The Perspective
Atlanta, Georgia
August 11, 2019

CBL Governor Nathaniel Patray

Liberia, from now on, will tweak the interest rate and improve Liberia’s exchange rate without using government money to buy back the excess Liberian banknotes, according to the July 19, 2019, Central Bank Economic Policy Statement. The 7/23/2019 Daily Observer article also quoted the Executive Governor of the CBL, Nathaniel Patray, who stated that CBL will start using INTEREST RATE, stop borrowings from Liberia’s “Rainy-Day-Money,” which is low, and develop financial markets,” (i.e., clearinghouse/financial platform) where investors can buy and sell securities.

Can the Central Bank of Liberia, with a negative cash position of $265M, essentially a borrower and less transparent, dictate interest rate policy? Or, as I surmise, did Governor Patray intend to calm the public about the July 2, 2019 newspaper report that CBL will withhold 100% of all US dollars remitted from 25%?  According, to the 7/3/19 Daily Observer, the public is not happy about the proposal. The 7/2/19 Newspaper had quoted the Minister of Finance, Planning, Development and Economic Affairs, Mr. Samuel Tweak that “ US dollars sent to Liberia…will be paid in Liberian Dollars.”

Common sense suggests when a method is ineffective or not appropriate for the moment, try another option. For example, a government might not want to use cash-infusion, which has an immediate effect, instead use an interest rate, which produces a gradual impact. In balancing currency exchange rate, governments have and continue to abandon cash infusion (i.e., Direct Method), employ interest rate (i.e., Indirect Method) or use both methods simultaneously to balance their currency against an alternative currency.

Direct Method includes printing of new banknotes, buying bonds from money lenders (also called quantitative easing) or paying refunds, any which depreciates the currency. On the other hand, indirect method, which tweaks the currency includes the following:: (1) Gross Domestic product, a growing economy tends to strengthen a country’s currency; (2) interest rate, higher interest rate improves the currency, and lower interest rate depreciates the currency; (3) trade, current account deficits depreciate the currency; (4) Economy, a good economy  strengthens the currency.

Let us review some examples of balancing a currency exchange rate: Interest Rate: The 8/7/19 NY Times stated that after President Donald Trump failed to use some of the $300 billion Exchange Stabilization Fund (“Rainy-Day-Savings”) to weaken the U.S. currency, he has forced the Chairman of the Federal Reserve Bank to cut interest rate. He hopes that a cut in the interest rate would reduce America’s currency, which would make U.S. exports cheaper against foreign products. Also, a cut in interest rate would encourage both US companies and buyers to borrow more money and improve the economy.   

Cash infusion through the purchase of bonds: Great Britain Officials, are expected to buy bonds from money-lenders to fight its slow economic growth due to Brexit Uncertainty. Purchasing bonds from money-lenders would replenish the cash of money lenders, allowing them to lend additional loans to borrowers. Printing banknotes/using cash reserves: China used a portion of its $3 trillion in reserves to weaken its currency, according to 08/05/19 NY Times. NY Times quoted President Trump as saying that China has devalued the “Renminbi,” in order to make US exports expensive to China, compelling Chinese to abandon US products and buy substandard Chinese products. 

Quantitative easing:  The writer of the 8/2/19 NY Times article called “Brexit Uncertainty Drives Down Economic Forecast”8/2/19 stated that Mr. Mario Draghi, President of the European Central Bank, and Ms. Christine Largarde, who will succeed Mr. Draghi, did not rely on indirect method (i.e., interest rate) to boost the economy. They have agreed to “…recommend the purchase of bonds, in effect, printing money,” as a stimulus to boost economic growth.  

Direct Method  (cash infusion) has an immediate effect on the currency, while the indirect (interest rate, for example) has a gradual impact. It is gradual for many reasons. For instance, the interest rate the central Bank usually use to adjust the cost of borrowing money among commercial banks is not the same interest rate that affects consumers. The impact is gradual because the adjusted cost (increase/decrease) will be realized when borrowers make payments a few days, weeks, months or years.

Moreover, the adjustment might be delayed because the current interest rate might be too low (as it is in the United States), hence, having a limited impact on consumers, if adjusted. In the case of Liberia, does CBL have any leverage on interest rate since the Bank has $265M negative cash position in 2018, essentially a borrower?

Before we discuss interest rate and the idea to establish a stock market in Liberia, let us review certain things: (1) Banks usually require collateral  to lend money, so many companies prefer selling shares/stocks and/or bonds. (2) Companies prefer selling shares/stocks because buyers are owners, and do not have to pay interest expense (3) Bond is a promise that an issuer would pay interest expense to a buyer; (4) interest is the cost of borrowing; (5) a cut in interest rate ends up weakening the currency; makes exports cheaper, thereby improving the economy; (6) an increase in interest rate ends up strengthening the currency, makes exports expensive, thereby, undermining the growth of the economy.

However, if the financial market is to be useful for trading securities, its central bank must ensure that: (1) underwriters/consultants evaluate a business’s Initial Public Offer (IPO), (2) independent rating agencies appraise and assign grades (AAA+ BBB, etc.) to bonds/stocks, (3) stock market ensures that trading is transparent, (4) financial institutions such as Bloomberg, LLC and New York Stock Exchange provide trading platforms (5) Security Exchange Commission monitors and regulates trading, and (6) businesses provide financial data include such as revenue projection, earnings per share, debt to assets ratio, prices of short-term and long-term bonds, assets, liabilities, equity, etc.

Sadly, many businesses in Liberia do not publish their financial data. Even public-service entities such as the Liberia Electricity Corporation, National Port Authority, etc. have stopped publishing their financial statements since 2014. Also, other private-utility entities (Lone Star and Orange, for example) do not publish their financial data, even though they are required by law to publish their data.

Worse, CBL’s financial data are not transparent: the entity that is responsible to monitor and guide the economy of Liberia. In fact, CBL deliberately deleted its 2018 Annual Report from online after the Ministry of Finance of Liberia disputed Liberia’s $227M deficit number. Also, on page # 11 of CBL 2017 financial statements, CBL increased its “Retained Earnings by L$14,471,689,000 (i.e. equivalent to US $115M) classified as “Translation Reserve. And, on page # 13 of  CBL 2017 financial statements, CBL increased its Ending Cash and Cas Equivalent by L$7,267,997,000 (i.e., equivalent to US $58M). Why did CBL not provide any schedules or statements to explain how it calculated the adjustments to Cash and Retained Earnings?  

So, if CBL cannot provide transparent data of the economic position of the country, will any investors trust its monitoring decisions such as its evaluations of commercial banks, corporations, and regulatory agencies responsible for a capital/stock market? And, if investors believe that Liberian financial data are less transparent, will they buy and sell securities, much more to allow CBL to dictate the adjustment of interest rate?

If CBL cannot adjust the interest rate and/or create a capital/financial market, will it abandon the use of cash to adjust the Liberian currency exchange rate? I do not think so.

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References

(https://www.liberianobserver.com/news/tweah-speaks-of-new-measures-to-stabilize-liberias-economy/). Government’s new measures to stabilize Liberia’s economy.

(https://www.liberianobserver.com/opinion/editorials/gol-must-reconsider-its-proposed-100-percent-surrender-policy/) Government’s proposal to withhold 100% of US inflow-remittances

 (https://www.trading-point.com/central-bank-intervention)
Central bank intervention policy

(http://www.cbl.org.lr/doc/FinancialStatement_2018.pdf)
2018 Central Bank of Liberia Audited Financial Statements.

 (http://www.cbl.org.lr/doc/APRIL%202019%20MER%20FINAL%20FOR%20WEBSITE.pdf)
INTEREST RATE 12.44%

 (http://www.cbl.org.lr/doc/Annual_Report_2018_Feb_12_2019.pdf)
CENTRAL BANK OF LIBERIA 2018 ANNUAL REPORT

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