidelines? This is because the IMF and its allies prefer Liberia’s saving to fall below its investment, compelling the country to borrow more money from the IMF and its allies.   

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