24 January 2014

Liberia Economic Crisis Deepens Amid Finance, Central Bank Row

Monrovia — A press release emanating from Central Bank of Liberia asserts that Finance Minister Amara Konneh attributed one of the causes of the hike in the exchange rate of the Central Bank of Liberia pumping huge amounts of cash in Liberian dollars into the economy.

Minister Konneh quizzed by members of the House of Representatives in the state of the nation's economy and the current confusion surrounding the exchange rate, said that there was no need to panic about the state of the economy.

"Inflation is not out of Control, we are de-dollarizing the Economy there is money here. Let's not scare our people," he said.

"The only reason we see inflation and the depreciation of the Liberian dollar to its counterpart is because the Central Bank has pumped in eight billion Liberian dollars into the country's Economy," said Konneh.

But just few days after these comments from the minister the CBL on Thursday issued a statement terming the minister's comments as a misunderstanding of the facts.

"The assertion is not only wrong, but also shows the lack of understanding of movements in monetary aggregates and their interpretation," said the CBL in the release issued on Thursday afternoon in Monrovia.

The bank stated that monetary aggregates change over time and reflects developments in an economy. The CBL said as any economy expands, as reflected in the growth of GDP; money supply will expand to facilitate economic transaction, which does not necessarily mean pumping of excess Liberian dollars into the economy.

"The currency in circulation at a point in time is a stock arising from the accumulation of changes over several years," said the bank.

The bank said that at the end of December 2006the Liberian dollars in circulation was L$2. 81 billion and L$8. 6 billion at the end of November 2013.

"So, the first point to be made is that the CBL did not pump L$8.0 billion into the economy in 2013. We must be emphatic about this," said the CBL.

"The second point is that monetary policy in 2013 was not expansionary, evidenced by the issuance of CBL bills during the last half of 2013 and up to January of 2014."

New Policy

The Central Bank said in its statement that the CBL bill is a new policy instrument introduced by the Bank to help control Liberian-dollar liquidity, meaning the amount of Liberian dollars in circulation and the issuance of these bills took L$2.7 billion out of circulation.

This action the bank said is a direct opposite to what the Finance Minister termed as pumping of Liberian dollars into the economy. The bank contends that the sale of US dollars through its auction program in 2013 also helped to reduce the amount Liberian dollars in circulation.

"In other words, the sale of US$72 million in the foreign exchange market mopped-up the equivalent amount of L$5. 9 billion using the average exchange rate of L$81. 8/US$1 at end-December 2013.

"All of this shows that the CBL has been actively engaged in implementing policies aimed at helping to stabilize the foreign exchange market," said the CBL.

Continued: "The third point to be made is that despite the explanations provided by the CBL regarding its stimulus initiatives, some commentators continue to misinform the public that such actions of the CBL have been the reason for an increase in Liberian-dollar liquidity, thus causing pressure on the exchange rate."

Are they fighting?

But the CBL's sharp response to the minister's comments about inflation on the Liberian economy has raised questions about the level of coordination between the two very important financial arms of the government. Experts in the field say the trading of accusations by the two entities leaves more questions than answers.

"There is clearly a misunderstanding between the reporters and what the minister said. The minister did not say that. He did not mean to imply that," said a government source who did not want to be named.

Continued the source: "There is no way the Central Bank would have pumped 8 billion dollars into the economy and keep the rate the way it is. I think what the CBL should have done was to sit down with the minister of finance and asked him what he meant.

Both parties should have sat down to discuss this matter. The way it looks like is that they seem like they are fighting each other and both of them don't know what they are doing. There is a clear misalignment, some lack of policy coherence between the two. The Central Bank is taking the word of the reporter."

Politics play

Many critical political minds say the continuous increase in the country's exchange rate and the giving of loans by the CBL governor Dr. J. Mills Jones to non financial institutions have led to some of the difficult economic conditions the country is faced with.

The Chairman of the opposition Liberty Party believes the CBL governor's political games have backfired, something that he said is leading to the fight between the two men.

"This is the thing that happens when folks start running for President early. You get a situation where our technical judgment is not the best," said Atty. J. Fonati Koffa.

"So I would think better coordination between the Central Bank and the Ministry of Finance; economists have pointed out to the dollarization of the economy as a factor; rates going up. I think better fiscal coordination will best help us out of the crisis whether real or perceived. It appears that there is a disconnect between the ministry of finance and the Central Bank."

Economist Sam Jackson said that the Liberian economy is loaded with a litany of challenges and would require the concerted efforts of all Liberians to fix it. He said both the CBL and the ministry of finance have done well in their management of the economy in their respective roles, but the fundamental problem, which remains the issue of trade gaps due to current account deficit, has to be tackled but carefully.

"We are not earning enough foreign exchange and we are importing too much. There is an expanding trade gap and it's a current account deficit and all of this is impacting the rich," he said.

"But it is not specifically anybody's problem or any one person's fault. You can't blame the CBL or the Ministry of Finance. We have to have more export than imports. We all as Liberians are to be blamed for the problem in the economy."

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