24 January 2014

Liberia: CBL Slams Minister Konneh

The Central Bank of Liberia has reacted sharply to statements recently made by Finance Minister Amara Konneh that the entity(CBL) pumped L$8.0 billion into the economy.

A press statement issued late Thursday said the Central Bank did not inject any such amount into the economy.

"Recent reporting in both the print and electronic media suggesting that the Minister of Finance had said that the Central Bank of Liberia pumped L$8.0 billion into the economy in 2013 is 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. Monetary aggregates change over time, reflecting developments in an economy," it said.

Recently, Minister Konneh was quoted as saying that the depreciation of the Liberian dollars against the US dollar was partly due to the huge money put in circulation by the CBL. "As an 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 accumulation of changes over several years. For example, Liberian dollars in circulation at end-December, 2006 was L$2.81 billion and end-November, 2013 was L$8.6 billion. 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," it said.

The statement further pointed 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. The CBL bill is a new policy instrument introduced by the Bank to help control Liberian-dollar liquidity; that is, the amount of Liberian dollars in circulation. The issuance of these bills took L$2.7 billion out of circulation. This action is opposite to pumping of Liberian dollars into the economy. The sale of US dollars by the Central Bank through its auction program in 2013 also helped to reduce Liberian dollars in the market."

The CBL statement did not take Minister Konneh's remarks quietly. It continued that, "In other words, the sale of US$72 million to 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."

"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. The CBL is constrained to provide the necessary data. The Liberian Government expenditure in Liberian dollars in 2013 increased by 47.8 percent or by L$4.6 billion at end of 2013, amounting to L$14.4 billion, up from L$9.8 billion in 2012. Were it not for the counter-measures taken by the Central Bank to manage, to the extent possible, the Liberian-dollar liquidity, the pressure in the foreign exchange market would have been greater. The CBL's stimulus initiatives for the most part were done in US dollars. The record is clear. The amount of US$22 million was deposited with local banks."

"The loans made by banks would, accordingly, have been made in US dollars. How would an increase in the supply of a given currency, lead to an increase in its price? This does not happen with any commodity, and money traded in the foreign exchange market is a commodity. It is the microfinance initiative that was totally done in Liberian dollars. The Board of the CBL approved L$400 million for this purpose. It should be known that the funds under the microfinance initiative are already part of the L$8.6 billion stock of Liberian dollars referred to above. The entire amount has not yet been disbursed. Only around L$300 million has been placed with various non-bank financial institutions in all 15 counties. It is difficult to see how those who continue to misinform the public came to the conclusion that L$300 to L$400 million would be a source of macroeconomic instability an economy the size of Liberia's economy."

Prior to the issuance of the statement, the exchange rate had almost hit the nineties mark.

"The fourth point to mention is that the existing stock of the L$8.6 billion is roughly equivalent to about US$97 million, which is only just about 5 percent of the estimated nominal GDP of US$1.98 billion for 2013. It is evident that developments in the foreign exchange market are not a simplistic issue of an excessive increase in Liberian-dollar liquidity, and certainly not the result of the Central Bank's policies. The CBL has repeatedly stated in its many reports that the value of a country's currency depends, among others, on the productive nature of the real sector of the economy. However, a currency may face sharp depreciation due to speculation, which can be fueled by misinformation and mixed signals arising from various statements about the economy."

But Minister Konneh's remarks at the time did not elaborate further.

"The CBL fully understands the concerns of the Liberian public and has been taking steps to contain the pressure in the foreign exchange market, and the effect of the policy actions will become evident. The CBL does not conduct monetary policy in the press or on the air waves and those who try to play politics with issues regarding the stimulus initiatives of the CBL, which are intended to help empower Liberians, especially those in rural areas, should refocus their attention. The CBL remains open to suggestions from all Liberians in trying to address the multiple challenges relating to macroeconomic stability, inclusive economic growth and poverty reduction," the statement concluded.

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