19 September 2018

Liberia: The Liberian Economy - Need for Stabilization and Reform

opinion

When former President of the Republic of Liberia, Her Excellency Madam Ellen Johnson-Sirleaf, was leaving office after two presidential constitutional terms, all of Liberia's bilateral and international partners, as well as observers of Liberian politics, lauded her for the role she played in the recovery and stabilization of the country's peace and security.

In the same time, they regretted her quasi inaction as to the stabilization and reform of the Liberian economy. This fact, it is believed, has led to the economic situation Liberia is confronted with today. One may wonder why such a situation has happened as all know that the former president spent the most part of her career in economic and social development, financial and monetary-related regional and international institutions.

It is the hope of this article's author that he will not be gotten wrong. His intention is not to criticize anybody or any institution. His sole aim is to address a simple diagnostic of the current situation of the Liberian economy, explore the sources, and indicate some of the paths or axes the Liberian government may explore to stabilize the current economic and fiscal situation facing Liberia while preparing a long-term development plan.

This task will not be easy. It is immense, difficult, to not say titanic. It will require a political will, committed human and physical resources, and lots of sacrifices. It is, however, imperative that it be undertaken if Liberia wants to break the cycle of conflict, violence and poverty that has engulfed the West-African country for the past years. A Latin adage says:"Errare humanum est, perseverare diabolicum". "To err is human; to persevere (in error) is diabolical".

It goes without saying that one of the major challenges facing the Liberian economy today is inflation. Inflation is a macroeconomic variable defined as a sustained increase in the average of all prices of goods and services in an economy.This average is known as a price level (P) and is commonly measured by either a Gross Domestic Product Deflator (GDP Deflator) or a Consumer Price Index (CPI).

The GDP Deflator is a broad index of inflation calculated by dividing Nominal GDP by Real GDP and multiplying by 100. The nominal GDP is the total value of all final goods and services calculated at current prices. The real GDP is the total value of all final goods and services calculated at base year prices (constant prices). The CPI measures the cost of a determined basket of goods and services bought by a typical household.

Such a basket includes, among others, housing, food and beverages, education, healthcare, transportation, etc. A change in the price level (P) from one year to the next constitutes the inflation rate. The inflation rate is also known as the cost of living. Since one of the major challenges Liberia is currently confronted with is inflation, so what are the causes of inflation? There is a consensus among economists on two types of inflation: demand-pull inflation and cost-pull inflation. Both types of inflation cause the P to increase.

Demand-pull inflation occurs when the aggregate demand (AD)-the total quantity of goods and services demanded by households, firms and the government (Real GDP)-rises more rapidly than an economy's production capacity. One of the factors that cause the AD to rise comes from the increase in money supply (M) by a Central Bank. The money supply means the money in circulation in a country. In the case of Liberia, the money supply mainly comprises the Liberian banknotes, the United States banknotes and the checking account deposits in the commercial banks.

In fact, some observers of Liberian politics and economy point to an increase in money supply (M) printed by and out of the Central Bank of Liberia as the cause of the inflation. If this hypothesis were proved to be true, it would constitute a vivid illustration of the quantity theory of money developed by Irvin Fisher (1867-1947), a Yale University American economist, to establish a connection between the money supply (M) and the price lever (P). Fisher developed this theory from an earlier quantity equation or the equation of exchange.

The quantity equation states that the money supply (M) multiplied by the velocity of money (V) equals the price lever (P) multiplied by the output (Y or GDP): M x V = P x Y. The velocity of money (V) often referred to simply as velocity, is the number of times each dollar of the money supply (M) changes hands to purchase final goods and services included in the GDP.

Assuming that the velocity was constant and the GDP did not depend on M but on labor, physical and human capital and technology, Fisher concluded that an increase in M directly increases P. The increase in P is also known as inflation. The same observers of Liberian politics and economy note that most of the money printed is kept in private houses and warehouses.

In the same vein, His Excellency, Dr. George M. Weah, in his July 16, 2018 Address to the Nation, acknowledged that more than 90% of the money supply was held out of the banking system. Thus, to conclude that the increase in M is the source of the inflation of the Liberian economy, an empirical study is needed. The infusion in the economy of the amount of US$25 million the President announced in his July 16, 2018 Address to the Nation would be a good measure if it were established that the increase in M was not the source of inflation.

On the other hand, cost-push inflation occurs when the prices of factors on production (inputs) increase. A typical cause of this kind of inflation is an abrupt increase in the price of an important raw resource such as oil. Such an increase is also known as a supply shock. Rising oil prices cause the costs of production and transportation to rise. Higher production costs lead to a decrease in the aggregate supply - the quantity of goods and services produced by the firms - and an increase in P.

Another cause of the cost-push inflation is the rise in the prices of imported products. There is no doubt that the depreciation of the Liberian dollar (L$) relative to the Unites States dollar (US$) rises the prices of imported goods. An increase in the prices of foreign goods shifts the demand to the local products which results in the rise of their prices. Even local producers, whose products have nothing to do with the exchange rate but are consumers of imported items, simply increase their prices to maintain their purchasing power.

The question is now what causes the de facto devaluation of the Liberian Dollar (L$). The answer is the shortage of US dollars on the market that may be explained by many factors, the most significant being the departure of UNMIL, capital flight, trade balance deficit and the foreign debt service.

As stated above, the government needs to take some short- and mid-term measures to stabilize the ongoing economic and fiscal situation while preparing a long-term development plan. The first measure to be taken is to enforce the 1999 Act that established the Central Bank of Liberia (CBL). The CBL was established by an Act of the National Legislature of the Republic of Liberia on October 18, 1999.

This Act became functional in 2000 and succeeded the National Bank of Liberia (NBL). In its PART V, the Act provides that the Liberian dollar shall be the currency of Liberia and legal tender. It also states that the currency of the United States of America shall be legal tender in Liberia. However, the same Act specifies that "prices for all transactions in Liberia shall be indicated in Liberian dollars and cents and that the Liberian Dollar shall be the currency for all accounting, financial reporting, and official purposes in Liberia".

These provisions imply that all prices of goods and services including salaries, school tuition fees, travel fares, among others, should be indicated in the Liberian dollar. They also imply that payments can be made in USD at the CBL exchange rate for transactions with the governmental institutions and at the market exchange rate for transactions with the private sector. This Act should be amended to prohibit the United States dollar as a legal tender in Liberia.

As such, the US dollar would simply become a foreign currency like other foreign countries' currencies and be kept in the CBL, commercial banks and accredited foreign exchange bureaus. The government may also consider introducing a new currency and legal tender, as many people have suggested, having in mind that a country's money is one of the symbols of the sovereignty of a nation.

The second measure the government should take is the restructuring of the Public Administration. Such a restructure should address the following: the match between government posts requirements and civil servants qualifications; salaries and fringe benefits of the three branches of government; the numbers and the roles of the government agencies that include committees, commissions and corporations;the budget law that confers to the legislature the right to intervene in the local administration's executive affairs; and the adoption and enactment of the Draft Local Government Act of 2015.

The third measure would concern the revisit of the status of the state-created monopolies, the tax code, the Mineral Development Agreements (MDLs), and the imports regulations to avoid the inundation of the Liberian market of unnecessary foreign products.

In parallel, the government should undertake monetary policy and fiscal policy measures the President talked about in his July 16, 2018 Address to the Nation. It is worth recalling that the monetary policy is the prerogative of the Chief Executive Officer and the Central Bank and has two targets or tools: the money supply and the interest rate. The fiscal policy is the prerogative of the government and the legislature and its targets or tools are the government spending and taxes. These two tools are decided by law. The Liberian Legislature has its part to play in the stabilization of the economy and cannot hold the government solely responsible.

The purpose of the above measures is to stabilize the government's spending and improve the financial capacities of the local administration.

As far as the long-term development plan is concerned, the government will firstly need to set the most important priorities since all of the country's systems are to be rebuilt. In the author's opinion, the first priority would be the rehabilitation and/or reform of the education, health and legal systems. The second priority may be the road and energy infrastructure rehabilitation without which no development is possible. The third priority might be the agricultural reform, to increase food and animal production both in quantity and quality to make Liberia food self-sufficient.

This reform may include a relative mechanization, food processing, animal husbandry and changes in eating habits to ease the dependency on the imported rice as the main Liberian food. The forth priority might be the mineral industry reform through transformation to add to the mineral products' value. To this effect, the review of the MDAs mentioned above should include, where possible, the development of mineral transformation pilot projects. If undertaken, these reforms will not succeed without a critical review of the whole context of the Liberian culture to get rid of traditions that hinder the development or the work of the legal system and keep and promote those that really represent the Liberian culture.

As education is so critical and vital to national development, the rehabilitation and reform of the educational system must get the needed attention and support of the national government so that the processes of rehabilitation and reform can get underway in earnest. It is worth noting that the Liberian Ministry of Education is determined, as indicated in pronouncements and actions, to reform the education system.

One of the areas to prioritize in the educational reform measures is the "the empowerment" of teachers of English to improve the composition and comprehension skills of students. The entire area of English requires special attention and action. Once the students can write and read well, they are likely to perform satisfactorily in subjects such as Chemistry, Economics, History, among others. My colleague, Peter N. Ben, and I are of the opinion that addressing the issue of "English Education" will tremendously improve the entire education system as it will make a great impact on students' academic performance.

President (Dr.) George M. Weah was elected for a six-year term. He has spent about seven months of the first year. While it is true that the beginning of his presidential term is experiencing a number of challenges, it is hoped that with appropriate measures taken, the present situation in the country can improve immensely. Hope for better Liberia should not be lost.

Economics is a social science, not a natural science. Thus, many may disagree with the opinion and suggestions of this article's author. That will be fine as it is the essence of academia critical thinking.

About the author: Ambassador Aloys Uwimana teaches Economics, French and Public Administration at the Nimba County Community College (NCCC) in Sanniquellie City. He holds a Bachelor of Arts in Economic and Social Sciences from the University of Rwanda and Masters of Arts in Economics from the Catholic University of Louvain (Belgium), French Studies from the American University (Washington, DC-USA), and International Studies from Ohio University (Athens, Ohio-USA). He can be reached at 0777778034/0888644125 or at [email protected].

Peter N. Ben, Dean of Admissions, Records, and Registration at NCCC, contributed to this article. He holds a Bachelor of Science in Education from Cuttington University College (CUC) and a Master of Science in Education from Cornell University (Ithaca, New York, USA). Even though he is not an economist, but an educationalist, he provided incisive and thoughtful comments and questions that helped to clarify and refine this article. His contact information is as follows: 0777523274 / 0886523274; [email protected].

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