Toward Genuine Economic Recovery, Stability, Sustained Growth, and Prosperity

• Causes and Solutions of Rising Prices and Swelling Exchange Rate in Liberia

A Policy Paper

By Martin K. N. Kollie
Contributing Writer

Central Bank of Liberia

A. Synopsis

The Liberian economy is on life-support. The local currency (LRD) is fast losing weight or power as a result of the growing demand for foreign currency (USD). There is a huge rush for foreign currency (USD) by both the private and public sectors. Real income, investment, and employment are being negatively impacted due to rising prices (inflation), swelling exchange rate, and global macroeconomic shocks.

The national debt of Liberia is hovering around US$2 billion which is almost equivalent to its overall Gross Domestic Product (GDP) of US$2.1 billion. Is Liberia reverting to HIPC? The supply of money and the demand for money in the Liberian market are disproportionate. The significant increase or upsurge in the supply of the local currency (LRD) coupled with the snail-paced growth in the economy (low productive capacity) is causing a mass disturbance on the Liberian market.

There is a downward shift in household income, real wage, purchasing power, and employment as a result of heightening economic slump. Foreign trade is being heavily wedged while Liberian-owned and foreign businesses remain very vulnerable to economic peril. The Liberian economy is in a state of recession.

The government has been unable to meet its revenue target and expenditure needs due to falling prices of key export commodities such as iron ore, rubber, gold, and diamond. The stimulation of growth in Liberia’s economy seems sporadic or rare for now as the scars of the Ebola crisis and the 2017 electoral impasse coupled with a decline in domestic revenue remain hard-hitting.
Trade deficit, fiscal imbalances, investor fear, redundancy of employees, tax evasion, overspending, bogus concessions, huge tariff on imports, high interest rate, unattractive investment climate, poor monetary/fiscal strategies, high rate of vulnerable employment, increased appetite for imports, dependence on aid/foreign assistance to stimulate growth, increasing debt stock, capital outflow/flight, UNMIL drawdown and an almost barren private sector have all placed the Liberian economy into a position of FREE FALL.  

Liberia recorded a trade deficit of US$22.10 million in March of 2018. The Balance of Trade in Liberia averaged -43.42 USD Million from 2003 until 2018, reaching an all-time high of 15.10 USD Million in January of 2005 and a record low of -198.02 USD Million in January of 2015. The current account of Liberia is -174.80 USD Million while the current account to GDP is 15.80 percent. Source: Trading Economics 2018.

This ongoing recession could shift towards depression if caution through concrete austerity measures, coupled with sustained economic frameworks, are not engendered to remedy this national morass. The government alone may not have all the answers to these economic tremors (inflation and swelling exchange rate). The pro-poor government needs urgent help amidst emerging economic paralyzes and harsh realities confronting Liberians from Montserrado to Maryland. The PEOPLE are catching hell and times are becoming overly difficult. Increased hardship has now become the order of the day.

It is a fact that the current economic crisis facing Liberia is a NATIONAL EMERGENCY which poses danger to the collective sovereignty and security of the State. As a student studying Economics at the University of Liberia, I find it imperatively and patriotically compelling to identify some prevailing economic challenges/causes confronting Liberia and recommend corresponding remedies/solutions to curb this national nightmare.

In times like these when a gallon of gas is sold for L$545 and the exchange rate is L$162 to US$1 in Montserrado and US$166 to US$1 in the rural regions, it takes the combined effort of national patriots to suggest concrete and sustainable solutions in dealing with the ongoing economic tragedy that has engulfed the country.

B. Mode of Inquiry

This policy paper was principally evoked by the urgency to find concrete and sustainable remedies to the virulent challenges facing the Liberian economy. The mode of inquiry used in terms of identifying causes and challenges are:

• Onsite investigation to gather firsthand information on rising prices and swelling exchange rate in Liberia

• Compiling statistical data and/or key information from primary and secondary sources (Surveys, Local and International Reports, News Analyses, etc.)

• Fact-checking, examining, and interpreting those statistical data and/or information.

Rationales / Objectives:

Fundamentally, all Liberians have agreed on one thing so far. This one thing that continues to provoke their outcry and disillusionment is the increasing hardship across the country as a result of inflation and rising exchange rate.
Based on the harsh economic realities that have swamped Africa’s first independent nation, this paper is bordered around these 3 main objectives:

• Identifying the causes of the rising prices and swelling exchange rate in Liberia

• Proffering corresponding remedies or solutions to these economic shocks

• Suggesting doable interventions to guarantee recovery, stability, sustained growth, and prosperity.

C. Causes of Inflation and High Exchange Rate in Liberia:

• Falling prices in traditional exports (rubber, iron ore, gold, and diamond)

65 percent of total exports in Liberia accounts for rubber while 17 percent accounts for iron ore, gold and diamond combined. Historically, Rubber reached an all-time high of US$526.40 in February of 2011 and a record low of US$146.40 in January of 2016. The price of rubber per JPY/kg as of June 22, 2018, was US$161.

Iron Ore traded at US$66.50 per MT on June 21, 2018. Historically, Iron Ore reached an all-time high of US$191.90 in February of 2011 and a record low of US$37 in December of 2015. Source: Trading Economics 2018. The prices of gold and diamond have as well fallen since September 2011.

The current and prolonged fall in the prices of these export commodities on the world market coupled with the overall decline in export is contributing to the shortage of foreign currency (USD) supply on the Liberian market. Due to this, there is an increase in demand for foreign currency (USD) by local and foreign businesses to trade.

•  The Drawdown of UNMIL

It is a fact that the drawdown of UNMIL has created an extra burden on our economy. This reflects a serious leakage in Liberia’s economy. For the period July 1, 2016, to June 30, 2017, the General Assembly appropriated a budget totaling US$394.48 million for UNMIL. See the breakdown below:

1. Special Account for UNMIL – US$197.24 million
2. Maintenance of the Mission – US$187.14 million
3. Support Account for Peacekeeping Operations – US$8.13 million
4. United Nations Logistics Base – US$1.97 million
5. Total for 2016/2017 – US$394.48

Due to its drawdown, the budget of UNMIL was cut by the General Assembly from US$394.48 million for FY2016-2017 to US$234.42 million for the period of July 1, 2017, to June 30, 2018. This means that US$160.06 million left the Liberian economy. See the breakdown below:

1. Special Account for UNMIL – US$116.95 million
2. Maintenance of the Mission – US$110 million
3. Support Account for Peacekeeping Operations – US$5.56 million
4. United Nations Logistics Base – US$1.91 million
5. Total for 2017/2018 – US$234.42 million

The cut in this budgetary appropriation could even triple due to the end of UNMIL’s mandate on March 30, 2018. This means that there has been and will be a huge outflow of USD from the market. This could put further burden on the Liberian economy and negatively impact the supply of USD on the Liberian market. This shock has had and continues to have a downward shift in employment, real wage, investment, household income, etc.

• High-Interest Rate

Even though the Liberian economy is rapidly declining, but interest rate remains very high which is contributing to snail-paced growth. For the last 15 years (2003-2018), the interest rate in Liberia has averaged 14.06 percent. The Interest Rate in Liberia was last recorded at 13.10 percent, reaching an all-time high of 20.30 percent in September 2004 and a record low of 13 percent in February 2017 (Source: Trading Economics 2018).

The high-interest rate by the Central Bank of Liberia is undermining the stimulation of local businesses, job creation, investment, etc. Whenever the interest rate is high, borrowers and businesses are discouraged to take loan/money to invest more or increase their capital. This often has a downward shift on investment/employment and is adversely impacting foreign and local trade.

The Interest Rate at Commercial Banks and Microfinance Institutions in Liberia is even far higher. For instance, the interest rate of Access Bank is around 25 percent. The Liberian economy is not experiencing rapid growth because the supply of money to produce and purchase goods/services as well as to employ more Liberians is insufficient or in small quantity. More Liberians and non-Liberians won’t go for money (loan) unless interest rate reasonably falls.

• Self-regulatory Exchange Market, Printing of New Bank Notes, and Counterfeiting

The Government of Liberia through the Central Bank of Liberia is under a statutory mandate to regulate the Foreign Exchange Market according to an Act of the National Legislature that created CBL on October 18, 1999. Unfortunately, the Exchange Market seems self-regulatory across the country, which sometimes can be attributed to exogenous factors and market forces.

Today, anyone everywhere can determine his/her own rate. Even in Monrovia, there are varying exchange rates. The CBL is yet to institute any genuine structural reform through concrete regulatory/controlled and enforceable framework to curb this situation. For instance, the exchange rate in Montserrado is L$162 to US$1 while it is L$166 to US1 in Maryland County.

The sidewall money exchangers are even far more than those who are in forex bureaus. This prevailing trend is influencing the swelling of the exchange rate on the Liberian market. It is also creating a fertile space for inflation and an illicit atmosphere of counterfeiting (LRD especially). In most African countries like Ghana, Senegal, South Africa, Kenya, etc., foreign exchange transactions are done in forex bureaus and commercial banks, and not on the sidewall.

Additionally, the printing of new banknotes which was sanctioned by the 53rd National Legislature in August 2016 is contributing to the problem in my opinion. Under Central Bank Governor Milton Weeks, $5 billion new banknotes were printed to replace mutilated banknotes. Furthermore, a new denomination of L$500 was also printed. There are still unexplained answers about who authorized the printing of this new denomination (L$500).

Additionally, this same Legislature authorized the printing of L$50 million new banknotes under Governor J. Mills Jones in April 2016. This was intended to help curb the depreciation of the local currency (LRD). But the realities on the ground now prove otherwise.

The printing of L$5 billion plus L$50 million new banknotes without fully retrieving the mutilated banknotes is creating shock in the market. This action seemed to have dollarized the market more with the local currency (LRD). Up-to-date, the Liberian Dollar is in surplus on the Liberian market while the foreign currency (USD) is in shortage.

In my opinion, the 53rd National Legislature did not do sufficient due diligence and empirical economic analysis before authorizing the printing of over L$5 billion new banknotes. The power delegated to the 53rd National Legislature to approve the printing of new banknotes according to Article 34(d) of the 1986 Constitution was probably overlooked or sabotaged probably due to self-interest.

• Capital Outflow, Capital Flight, and Investor Fear

Huge capital outflow has been and continues to be a challenge in terms of creating further leakage(s) in the Liberian economy. The declining state of the country’s economy and the non-assurance of a booming prospect in the short-run is creating panic and fear not only in investors but citizens and non-citizens who had earlier thought to invest.

The huge outflow of assets (current, fixed, financial, and intangible assets) from Liberia by investment companies and firms especially due to perceived fear as a result of the prevailing economic crisis is causing shock in the economy. A lot of multimillion companies are scaling down on investment and even downsizing employees. Putu Iron Ore Mining Company and BHP Billiton are no more.

The survival of China Union, Arcelor Mittal, LAC, Bea Mountain Mining Corporation, CRC, Golden Veroleum, Sime Darby, etc. is severely threatened by this unfavorable investment climate which rarely guarantees the maximization of profits or higher returns on investments. As foreign investment shrinks due to capital outflow, the hope for an economic boom in Liberia continues to dwindle. This is affecting domestic revenue mobilization.

Furthermore, capital flight coupled with illicit financial flows is on the increase both in the public and private sectors. It is a fact that millions of US Dollars are transferred from our economy to foreign accounts every month by investors, expatriates, foreign diplomats, public officials, local/foreign entrepreneurs, and private citizens.

Whether financial assets are transferred legally or illegally, capital outflow/flight and illicit financial flows are the twin economic tremors mainly affecting the import-driven economy of Liberia. This trend is leaving a lot of our commercial banks almost incapable of functioning (path to insolvency). It is also contributing to the reduction of the foreign currency in circulation; thereby, creating a huge demand for USD.

• Dependency on Imports, Cut in Foreign Aid, and Foreign Dominance

It is undebatable that no matter what the experts do in terms of finding a short-term solution to the current economic crisis, the Liberian economy will continue to encounter challenges because it is largely import-based and aid-dependent. Liberia is spending a huge amount of money (USD) to import goods and services into the country than it is receiving from exports. Liberia ranks 144 in the world in terms of total export volume due to an underdeveloped industrial sector (Source: Economy Watch).
For example, this is an outlook of Liberia’s imports and exports in 2012:

a. Imports – US$2.275 billion
b. Exports – US$774.8 million

Do you see the disparity? Up-to-date, this trend has rarely changed. In fact, there has been a decline in exports while imports have upsurge or increased intermittently. As a result of this, the balance of trade is negatively impacted because more money (USD) are leaving the economy than coming in. The Balance of Trade in Liberia has been averaging -43.42 USD Million from 2003 until 2018.

Due to rising import, the foreign currency (USD) has more power/weight than the local currency (LRD) because the demand for foreign currency in order to import goods/services is high. Consequently, this has predominantly led to the fast depreciation of the local currency (LRD).

As global economic recession sets in, friendly nations and donors are becoming much more cautious about giving out aids and grants especially to developing countries. The cut in aid to Liberia especially by western powers is having an adverse impact on the economy as well. This means that Liberia will have to stand on its own by improving its revenue base. For instance, US President Donald Trump instituted measures to cut foreign aid since 2017.

The Liberian economy is controlled mostly by foreigners. These foreigners divert almost all their profits to their countries or in foreign accounts, leaving Liberia with nothing. This is also affecting the circulation of money (USD) on the Liberian market.

• Increasing Debt Stock

The debt of Liberia continues to increase. Before President Ellen Johnson-Sirleaf could exit, Liberia debt accounted for US$874.1 million according to Central Bank of Liberia 2017 Annual Report. See summary below:

a. External Debt – US$608 million
b. Domestic Debt – US$266.1 million

Additionally and in just 5 months, the Government of President George Weah has ratified and signed 2 separate loan agreements amounting to almost a billion dollar. See the breakdown below:

a. ELTON Finance PTE Limited Loan – US$536.4 million
b. EBOMAF Loan – US$426 million

These 2 loans have significantly increased Liberia’s debt stock to almost 2 billion USD. Servicing Liberia’s huge debt amidst a decline in economic activities puts more pressure on the economy. For instance, US$30 million has been budgeted for this fiscal year (2018-2019) to service pay back debt. This means that US$30 million is leaving the economy. Furthermore, in as much government debt sharply increases, the ability of the government to spend money on other development priorities would be undermined.

• Increase in the Price of Petrol Products and High Tariff

In May this year, the Government of Liberia through the Ministry of Commerce and the Liberia Petroleum Refinery Company (LPRC) increased the price of a gallon of gasoline/diesel by 20 cents USD (US$3.61 for gas while US$3.70 for diesel). This increment in the price of petrol products coupled with the swelling exchange rate has led to increased transportation fare which is shifting the prices of other basic goods and services upward.


The complexities and bureaucracies at the Freeport of Monrovia, the Gateway to Liberia’s Economy, remain alarming. There are facts to show that LRA, BIVAC, and APM Terminal are charging a high tariff on goods and services (imports). This is discouraging a lot of importers from using the Freeport. Instead, they are using neighboring ports.

Furthermore, there are facts to show that LRA, BIVAC, and APM Terminals have been demanding local businesses to pay taxes/duties in foreign currency (USD). This has even increased the chase for foreign currency; thereby rendering the local currency (LRD) powerless.

D. Solutions and Recommendations:

As Liberia’s economy takes a nosedive due to rising prices and the swelling of the exchange rate, the urgency to find a genuine and sustainable solution to the current economic paralysis confronting the country cannot be overstressed. The need to shift toward recovery and macroeconomic stability is critical to averting further crisis. Therefore, this paper submits the following recommendations in 3 phases:

• Toward Recovery (Short-term measures)
• From Recovery to Stability and Sustained Growth (Medium-term measures)
• From Stability and Sustained Growth to Economic Prosperity (Long-term measures).

 

• Toward Recovery (Short-term measures)

• The Government must immediately set-up a National Economic Recovery Council (NEREC) that will be mandated to develop a more concrete and doable Economic Recovery Plan pointing toward macroeconomic stability, sustained growth, development, and prosperity.

 

• Since there is a surplus of Liberian dollars on the market as a result of the printing of over L$5 billion new banknotes and a new denomination (L$500), the Government through the Central Bank of Liberia and LRA along with Commercial Banks and other Microfinance Institutions must design a workable approach to retrieving mutilated banknotes from the market.

• The Central Bank of Liberia must institute sweeping and structural reforms geared toward the regulation of the exchange market especially sidewall exchanging. Transitioning from sidewall exchange to forex bureau exchange would help to control Liberia’s floating exchange rate system. The setting up of a monetary board could also buttress this effort.
  
• Since there are confirmed reports of mass counterfeiting and money laundering mainly as a result of the printing of new banknotes, the Financial Intelligence Unit (FIU), the National Security Agency (NSA), LRA, CUSTOM Security, BIN, and LNP must engender an aggressive alert mechanism strategy and mitigation plan to curb this illicit infusion of cash in the economy. The need to increase border patrol and vigilance for the purpose of gathering intelligence nationwide is as well crucial.

 

• Due to the huge supply of Liberian dollars in the economy which is being illicitly influenced by counterfeiting and money laundering according to verifiable sources, the Government needs to begin considering the possibility of changing the local currency banknotes to new ones with highly sophisticated security features.
  
• The Government must cut down on overspending, avert economic sabotage, maintain fiscal discipline, and empower anti-graft agencies/commissions. The need to readjust 2018-2019 fiscal envelop in order to cut down on recurrent expenditure is key. This could save the government from running into a huge deficit and help it to divert some resources to sectors that bring in short-term returns/dividends (e.g. Tourism).

• The Government must design meaningful ways and strategies to increase export and discourage import. The need to invest in Liberia’s manufacturing and infrastructure sectors is critical. This would add value to raw materials, promote export, expand local markets, and create new jobs.

 

• The Government must review the concession agreements of APM Terminals and BIVAC in order to avert emerging complexities, unnecessarily bureaucracies, huge tariffs/taxes, and trade barriers usually encountered at the various ports of entry. The need for businesses to pay taxes in the local currency (LRD) could reduce the high appetite for foreign currency (USD).

• The Government must enact and enforce a law that compels foreign investors and entrepreneurs or foreign business merchants to save a reasonable amount of their returns (dividends/profits) in the various commercial banks. This could help mitigate capital outflow/flight. The bill submitted in similar pursuit by Representative Dixon Seboe of District #16 is worth commending.

 

• The Government needs to subsidize the importation of some inelastic goods or basic commodities that are predominantly consumed such as gas and rice. The need to cut down taxes on these commodities would increase purchasing power and influence the fall in the prices of other commodities. The Government must also be thinking about producing Liberia’s staple food. Why is Liberia spending over US$200 million on the importation of rice when it has an arable land of over 5.1% according to World Bank?

• The Government must revitalize/rehabilitate the refining facilities of the Liberia Petroleum Refinery Company to pre-war status or even more sophisticated then it was. LPRC was never established only for storage. If this is done, the prices of petrol and diesel could fall drastically.

 

• From Recovery to Stability and Sustained Growth (Medium-term measures)

•  Instead of relying mostly on the mining sector for export, the Government must shift toward economic diversification by stimulating growth through:

 

• Agro-economic productivity (Mechanized farming)
• Tourism and Technology
• Energy and entrepreneurship (SMEs)
• Industry and commerce
• Infrastructure and the service sector

• In an effort to create wealth, guarantee gainful employment, increase export, promote trade, reduce reliance on foreign aid, decrease import, and create a favorable economic atmosphere, the Government must focus on industrialization. The urgency to add value to Liberia’s raw materials would contribute to stability and sustained growth. For instance, manufacturing iron into steel and iron would add value to the local currency than just exporting iron ore.
• For Liberia to fully maximize its resources, the Government must invest in human capital through academic education, vocational and technical education, in-service training and manpower development. In addition, I recommend the construction/establishment of four (4) regional polytechnics that will offer technical education in different disciplines.

 

•  Amidst these daunting economic challenges, no genuine progress can be made if CORRUPTION, ILLICIT FINANCIAL FLOWS, and TAX EVASION both in the public and private sectors are not seriously tackled. The Government through LACC, GAC, IAA, PPCC, FIU, LRA, and MoJ must institute short, medium, and long-term austerity measures that seek to prevent and respond to these economic crimes and guarantee openness, accountability, transparency, and integrity in public service.

• The Government through the Legislature and Executive must refrain from ratifying and signing into law bogus concessions that are not in compliance with due diligence and legal veracity.

 

• Like it was done in the past, the Government must reestablish free and special economic zones in order to attract direct foreign investment and stimulate sustained growth in the Liberian economy. The need to also enforce the Liberianization Policy in order to protect Liberian-owned businesses and entrepreneurs cannot be overemphasized.

• The De-dollarization of the Liberian economy is imperative. The Government must initiate a national debate around the merits of a “Single Currency Regime” and its applicability in Liberia.

• From Stability and Sustained Growth to Economic Prosperity (Long-term measures)

• The Government must institute sweeping reforms and aggressive pro-poor measures to ensure the equitable distribution of the nation’s wealth. Emphasis must be placed on poverty alleviation through wealth creation and economic parity/freedom.

 

• The Government must focus on improving the quality of life in the country by increasing investment in the areas of education, health, social security, profitable employment, improved housing, safe environment, electricity, safe drinking water, good roads, etc.

• The Government must strengthen governance structures and institutions in order to respond to the ultimate needs, interest, and welfare of the Liberian people. It must institutionalize workable frameworks that ensure public accountability, transparency, and integrity at all levels.

 

• The Government must expand Liberia’s tight fiscal space by strengthening tax administration, increasing export over import (surplus in the balance of trade), expanding local markets through manufacturing and industrialization, etc.

• The Government must divert a good portion of the National Budget to capital investment. Liberia is the only country in this region where its recurrent cost/expenditure is more than 86 percent.

• The Government must link Monrovia and all county capitals with paved roads and construct/repair key primary roads around the country. This will highly impact rural development and economic boom across the country.

E. Conclusion

As the nation goes through this period of economic slump, the 4.8 million people in Liberia are yearning for a solution. The hope of the Liberian people seems rare, but their resilience for an economic daybreak remains undiminished. It is this resilience that has even made them more vocal in calling on the government to immediately intervene.

As a youth and student activist, it obligates me to suggest possible remedies to the government in times like these. On this basis, I think by considering some of the recommendations inscribed in this paper could help to cushion the harsh economic realities to a certain extent, if not wholly.

Yes, I believe that Liberia can disengage from this recessed stage to full recovery, macroeconomic stability, sustained growth, genuine development and unhindered prosperity. Getting all of these done will require the firm demonstration of political will and undiluted patriotism.

References/Citations: The 2017 Central Bank of Liberia (CBL) Report, World Bank Overview of Liberia's Economy 2017, IMF Economic Outlook on Liberia, The Economy Watch, Economic Trading.

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About The Author: Martin K. N. Kollie is a youth and student activist who hails from central Liberia, Bong County. He currently studies Economics at the University of Liberia. He is the President of the Economics Student Association and an honor scholar of the Lux-In-Tenebris Scholar Program. Martin is an ideological stalwart of the Student Unification Party (SUP). He can be reached via these details: martinkerkula1989@yahoo.com or (+231) 776-572-334

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