Stabilizing the Liberian dollar and Consumer Prices

Since this year, the Liberian dollar has been performing poorly against the US dollar, after it had been relatively stable during 1998-2000. According to official data published by the Central Bank of Liberia (CBL), cited in the Economist Intelligence Unit's (EIU) third quarter Country Report, the dollar's quarterly average exchange value fell above L$44:US1 in the first quarter of 2001, while the monthly average and end-period rates for April were L$46.42:US$1 and L$48.50:US$1, respectively. This was the first time that the dollar fell to such highs since it lost its fixed official parity with the US dollar at the end of 1997. The dollar depreciated further, falling to L$57.50:US$1 at the end of July, according to the IMF, and again to L$60:US$1 on August 6th.

Government officials have blamed recent increases in consumer prices in Monrovia, especially gasoline, fuel oil and transport prices, on the depreciation of the dollar, which has in turn been blamed on the UN sanctions and the Lofa war. Hence, in an effort to stabilize the dollar and reduce price instability, the Central Bank, the Ministry of Commerce and the Petroleum Retailers Association of Liberia (PRAL) agreed to set the price of gasoline and fuel oil at L$155 per gallon, effective August 18th. The government has promised to stabilize the price at this new level by continuously providing the needed foreign exchange to petroleum retailers on a weekly basis. The first two of such weekly foreign exchange installments (US$75,000 and US$60,000) were injected into the economy during August and early September. The CBL also planned to buy up from circulation a large, unspecified quantity of Liberian dollars.

These efforts seem to have succeeded partially in stabilizing the exchange rate, as the dollar gained significant strength during the closing months of the year (from L$60:US$1 in August to about L$44:US$1 in November). However, reports from the capital indicate that consumer prices have remained generally high in the country, confirming the belief that while propping up the dollar may have temporarily reversed the decline of the currency, such a measure is not enough to maintain long-term price stability, the chief monetary policy objective of the government. Such efforts will have to be complemented with other regulatory measures aimed at curbing the behavior of local traders (mainly Lebanese), who are reported to be hoarding the US dollar and refusing to accept business in the domestic currency, thus leading to the US dollarization of key segments of the economy.

Moreover, it is unlikely that the government will be able to maintain the stability of the dollar, in the long-term, through continuous injection of foreign exchange. Liberia's total foreign reserves (including foreign exchange and reserve position in the IMF) have remained insufficient, in relation to import payments, at least since the civil war ended. They averaged only US$440,000 during 1997-2000, and in the first two quarters of this year, they further declined to US$250,000 and US$260,000, respectively. With declining foreign reserves, it is difficult to see how the government can depend on the use of foreign exchange intervention as an effective policy instrument in the long run.