Liberia's ongoing currency challenges, including the periodic shortage of the Liberian Dollar (LRD) and its volatile appreciation against the US dollar, have sparked concerns among economic stakeholders.
Dr. Bonokai G. B. Gould, a Certified Chartered Economist (ChE) and lecturer at the University of Liberia, recently offered an in-depth analysis of the factors fueling this currency crisis, shedding light on seasonal economic activities, monetary policies, and deep-rooted structural issues within the country's financial system.
Dr. Gould, who is also the Deputy Head of the Development Finance Section at the Central Bank of Liberia (CBL), explained that Liberia's currency situation is more than a simple case of supply and demand. Rather, it is a complex issue intertwined with cyclical economic activities, policy interventions, and a broader lack of trust in the local currency.
He pointed to four main factors driving the current crisis: seasonal cash flow patterns, monetary policy decisions, widespread dollarization, and the structural limitations of Liberia's banking system.
Liberia's economy is heavily influenced by seasonal trends, which dictate the availability of both the Liberian and US dollar in circulation. Dr. Gould noted that during major holidays such as Christmas and Independence Day, Liberian households experience a surge in remittances from the diaspora, predominantly in US dollars. These foreign inflows are exchanged for LRD to meet local consumption needs, which temporarily boosts the value of the local currency.
"The World Bank's Migration and Development Brief consistently highlights that remittances account for roughly 18-20% of Liberia's GDP. These inflows contribute significantly to Liberia's monetary circulation, but also create a temporary surge in the demand for LRD during these seasons," Dr. Gould said.
Similarly, Liberia's agricultural cycle, particularly the harvesting of crops such as cocoa, rice, and coffee, increases demand for local currency in rural areas, as communities require cash for trade and consumption. This added demand can lead to a temporary shortage of LRD in circulation, especially when rural areas are geographically isolated from formal banking services.
The Central Bank of Liberia plays a pivotal role in managing the country's currency and monetary stability. However, certain CBL monetary policies, while designed to control inflation, may inadvertently exacerbate the LRD shortage. Dr. Gould pointed to the CBL's tendency to adopt restrictive measures aimed at curbing inflationary pressures, such as reducing liquidity in the economy.
"In 2022, the CBL tightened monetary policy by reducing liquidity injections in response to rising inflation. While this was aimed at controlling inflation, it also led to a contraction in LRD circulation, further straining the supply during peak economic activities," Dr. Gould noted.
Moreover, the CBL frequently conducts foreign exchange auctions to stabilize the exchange rate and safeguard foreign reserves. These auctions, while effective in controlling the value of the US dollar, also withdraw significant amounts of Liberian dollars from circulation, worsening the existing shortages. Dr. Gould pointed to the CBL's auction of over LRD$65 million in 2023, which further drained LRD liquidity from the economy.
The widespread preference for the US dollar over the Liberian dollar remains one of the most significant hurdles in addressing the country's currency issues. Dr. Gould attributed this preference to the perceived stability of the US dollar, which is viewed by many Liberians as a safer store of value than the volatile LRD.
"The reliance on US dollars is widespread in Liberia, especially in high-value transactions such as real estate, automobile sales, and even some government dealings. This 'dollarization' significantly reduces the demand for LRD, as many prefer to save and transact in US dollars, given the volatility of the local currency," Dr. Gould explained.
Anecdotal evidence from market traders in Monrovia reveals that many businesses and individuals prefer dealing in US dollars, particularly during periods of LRD depreciation. This preference is compounded by a lack of public trust in the Liberian dollar, which is often perceived as vulnerable to inflation and instability.
Dr. Gould also pointed to structural challenges within Liberia's banking sector as a major factor contributing to the currency shortage. With about 60% of Liberia's population residing in rural areas, the lack of access to formal banking services has limited the effective distribution of LRD. Many people rely on informal savings groups and cash-based transactions, bypassing the formal financial system.
"While Liberia's urban centers may have access to financial services, rural populations face significant barriers. The informal economy, including money changers and informal traders, plays a dominant role, often hoarding Liberian dollars to take advantage of anticipated exchange rate movements," Dr. Gould noted.
He referenced a specific instance from 2021 when reports surfaced about money changers hoarding LRD during a period of sharp depreciation. This kind of behavior only exacerbates the shortage of LRD, creating artificial scarcity and further destabilizing the currency.
To address these challenges, Dr. Gould offered several recommendations aimed at improving the circulation and stability of the Liberian dollar.
Among the key solutions, he suggested enhancing financial inclusion through mobile banking and digital payment platforms to expand LRD access, particularly in underserved rural regions.
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He also advocated for a more transparent approach to foreign exchange auctions, ensuring that liquidity contractions are minimized during critical economic periods.
Additionally, Dr. Gould emphasized the importance of promoting the use of LRD in daily transactions by incentivizing businesses to price goods and services in local currency rather than US dollars. This, he argued, would help reduce the dominance of the US dollar in Liberia's economy.
"By gradually requiring government salaries and payments to be made in LRD, we can encourage wider usage of the local currency. This will reduce the over-reliance on US dollars, making the LRD more viable for day-to-day transactions," he said.
Ultimately, Dr. Gould underscored the need for long-term economic diversification. He argued that reducing Liberia's dependence on remittances and resource exports would help stabilize foreign currency inflows and reduce the volatility of the LRD.
"Investing in sectors such as manufacturing and services is essential for creating a more balanced and stable economy. This will lead to more predictable currency flows, which will benefit the Liberian dollar in the long run," he concluded.
