29 January 2014

Liberia: Local Currency Nosedives By 15 Percent in 2013

During her annual message to the third session of the 53rd National Legislature Monday, President Ellen Johnson

Sirleaf said the Liberia dollar experienced a nose dive trend and is under enormous pressure, a situation that resulted in a depreciation of 15%.

Under the theme "Consolidating the processes of transformation," the President said the local currency was relatively stable in 2013, it was due in part to deteriorating term of trade caused by rising demand for imports and decline in exports from rubber, which along with iron ore, represents 95% of the country's total exports. "Relatively stable since 2010, the Liberian dollar came under enormous pressure during the year, resulting in a depreciation of 15 percent. This was due in part to deteriorating terms of trade caused by rising demand for imports and decline in exports from rubber which, along with iron ore, represents 95 percent of total exports," Madam Sirleaf said.

Besides, she reported that United Nations Mission in Liberia (UNMIL) drawdown has also impacted the injection of foreign exchange into the local market.

She said: "The depreciation was also due to speculative capital flight which was addressed by the Central Bank of Liberia (CBL) intervention in the foreign exchange market, which mopped up excess Liberian dollar liquidity that contributes to exchange rate volatility"

At the same time, the President also pointed out that international reserves fell US$14 million below the target level required under the country program with the International Monetary Fund, implying less than three-month import cover. "A CBL decision placed US$22 million in commercial banks as economic stimulus lending to the agricultural and construction sectors and to Liberian businesses. The beneficial results of this action can only be assured through better coordination and cooperation by the leadership of the Central Bank and the Ministry of Finance", she added.

In spite of these, the President said, the high level of dollarization moderated the effect of the depreciation, keeping inflation at a single-digit 7.5%, which compares favorably with other countries in the region. The reserve target under the country's program with the International Monetary Fund was also met at the end of December. During the State of the Nation address delivered at the Capitol Building on January 27, 2014, President Sirleaf further said the CBL remains a strong institution with potential to do more in support of growth in the economy. "Significant progress has been made in regulating the activities of the insurance sector, modernizing the payments system and establishing a collateral registry. The issuance of 90-day Treasury bill denominated in Liberian dollar commenced in the fourth quarter of FY2012/13, primarily to facilitate revenue smoothing and as an initial step towards the creation of a domestic money market". According to her, a four-year roadmap has been formulated to address the dual currency issue through a rational and gradual transition process of de-dollarization through the removal of barriers to increase demand for transaction in Liberian dollars. A more effective cooperative role by the monetary and fiscal authorities will ensure that the economy performs as planned and the roadmap is implemented as envisioned.

It can be recalled that immediately after the Christmas and New Year's holidays, the Liberian currency sharply went down to the US dollars with the exchange rate of 1 to 86, creating serious economic concern both to the government and consuming public though with the recent intervention of the CBL it is lowering between LD$1.00 to US0.80.

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