19 February 2013

Liberian Economy Rides on Waves -Balance of Payment Improves as Remittance, Debt Rise

Critics of the Sirleaf Administration have so often blamed the lackluster performance of the Liberian economy on official corruption to the extent that the performance of the economy appears a sole function of corruption. But while the Central Bank of Liberia (CBL) wills not to be drawn into the political dogfight, it believes several other militating factors of external and natural sources are to blame. The bank believes also that while the fundamentals of the economy faces daunting challenges, they remain strong and promising. This prompts observers to suppose that the economy might actually be riding on waves: improvement here, deficit there.  The Analyst has been taking another bird's-eye view of the 2012 edition of the bank's annual report.

The Annual Report of the Central Bank of Liberia (CBL) says that to the extent that the nation's export earnings and remittances from private and other sources improved, its external and domestic debts rose over previous totals.

The bank said there was however, no reason for alarm, as the fundamentals of the economy remain strong and promising, thanks to improvements in the commodity market, the encouraging performance of the real gross domestic product (RGDP), and the sound monetary policies it initiated to instill confidence and fair play.

Commodity market: local and international

The bank said despite noticeable decline in crude oil production globally that triggered rise in oil prices, interventions in development and weak demands resulted in falling prices. For instance, the bank said, the per barrel price of crude oil plummeted to US $108.9 by the end of June from US $118.5 between January and March of 2012 before rising to about US $110.4 per barrel in October.

The hike, naturally, jacked up the pump prices of gasoline, kerosene, and fuel oil in Liberia and correspondingly, the costs of the transfer of goods and services – mainly commuter fares and the prices of local threshold produce.

The report made no link between the fluctuation in oil prices and the performance of the nation's cash crops and minerals, but it said during the same time of the year under review, the prices of cocoa, gold, and cement spiked moderately as those of iron ore, diamond, round logs, and rubber took nosedives.

"[The] rice of cocoa increased to US $2,494.1 per metric ton at end-September, 2012 and remained at US $2,457.8 during the last quarter of the year. However, annualized fourth quarter comparison shows that price of cocoa reduced by 0.5 percent," the report said.

In comparison however, the report said iron ore prices dropped by 21.2 percent from US $141.8 per metric ton in the first quarter of 2012 to $121.1 per metric ton by year's end. The report blamed the fall, which contributed to budget deficit by hurting the nation's revenue intake, on what it called "global meltdown" and reduced demands that relate to an emerging oil market in China. By how much the drop in iron ore prices hurt revenue, the report did not say, but it projected good prospects for 2013.

As for round logs, the report said the price fell in phases to 5.5 percent from an average of US $373.26 cubic meter, meaning to analysts that the per cubic meter price stands currently at US $352.73, or thereabout.

The bank's report attributed the plummet to what it called "weak external demand", being completely silent on recent hullabaloo about the corruption in the forest sector that relates to the misapplication of the private users' permit (PUP). The intensity of the hullabaloo forced the government, last month, to suspend indefinitely the use of PUP, pending the outcomes of investigations it ordered.

But the bank said the production of round logs outstripped sale, suggesting to observers that loggers were simply ripping the nation's forest resources without consideration for commercial value and benefit to the nation.

"Production of round logs surged to an estimated 155,888 cubic meters in 2012, from 74,107 cubic meters in the previous year, representing an increase of 110.4 percent," the report said.

It noted further, "the rise in production was partly a direct outcome of growth in the number of companies engaged in logging activities. Also, an estimated 245,901 pieces of sawn timber was produced during the review period compared to 331,540 pieces in 2011, indicating a fall of 25.8 percent. The regulatory framework put in place by the Forestry Development Authority (FDA) in anticipation of full-scale mechanized timber production in the country was partly responsible for low output."

Another of the nation's offshore earner, rubber, the report said, experienced "moderate decline in prices" from about US $1.75 per pound, between January and March, to US $1.40 by year's end. CBL blamed the falling rubber prices on what it called "slowdown in global demands".

Regarding diamond, the report said CBL recorded a production of 34,271 carats  in 2012 representing a 14.0 percent or 5,595 carats lower than the previous year. "The decline in output was partly attributed to the shifting of labor from diamond mining to gold mining," the report said.

It did not say what that meant in real financial terms or what the prospects would be for this year; but it said the implication of the performances of the nation's export earners was promising. "But just how promising?" is the question many are asking.

Liberia's economic overtone

That only one export commodity functioned well during the year in review, CBL said, has nothing to do with the overall performance of the nation's economy.

"Outlook for the Liberian economy over the medium term remains favorable. The economy is projected to grow at an average of 7.4 percent over the period spanning 2012 to 2015; expected to be driven by continued rising growth in the agriculture, mining, and services sectors," it said.

The report however warned that nation's economy would remain in the woods unless major economies contained the "sluggishness in global economic activities", which is not within the powers of Liberia's struggling economy to control.

Observers say there should be a correlation between falling export earnings, dwindling commodity imports, rising demands due to hoarding, and rising prices of imported goods and local produce.  But CBL said while that is not exclusively the case at the moment given that it only recorded a 5.0 percent inflation rate last year, maintaining stable and low rates of inflation would be difficult unless rising international prices of oil and food were brought under control.

"The slowdown in inflation can be explained by the improved domestic food production and prudent management of monetary policy. Annual headline inflation in 2012 stood at 6.9 percent, from 8.5 percent reported at end-2011," the report said.

It noted elaborated further, "The key drivers of inflation were food and non-alcoholic beverages (10.4 percent), transport (5.7 percent) and furnishings & household equipment (4.3 percent), representing 73.9 percent of annual headline inflation for the year ended, 2012."

The bank projects decline in inflation in 2013 by 0.5 percentage point, noting that that would depend "largely depend on both domestic and imported food prices, the behavior of international oil prices, the exchange rate as well as the state of domestic infrastructure".

The bank concurred with President Ellen Johnson-Sirleaf that the nation's real GDP grew by 8.7 percent in 2012 from an estimated US $768.0 million in previous year to US $835.1 million. The upward push, it said, relates to improved activities in the mining and panning, agriculture and fisheries, and services sectors.

The report however noted that real GDP in 2013 is projected at 7.9 percent, 0.8 percentage point lower than the revised growth reported in 2012.

"The slowdown in real GDP in 2013 is expected to be driven by the rising but decreasing rate of production in the mining and panning sector," the report said without saying what would cause the decline in production in that sector.

These developments, which it attributed to improved domestic food production and efficient management of monetary policy, have helped keep the inflation index in the single digit. The report pointed out that the overall 5.5 percent inflation rate recorded would actually drop to 4.5 percent, if one ignored the rises in food and transport costs.

In the banking sector, the report said commercial banks pumped some L $19,226.8 million into the Liberian economy in the form of personal loans representing an 18.9 percent increase over 2011. It said this rise was in spite of considerable drop in deposits and saving rates. The declines reflect a gradual rise in competitiveness of the industry, the report said.

Along with the good news of increasing lending by commercial banks, the report said the Liberian government has earned more in export earning than it paid for imported commodities. "Liberian's balance of payments (BOP), in 2012, significantly improved from a deficit of US $21.0 million recorded in 2011 to a surplus of US $29.4 million."

It however revealed that not all was as rosy as it sounded. "The trade balance improved markedly from a deficit of US $1,438.4 million in 2011 to US $650.6 million in 2012 largely on account of declining imports. The services account also recorded a net outflow of US $746.5 million in 2012, from US $636.3 million, representing an increase in outflow of 17.3 percent mainly on account of increase in business travel and transportation."

However, it said these figures were not absolute. "The current account balance recorded a deficit of US $1,607.06 million. Furthermore, the trade balance improved markedly from a deficit of US $1,438.4 million in 2011 to US $650.6 million in 2012. Total trade position was estimated at US $1,423.0 million in which imports accounted for 67.4 percent while exports constituted 32.6 percent."

It described the overall worsening trade deficit as "deterioration" and blamed it on increased import payments during the year.

Regarding the exchange rate between the Liberian and US dollars, the bank said the official year-end rate stood at L $72.50 to US $1.00 from L $73.5 to US $1.00 at the end of January 2012.

But it said that was how far the economic good news extended. "Liberia's public debt stock at end-September, 2012 stood at US $561.5 million, indicating an increase of 8.2 percent relative to the level recorded at end-September 2011," the bank revealed, causing suspecting Liberians to shudder violently in fear (and anger?).

"Foreign debt now in the millions again even while poverty reigns in the land?" is the question most Liberians who remembered the nation's crippling 4.9 billion United States dollar debt, for which the nation has nothing to show and which the international community heaved from its shoulders just two years ago.

As if that was not enough bad news, the bank's report further revealed that the government was indebted to local banks to the tune of US $280.5 million or 97.3 percent of the country's total domestic debt stock.

"It grew by US $11.4 million (4.2 percent), compared to the corresponding period in 2011. Suppliers' credit, salary and allowances, pre-NTGL salary arrears, and others accounted for US $1.9 million, US $3.7 million, US $1.3 million, and US $0.8 million, respectively," the bank said.

Currently, there are nine commercial banks in Liberia with 78 branches spread across several counties in Liberia, 46 of them in Montserrado along followed by 9 in Margibi and 7 in Nimba. Southeastern Sinoe and Grand Gedeh get one apiece while Maryland gets four. None in River Gee County.

CBL said it worked with the Liberia Bankers Association (LBA) during 2012 to provide refresher training for 54 employees of those banks. Courses offered during the three-week training were Treasury Management Operations, Credit Risk Management, and Internal Audit & Compliance.

The bank said it made the achievement of a broader exchange rate the focus of its monetary policy during the year. However, it said it has had to rely exclusively on weekly sale of foreign exchange as the only available means to monitor and control the domestic monetary conditions.

It however noted that it was working with other key stakeholders to have "other policy instruments available to impact domestic money supply". "The introduction of the Treasury bill market will add to the number of policy instruments available to the CBL to influence domestic monetary conditions," it said.

It did not say, but observers believe the second policy instruments is likely to relate to funds remitted to Liberia from abroad, which represents a significant individual earning, but which does not contribute to revenue build-up.

According to the report, money sent from abroad to relatives, friends, and partners in Liberia amounted to US $1,287.4 million in 2012, reflecting a 2.1 percent increase compared with US $1,261.2 million reported for 2011.

"The growth was solely due to an expansion in service payments to US $379.4 million at-end November, 2012, from US $174.6 million recorded for 2011. This is the only category that recorded increase for the period. Compared with 2010, total inward remittances expanded by 31.3 percent, from US $980.5 million. A disaggregation of inward remittances by category reveals that workers' inward remittance accounted for the largest share of 35.7 percent; followed by service payment, 29.5 percent; exports, 22.8 percent; grants, 8.3 percent; official transfers, 3.6 percent and loan, 0.02 percent," the report said.

On total outward remittances, which it said declined by 14.8 percent to US $1,160.2 million over the US $1,362.3 million reported during the preceding year, the report said the slump was mainly on account of 33.9 percent reduction in import payments.

"Remittance, being one of the major sources of foreign exchange for the economy, experienced higher inflows than outflows of foreign exchange during the period recorded; showing a net inflow of US $127.2 million in 2012, compared with a net outflow of US $101.1 million recorded for 2011," the report revealed.

CBL has meanwhile revealed that despite the increase in commercial banking activities, mainly the increase in personal loan assessment, most Liberians continue to hide their money under mattresses. For instance, the bank said only 15 percent of the L $7,556.5 million in circulation was in the bank, that being a 4.2 percent increase from 2011.

That 85 percent of the currency in circulation was outside the banking system, CBL said to observers' disbelief, reflects the people's growing trust in the banking sector "arising from the continuous stability enjoyed by the industry".

The bank said that while it hails development in the sector, it was important that Liberia strive to reduce the shocks to its economy by reducing the high reliance on external market forces.

"The continued widening of the current account deficit reflects the import dependent nature of the economy and suggests the need for policy makers to begin to prioritize inward looking strategy geared towards strengthening domestic production of goods and services for less reliance on imports," CBL said.

One way observers say the nation can achieve this important feat is to make money transfer through banking transaction affordable and easier.

CBL agrees, "In order to promote competition and, consequently, efficiency in the sector, the CBL directed, and banks have begun implementation, that commercial banks should provide multiple money transfer services." It notes that the focus is to make transfer more convenient and affordable. The improvement will supplement services currently being provided by Western Union and Money Gram money transfer services.

The report also said that the bank, having worked with police recently to educate foreign exchange operators and then routed the illegal ones, has plan to bring this informal sector to the main fold of commercial banking. This, it disclosed, commercial banks had failed to achieve after several months of attempts to engage with foreign exchange operators.

"As the result of this action, there has been a reduction in the number of illegal operators," the bank said.

External collaboration

CBL said it has worked during the year in review with other central banks across the 6-country West Africa Monetary Zone (WAMZ) through the support of African Development Bank (AfDB) to modernize Liberia's national payment system.

When the modernization scheme is completed, the report said, such participating countries as The Gambia, Guinea, Sierra Leone, and Liberia would be able to reduce transaction costs, eliminate risks, and enhance efficiency in their banking sectors.

When the system is fully installed, each country will in the short term, be able to tap into a network infrastructure and electronic operating systems including the Real Time Gross Settlement System (RTGS), Automated Clearing House (ACH), Automated Check Processing (ACP), and Scripless Securities Settlement System (SSS).

The bank said it would shortly acquire an electronic payments switch that will co-exist with the RTGS, ACP, and the scripless.

The long-term objective of current efforts though, the report said, leads to the promotion of the financial integration of the six members of WAMZ: Nigeria, Ghana, the Gambia, Liberia, Sierra Leone, and Guinea.

Because CBL considers the modernization as crucial to its financial sector reform, it said it has established a separate unit and mandated it to spearhead the process.

"The primary goal of this initiative is to provide efficient, reliable, secure, and cost-effective interbank electronic funds transfer and clearing services to the Liberian banking industry that meets international standards," CBL revealed. "The Switch will enable customers of one bank to use their bank cards (debit, credit or prepaid) to transact business at ATMs of other banks and to purchase goods and services at any point of sales (POS) with different merchants. This initiative is also geared towards promoting financial inclusion, especially for the unbanked population through the introduction of other innovative financial products such as mobile."

CBL said it ensured efficiency within the financial system during the year in review by extending on-line banking services to its external customers through the provision of electronic statements.

"This service, which was in the past only used by the Ministry of Finance and the commercial banks, was rolled out to all other Government ministries and agencies. Also, the CBL during the course of the year improved the quality of the Liberian dollar banknotes," the report noted.

More to its international links, the bank said pursuant to a memorandum of understanding it signed with the Central Bank of Nigeria (CBN) in 2009, the two institutions conducted joint examinations of two subsidiaries of Nigerian banks operating in Liberia during 2012.

2013: banking prospects, challenges

Meanwhile, CBL said the prospects for improvement commercial banks operations are brighter but challenging. It said the banks would embrace the brighter side by first addressing such critical issues as stakeholders' concerns, and in particular, the public in respect of past errors.

"This will involve making thoughtful changes to the way their businesses are run and structured to ensure the safety of the financial system, prudent governance and risk management, and transparency and fairness in dealing with customers. At the same time banks must change their business models to ensure that they are fit and sustainable under our evolving regulatory framework," CBL said.

The report praised commercial banks operating in the country for providing credits to customers, but it said they needed to do more to become reliable contributor to the growth of the Liberian economy.

"Indeed, the success of Liberia banks is inextricably linked to the growth and strength of the Liberian economy. Therefore, finding the right business models and balances between risk, stability, and profit for a successful financial sector is the key challenge facing the industry for the year 2013 and going forward," CBL noted in the report.

Upholding Liberianization

CBL said during the year in review, it continued the US $5.0 million Credit Stimulus Initiative Program for Liberian-owned small and medium size enterprises continued and that a grant of US $200,000.0 was provided to the Liberia Business Association (LIBA) to build the capacity of the institutions.

Also, the bank said it launched a L $$200.0 million Loan Extension and Availability Facility (LEAF) designed and launched in continuation of one of its access to finance initiatives.

"The program was intended to provide soft-loans to microfinance institutions, credit unions and village savings & loan associations. The program provided loans to these institutions for a 3-year period at only 3.0 percent to facilitate onward lending to their clients and members. Loan funds were provided in 2 rounds of call-for-proposals," the report said.

Besides, the bank said, it launched a US $10.0 million CBL Mortgage Stimulus Initiative during the year to provide, "for the first time in Liberia, the opportunity for Liberians to access loans for home ownership".

"Following the launch of the mortgage program, a US $7.0 million Agricultural Stimulus Initiative was also launched to help provide access to finance to the agriculture sector. This is an opportunity to make medium- to long-term credit facilities to farmers in order to stimulate private investment in the agricultural sector and create employment," the bank said.

The bank gave no landmark examples of the outcomes of these loans and programs.

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