Liberia ‘hunts’ for Economic Solutions

A-three day economic forum aimed at seeking ways to resolve Liberia’s deepening economic crisis got underway on Wednesday at the ministerial complex in Monrovia. 

In recent times, there has been series of outcries from several sectors to redeem  the economy.  At present, the exchange rate has risen high by the day with little being done by government to remedy the situation.

Organized by the UNDP along with European Union, USAID and ECOWAS, under the theme National Economic Revival and Growth brought together key stake holders from both government and private sector.

At the opening of the dialogue, president George Weah said the  was organized at the right time  so that stake holders will find a way out in  seeking ways to solve some of the economic challenges.

“This Conference is organized and convened as an important initiative of my Administration, in order to stimulate a broad-based conversation among stakeholders within the Liberian economy, concerning the best and most feasible way forward to sustainable growth and development. 

“There were structural challenges which would require major adjustments if they were not to continue to have a negative impact on macro-economic stability. There were also issues of liquidity, and a persistent decline in the value of our currency, compounded by reducing inflows of foreign exchange and investments, all of which placed upward pressure on inflation,” he said.

For his part,  the Minister of Finance, Samuel Tweah, outlined  some of the challenges and looked  at the way forward:

“We are Trying to reduce inflation  in the country by putting the right policies into place within the next few months. That is before the end  of this year those measures should be into place. Also, we are working on fiscal policy reform. Those are the immediate plans;  Try to stabilize the market. Stabilize the micro economic system. These are our  immediate priorities.

“In the new 2019/2020 Year national budget, the Government aims to moving toward this path in higher domestic revenue performance through a combination of tax policy measures, measures that broaden the tax base, administrative efficiency, use of technology, minimizing exemptions and using tax incentives more reasonably,  and stronger financial support for revenue mobilization. So the 2019/20 national budget now under consideration is NOT just about downward adjustment. Going forward, the Government aims to increase its effort to collect taxes, backed by the strong political will shown by the President to collect the fare share of revenue due to the Government.

“The reality is that strong revenue performance is a function of continued growth in the economy, improvements in the business climate, increased flows of investment etc. The President has established a business climate working group that has engaged a wide range of stakeholders to address the challenges and costs of doing business in Liberia. 

“The Working Group has engaged stakeholders in the shipping industry with the aim of bringing down the costs of imports, which also have passthrough impacts on prices. Evidence shows that import costs can come down if the Government, the National Port Authority, shipping lines and other stakeholders remain on their current path of bringing prices down and improving efficiency in that sector.

“The cost and reliability of electricity is also a challenge to the business environment. Per kilowatt hour cost of power in Liberia is 35 US cents, while for most countries in West Africa it is less than 15 US cents.  The completion of the CLSG transmission lines early next year will enable Liberia to import cheaper power from neighboring countries, helping to improve the business climate.

Contract enforcement and the litigation of business cases in Liberian courts remain areas of concern. The Business Climate Group is working closely with the Chief Justice and leaders of the judiciary as well as key private sector groups such as banks, which are often affected in these types of cases, to situate contract enforcement on a more transformative path.

“The country cannot absorb the number of young people entering the job market yearly and this is serious recipe for crisis and tension. In this regard the Government, its partners and all stakeholders are challenged to open frontiers for all our young people. A major area is the field of agriculture, where business climate challenges of cost of electricity, for example, do not necessarily apply. The President and the Government view the agriculture space as the clearest path to short to medium term job creation.

“The benefits here are too great and we would like to see some consensus developed around agriculture investment during this Dialogue.

Then came the Executive governor of the Central  bank of Liberia, Nathaniel  R. Patray. On the monetary policy development, he admitted the constraints and challenges.  “Monetary policy implementation has continued to be constrained in the achievement of the core mandate of price stability by the Central Bank of Liberia (CBL). This mandate is dictated by the fact that inflation has implications for eroding the purchasing power of households, reducing the revenue base of the country as well as inhibiting investment inflows and undermining the competitiveness of the economy.”

“Due to the unabated inflationary and exchange rate pressures since 2015, the CBL is in the process of shifting its monetary policy framework from intermediate exchange rate targeting to the use of monetary policy rate as the key policy instrument of the Bank. Before now, our monetary policy involved the use of several monetary policy instruments, including the reserve requirements and foreign exchange auctions,” he added.

He said, the transmission mechanism of interest rates in the economy has been relatively ineffective, as the interest rate spread between the lending and saving rates remains wide in the absence of effective monetary policy rate.

“These phenomena have induced the CBL to contemplate the introduction of a proxy monetary policy rate, the Standing Deposit Facility and the Central Bank notes to be issued at high interest rates to attract liquidity into the banking sector. At the moment, currency outside the banking sector accounts for 86 percent, which is not healthy to promote vibrant financial intermediation and monetary stability,” he went on.

“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.

“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. 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. In order to address these challenges, the Bank is considering increasing the SDF rate from 4 percent to 24.5 percent. Our major concern is the costs of about US$9 million dollars required to finance the operation of this rate in one year.

“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.

“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, something that the CBL prioritizes as aptly articulated in the Financial Sector Development Implementation Plan (FSDIP) which was launched in 2014 with support from the World Bank.

“The CBL, in collaboration with the Ministry of Finance and Development (MFDP) recently developed a detailed Roadmap for the Digitization of the Liberian economy. The Roadmap intends to leapfrog the Liberian economy from the present stage to a more efficient, transparent and productive system. The digitization initiative will also promote financial inclusion, minimize fraud, reduce delay in payments, and deepen financial activities.

“As part of the roadmap implementation, the Bank continues to engage the Ministry of Finance and Development Planning (MFDP) and the Liberia Revenue Authority (LRA) for the automation of all Government of Liberia’s Revenue Collections and Disbursements. This integration will ensure the timely and seamless automation of payments of civil servants’ salaries, pension benefits, vendor payments, and payments to other government ministries and agencies at the same time provide secure and efficient collection of Revenue.

“The CBL is in readiness to implement, in collaboration with the West African Monetary Institute (WAMI) and the AFRIXEM Bank, the Regional Project for the integration of technological payment systems and the definition of a common framework for transacting, clearing and settling cross border transactions in domestic currencies. The project is expected to enhance trade in the sub-region, and to mitigate corresponding banking relationship difficulties, reaching to all market participants with financial services that are fast, reliable, simpler and affordable.

Challenges of the CBL

 Governor Patray  outlined some of the key challenges such as Dual currency regime that limits monetary policy options by the CBL; The shallowness of the financial system, as reflected by the lack of functioning financial markets where policy instruments are traded; Excess liquidity outside the mainstream banking system, which is undermining intermediation and Limited foreign reserves, thus inhibiting the CBL’s ability to adequately respond to potential external shocks to the economy and help smoothen exchange rate volatility. 

Not only that, but also, high imported cost push inflation that has adverse implications for real purchasing power; 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.”

He said, as a way to mitigate the challenges, the bank has decided to implement policies that would improve the sector.

That the Bank is currently in the process of reviewing its existing Act to strengthen its operational and goal independence, including governance as well as the development of a new Monetary Policy Framework and Charter to guide the operationalization of its Monetary Policy Committee (MPC).

He said, 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 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;

1. 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;
2. The CBL is also strengthening its data warehouse to enhance the conduct of empirical analysis and provide evidence-based policy advice;
3. The CBL is 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;
4. The CBL 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;
5. The CBL remains committed in the implementation of policies that would support the building of foreign exchange reserves to serve as buffer for the economy;
6. The CBL 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;
7. The CBL is working toward full digitization of the financial system in order to enhance the provision of inclusive financial services and ensure financial deepening;
8. 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; To promote a cash-lite economy,  tweah

• CBL is working towards increasing financial education, to take banking services to the public;
• CBL is holding discussions with development partners and other stakeholders about promulgating regulations indicating that all transactions above a given limit, with the exceptions of goods traded over the counter which can be settled in cash, should be paid through bank transfers and not by cheque or cash, to encourage individuals to open accounts and manage them. This would be more useful if among other things, the mobile banking services such as those provided by MTN and Orange Money can be linked to bank accounts. 

• The CBL is promoting interconnection of banks and other financial institutions via a common switch where for instance an ATM card from one bank can be used across all banks at an affordable price.

He said, at the just concluded Statutory meeting of the West African Monetary Zone (WAMZ) in Conakry, Guinea, the CBL held a side meeting with the Central Bank of Nigeria with the aim of knowledge sharing on some of these initiatives and to promote intra-regional trade through the direct exchange of Liberia dollars for Naira and vis versa. I am glad to inform you that the scoping mission from Nigeria is expected in Liberia from September 7 to 12, 2019.