The Liberian dollar is— once again— losing ground against the US dollar as consumers grow weary of visiting the market due to this situation. On the local foreign exchange market last week, the Liberian dollar was trading at L$85.00 for US$1.00, as the first quarter of 2014 draws its curtain. In January, the foreign exchange market got worse with the exchange rate hitting at L$90.00 for US$1.00.
Amidst worries, consumers gave mixed reactions last week on fears that they may soon be unable to buy their needs. In a conversation with the Daily Observer’s business desk in Monrovia on Friday, Madam Hester R. Johnson, a consumer, expressed frustration over the pace at which the local currency is losing ground.
“I came to the market to buy my food, but I am forced to spend more because prices have gone up. I am told that the exchange rate is the reason for the increase,” she said. Most Liberians earn their living on the Liberian dollar; as a result, depreciation of the Liberian dollar leads them to spend more money for less goods and services.
While Madam Johnson and a larger segment of the population were worried about the depreciation of the Liberian dollar, others who have easy access to the US dollar were yearning for further increase in the exchange rate. “I want a higher rate for my US dollar,” insisted John G. Mulbah. Two money changers on Carey Street, Alpha Diallo and Andrew Kollie, attributed the depreciation of the Liberian dollar to huge demand from businesses, mainly from foreign business owners.
“These business people need the US dollar rate intact to import their goods,” they said.
Whatever the case, this situation warrants some level of intervention by the central government as the demand for the US dollar rises.
The business desk following the foreign exchange market for weeks has observed that the huge demand for the US dollar is influenced by several factors as follows; the rising trade deficit being sustained by the economy where import is far higher than export.
For example, the Liberian economy has to raise millions of US dollars (import payments) for rice, petroleum, clothes, cars and all of the consumable goods that importers bring to Liberia to sell.
It is worth noting that most of the goods imported are sold in Liberian dollars, which have to be exchanged to US dollar before new goods are imported. The other reason is that all of the foreign companies, mainly concessionaires, are exporting unprocessed raw materials to the world market.
These companies sell our raw materials in US dollars, but they don’t bring their profits back to Liberia. They shipped their profits overseas and deposit them in their foreign bank accounts and bring back only operating costs.
Also to blame is the lack of or slow pace at which manufacturing is taking-off in the economy.
Businesses have attributed the snail’s pace of industrialization in Liberia to the high cost of doing business in a country that has no electricity and pipe borne water. If any of these two infrastructures is available, it would be sold for the highest price probably in the world. Another key reason for the depreciation is that the government of Liberia requires the Central Bank of Liberia to maintain reserves in US dollars. This policy has, to a larger extent, limited the CBL’s ability to intervene or auction more US dollars to businesses.
CBL’s 4th Quarter Exchange Rate
In the 4th Quarter of 2013, the Liberian-US dollar exchange rate (on average) depreciated by 12.9 percent to L$81.88 for US1.00 at end-December, 2013, from L$72.50 forUS1.00 at end-December, 2012, the Central Bank of Liberia (CBL) says.
However, when compared with the immediate past quarter, the depreciation was moderate at
2.8 percent. A major factor that contributed to the pressure in the foreign exchange market, the CBL observed was largely caused by the high demand for foreign exchange needed to service rising import payments in the economy. The end-of-period exchange rate also depreciated during the quarter, moving to L$82.50 for US$1.00 at the end of December, 2013, from L$72.50 for US$1.00 a year ago.
CBL’s Market Intervention
According to the CBL, the total amount of foreign exchange sold during the 4th quarter of 2013 amounted to US$5.7 million, 60.0 percent down from US$14.3 million sold during the third quarter of 2013. With the Government of Liberia’s (GOL) external reserves accretion policy in place, the CBL declared that its intervention level declined substantially at end-2013 giving rise to immense pressure on the exchange rate during the quarter. On an annual basis, the total foreign exchange sold during the quarter dwindled by 67.4 percent.
Money Market Developments
On the other hand, however, the money market operations in the economy gained momentum at the end of 2013. On behalf of the government of Liberia, the CBL conducted three 91-day T-bill (Treasury bill) auctions valued at L$320.5 million at a weighted average discount rate of 1.88 percent.
The CBL reported that the amount of L$379.5 million (at a discount rate of 2.11 percent) representing the total value of previous quarter’s T-bills issued was redeemed in the quarter and those issued during the 4th quarter, 2013 are expected to be redeemed in the 1st quarter of 2014.
“It should be noted that the primary motivation of the T-bill program is to service government of Liberia’s short-term expenditure need,” the Bank noted.
In November 2013, the Bank disclosed that it conducted an auction in CBL bill redeemable in 182 days which aimed at sterilizing the excess Liberian dollar liquidity in the banking sector.
At a weighted discount rate of 2.44, the CBL bill was issued at the value of L$1,130 million compared with L$1,197.5 million (with 91-day maturity) issued in the preceding quarter.
The low cost of borrowing (low average weighted discount rate) reflects excess liquidity in the system, which the CBL said it intends to sterilize.
The levels of oversubscriptions in both the T-bill and CBL’s bill auctions during the quarter ended December, 2013 reduced substantially to, L$145.8 million and negative L$870 million, compared with L$324.6 million and L$416.7 million, respectively, in the preceding quarter, indicative of the gain made by CBL in reducing excess Liberian-dollar liquidity in the system. The introduction of Liberian-dollar-denominated assets, the CBL has said is a positive measure toward de-dollarization in line with West African Monetary Zone’s (WAMZ) single currency drive.