7 May 2014

Liberia: Messy Economy - Depreciating Liberian Dollar, Shortfall, Stalled Projects

Despite the proclamation by financial managers in Liberia that the country is expected to experience a slight decline in economic growth in 2013-2014, the prevailing economic situation in the post war country is somewhat becoming complex with indications that the economy is experiencing one of the worst periods in post war years, massive inflation, huge budget shortfalls and stalled development projects all pointing to the number of economic constraints facing the country.

The Liberian dollars drastically depreciated to the United States dollars from the later part of April to May currently trading at US$1 to 88 and more, running parallel to the exchange rate is the prices of basic commodities on the market.

This has also resulted in an increase in the price of petroleum products necessitating increment in transport fares and prices of other products since the country lacks electricity with people relying on petroleum products to run private generators and vehicles.

Liberians are feeling the pinch of what is now seen as an economy in mess with many shunning the local currency, the Liberian dollars since a meager US$5 trading for L$440 which cannot be easily carried when exchanged in denominations of 5 or 10 Liberians dollars.

Zimbabwe experienced one of the worst inflation in African history when it recorded 11.2 million per cent a year in 2008. With the Zimbabwean economy in a downward spiral officially, one US dollar was at the time worth Z$180. But on the black market, it fetches Z$8,000 - and that was for cash, which was in desperately short supply. For bank transfers, the rate was Z$1.5million to one in October 2008.

With the Liberian dollar fast approaching US$1 to L$90 which is half of the worse Zimbabwean inflation years, there are worrying economic signs that should financial managers not act appropriately, the country could slip into a hyper inflation regime.

Hyper inflation is the worse inflation a country can experience as it occurs when a country experiences very high and usually accelerating rates of monetary and price inflation, causing the population to minimize their holdings of money. Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value. The real value of economic items generally does not stay the same with respect to one another, but remains relatively stable in terms of foreign currencies.

The country's messy economic situation began emerging from afar as international organizations, including the World Bank, which have all rated the economy as improving over the last two years, could not capture anything positive about the country in its latest report.

Liberia was not captured in the recent World Bank report entitled the Africa's Pulse released Monday, April 7 which stated that Economic growth in sub Saharan Africa continues to rise from 4.7 percent in 2013 to a forecasted 5.2 percent in 2014. According to the bank, this performance is boosted by rising investment in natural resources and infrastructure, and strong household spending, but Liberia was not amongst the African countries that made significant improvements as mentioned in the report.

Neighboring Sierra Leone, Ivory Coast and crisis prone Democratic of Congo were all amongst the list of performers according to the World Bank report.

"Growth was notably buoyant in resource-rich countries, including Sierra Leone and Democratic Republic of Congo. It remained steady in Cote D'Ivoire, while rebounding in Mali, supported by improved political stability and security. Non-resource-rich countries, particularly Ethiopia and Rwanda, also experienced solid economic growth in 2013", the report stated.

Finance authorities in Liberia might be smoke screening the actual amount of the shortfall the 2013-2014 budget is experiencing as the shortfall has been blamed for a number of hitches in growth including stalling of major projects amongst others.

Finance Minister Amara Konneh recently said Liberia's real Gross Domestic Product (GDP) growth for fiscal year 2013/2014 is estimated at 8.1 percent, something he said is slightly lower than the 8.3 percent growth recorded in 2012 indicating that this growth in 2013 was driven largely by the increased activities in the mining sector, something he said that would have a positive impact on the country's economy.

Konneh admitted that the country's economy experienced some difficulties in the second quarter of this fiscal year something he attributed partly to the depreciation of the Liberian Dollar against the United States Dollar both legal tender in Liberia but the situation seems to be getting worse as the domestic currency continues to depreciate more against the United States dollars coupled with the budget shortfalls spanning over three quarters.

By early May 2014, the exchange rate has skyrocketed to US$1 to L$88 or more surpassing a point the rate reached a few months back when the Central Bank of Liberia imposed a political measure to curb the increase in the exchange rate.

The Bank moved to slow the increasing exchange rate by warning money exchangers in the streets to maintain the rate at L$ 80 to US$1, a measure that was implemented for less than a week and later faltered as the rate began increasing. That was a political intervention by the Central bank to manage the exchange rate, but the other market forces could not maintain the exchange rate at the point enforced by the CBL.

CBL Governor Mills Jones under pressure for his loan scheme to Liberian businesses which resulted into infusing millions of Liberian dollars in the local economy recently said his effort was geared toward reducing poverty. "My message to the Liberian people is that poverty is not our destiny. We are going to change the Liberian economy. We are going to bring about economic emancipation."

But Finance Minister Konneh provided several reasons for the depreciation of the Liberian dollars against the United States dollars and amongst them, he said "Another reason for the depreciation is the injection of more Liberian Dollars into the economy in the last six months. We are trading more in Liberian dollars now so the circulation is increasing."

Liberians across the divided provided separate views on the depreciation of the local currency to United States dollars as former Auditor General John S. Morlu provided five reasons in the analysis of the Liberian economy. The CBL loan shop scheme, a United States dollar window at the Central Bank,CBL depletion Liberia International Reserve, Deficit Spending and Corruption induced Capital Flight.

"Central Bank does not have its own money to give away. Instead, it's using its role as the depositor and custodian of Liberian taxpayers' monies to make these loans. Making loans are directly increasing the money supply in the economy. The loans provided by the Governor are in Liberian dollars. Where does the Governor get the Liberian dollar to loan out? The Governor is printing more Liberian dollars to support his loan schemes, increasing the amount of Liberian dollars in circulation without a corresponding output to obtain more U.S. dollars" stated Morlu.

On the other side of the coin, the CBL in a statement in January 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," stated the bank.

The bank said that at the end of December 2006 the 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."

At the time in January, the CBL said it has introduced a new policy with the issuance of bills that will help in solving the economic crisis. 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.

"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.

In spite of the issuance of the pronounced bill by the CBL the situation is getting worse in the country with many now shunning the Liberian dollars since it is gradually becoming worthless.

In less than two months the exchange rate has reached an alarming proportion and is already surpassing the previous level, with accompanying effects such an increase in the prices of essential commodities on the Liberian market.

In stores and other business centers, the Liberian dollars have grown worthless to the extent that merchants are virtually refusing to accept or in some cases accepting it at a rate of around US$1 to L$90 since the majority of the prices of commodities are quoted in United States dollars.

Hidden facts on Budget shortfall?

The Liberian Government through the Ministry of Finance announced a budget shortfall of US$47 million, warning line ministries and agencies to take the necessary measures in preparation for the shortfall in revenue. Liberia's Finance Minister Konneh says, he takes responsibility for the shortfall in the 2013/2014 as head of the institution responsible for crafting the budget.

"I am the Minister of finance, I am responsible; yes, it's nobody; I am today the Minister of finance of the republic of Liberia in charge of implementing our fiscal policy. Whether the numbers change in the legislature in the draft budget that was submitted to the legislature, I am the custodian of the national budget and I am responsible," says Konneh.

"And that is why I am working with my colleagues across the government to make sure that the government continues to operate; continues to invest in the public sector programs to keep the economy stable."

With major infrastructure projects mainly road construction stalled, there are arguments that the budget could be experiencing a massive shortfall than the pronounced US$ 47 million.

The International monetary Fund assessment team that recently visited Liberia alarmed that projects in the tune of US$ 80 million are currently stalled a figure that raises more qualms that a shortfall of US$47 million as pronounced by the Ministry of Finance could not solely be responsible for the inability of the Government to meet up with payments for projects in the tune of US$ 80 million, although the IMF statement indicated that some of the projects are being implemented with budgetary allocations.

Signing contracts and commencing implementation without budgetary allocation is another strange financial decision on the part of finance managers which is further putting the economy at risk of collapse.

"Addressing significant shortcomings that have emerged in the budget process and expenditure controls will be critical in the coming months. In recent weeks, it has become clear that a significant number of road contracts were being implemented without corresponding budgetary allocations.

The authorities are initiating external audits of the financial and technical aspects of these projects, and are working with relevant stakeholders to ensure commitments outside the budget do not occur again", the IMF statement indicated. IMF stated that the deficit could grow to 3.8 percent in 2014, a projection that ongoing deficit could impact the country in the ensuing fiscal period.

"The overall fiscal deficit is still projected to reach 3.8 percent of GDP in 2014 (fiscal year), as envisaged at the time of the last review, as the authorities were able to reduce current spending. The authorities are strongly committed to preserving current expenditure savings and to implementing decisive measures to raise revenue collection in the reminder of the fiscal year, including by addressing the backlog of taxes in the concessions sector and collecting fees owed by state entities," a statement from the world monetary body indicated.

United States Ambassador to Liberia, Deborah Malac has joined in by cautioning the Government of Liberia not to spend what it does not have.

"It is hard, when you are impatient to make thing happen when the money is not there. Sometime it is good to take a step back to figure out what is possible with the funding that is available, and then look and hope for other way to look for funding", says Ambassador.

The prevailing economic outlook of the country is troubling and could indicate that the economy is gradually collapsing and could perhaps reach crisis proportion. The Central bank of Liberia and the Ministry of Finance are yet to move in tackling the increase in the exchange rate as the prices of commodities on the market are moving parallel to the exchange rate resulting in hardship for the population.

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