Bankers’ Association President explains
The enactment into law by the 53rd Legislature declaring the Liberian dollar as the sole currency of the country and legal tender last Thursday dominated the Liberian National Bar Association’s (LNBA’s) Annual Assembly with John Davies, President of the Liberia Bankers’ Association (LBA), asking for collaborative efforts to prevent its enforcement by the administration of President George Manneh Weah.
Mr. Davies, who is also president of the Liberia Bank for Development and Investment (LBDI), argued that if the law were to be enforced by this government, it means the economy will experience “looming crisis.”
“We have to join our voices in urging that all stakeholders in the governance, financial and money policy arena prevent the looming crisis the economy will experience should this Act become enforceable,” Mr. Davies said, making a passionate appeal to the LNBA.
He continued, “Let us ensure that a strategic and skillful approach is taken in the implementation of this program.”
In March 2017, the Liberian government introduced forced de-dollarization through an Act of the Legislature, to amend Part V, Section 19, Sub-section 1 and 2 of the Act establishing the Central Bank of Liberia (CBL) on March 18, 1999.
The amendment sought to “declare the Liberian dollar as the sole currency and legal tender.”
The Legislature, by the passage of the Act, directed that “prices for all transactions in Liberia shall be solely indicated in Liberian dollars and cents and the Liberian dollar shall also be the sole currency for Accounting, Financial reporting and official purposes and disclosures in the country.”
At the same time, the Act sought to maintain the United States dollar as legal tender for the sole discharge of foreign public and private obligations.
However, Mr. Davies believes that the use of the Liberian dollar as sole currency will cause local banking institutions to lose relationships with foreign correspondent banks to maintain their offshore accounts (accounts held in foreign banks), which transactions are traded with United States dollars.
“Local banks will not be able to pay depositors in the event of a run on the bank for huge United States deposit, owing to the depreciation that dollar deposited may be nationalized,” Mr. Davies said.
Moreover, he said that “Credit dollarization will be affected, thus impacting the banks’ balance sheet adversely and creating more non-performing loans.
“Some major concession agreements will be affected, especially those with U.S. dollars as contracting currency,” according to Mr. Davies.
He continued, “balance of payments deficit will increase and the current pressure on the exchange rate will worsen, leading to further undermining of the CBL’s ability to manage the exchange rate.”
Davies further argued that the intent of the Act to retain the U.S. dollar as a legal tender and restrict its usage to settlement of foreign obligations as legislated is legally “ambiguous.”
“The LBA and the CBL made clear their grave concerns regarding the forced de-dollarization rather than phased implementation of the process as highlighted in this act,” Mr. Davies said.
The ambiguity, he argued, is evidenced by the fact that the Act did not identify any clear methodology for what is meant by foreign obligations for the purpose of transparency.
“Did they mean foreign public, foreign private obligations, foreign in terms of foreign designated obligations and vis-a-vis the utilization of the two legal tenders?” Davies wondered.
According to him, the Act was not the product of enough consultations between the legislature and economic stakeholders, especially the experts.
“The legislature did not note the eventual economic costs of the forced de-dollarization of the Liberian economy with the eventual passage of the Act,” Davies believed.
He recounted how, in October 2017, the Liberian dollar has depreciated 21 percent since 2013, and the pace of depreciation has increased since 2016.
In order to revitalize the economy, Davies suggested the challenge remains the actualization of policies aimed at economic diversification, increasing investment and improving balance of trade, sustained foreign direct investment, remittances, development of infrastructure and institutions, combating corruption and maintaining political stability and security.
“This picture clearly did not support the move to forced de-dollarization,” Mr. Davies disclosed.
His argument was centered on the topic “Economic and Financial Impact of Forced De-Dollarization on the Liberian Economy.”
Mr. Davies argued that the country’s economy is basically import-oriented and forced dollarization will further exacerbate the liquidity crisis.
“There is no guarantee that we will be able to handle the risks factor of the exchange rate, because most forced de-dollarization programs initiated by countries globally have ended with bad economic experiences and virtual re-dollarization. We are aware of the experiences of Mexico and Bolivia, which had a bad outcome of their forced de-dollarization programs,” he said.