One of the major functions of central banks across the globe is to manage the foreign reserves of countries and to intervene in the market to ensure price stability. For an economy like Liberia, which has a dual currency regime, continuous market intervention by the central bank is critical to maintaining not only price stability, but to guarantee a good marketplace for the use of the two legal tenders.
The Liberian dollar is challenged with the lack of smaller (L$1 and L$2 dollars) denominations and so, unlike the United States dollars which has, the smallest denomination of the Liberian currency in circulation is the L$5 bill.
Amidst these challenges, however, the Central Bank of Liberia (CBL) is fulfilling its mandate day-in-day-out. The Bank, in fulfillment of one of its key functions of continuous market interventions, has announced that it auctioned US$26 million to businesses in the 2nd Quarter of 2013.
According to the Bank’s Financial &Economic Bulletin covering April-June, the total amount of foreign exchange sold in the quarter ended June, 2013 was US$26 million. The CBL made this market intervention to stabilize the foreign exchange rate between the US and the Liberian dollars and to lessen the US dollars demand by businesses.
Though the US$26 million was slightly (1.1 percent) lower than the US$26.3 million auctioned by the Bank during the first quarter, the Bank noted that the amount represents a significant intervention during the quarter.
The CBL noted that an annualized comparison shows that total foreign exchange sold during the reporting period rose by US$1.7 million or 7.0 percent, from US$24.3 million recorded in the corresponding quarter of 2012.
T-Bills as Strong Money Market Instrument
On May 2, 2013, the CBL issued the government of Liberia’s (GOL) Treasury bills (T-bills) in the economy with an initial amount of L$149.0 million offered. A T-Bill is a short-term debt obligation backed by the GOL with a maturity of less than one year.
T-bills are sold in denominations of L$1,000 up to a maximum purchase of L$5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).
T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.
The GOL’s T-bills auction held in June of this year brought to two, the number of monthly T-bills issued, which is exclusively conducted in Liberian dollars.
The CBL has insisted that it is issuing GOL T-bills with a view to enhance wider use of the Liberian dollars and help improved the profitability of banks, given that the commercial banks are the only participants at the moment bidding at the monthly T-bills auction.
The CBL disclosed that first the T-bills issued matured in August, 2013 and was redeemed.
“The level of oversubscriptions reported during the May and June auctions (L$149.8 million and L$110.6 million), respectively reflect the current high level of excess liquidity in the banking system,” the CBL noted in its Bulletin.
Meanwhile, the CBL has announced that currency in circulation decreased by 0.62 percent to Liberian dollars eight billion one hundred forty seven million two hundred thousand (L$8,147.2 million) at end-June, from Liberian dollars eight billion one hundred ninety seven million seven hundred thousand (L$8,197.7 million) recorded at end-March, 2013.
According to the CBL, the reduction was on account of a 3.0 percent fall in currency outside banks to Liberian dollars six billion four hundred seventy four million seven hundred thousand (L$6,474.7 million), from Liberian dollars six billion six hundred seventy two million four hundred thousand (L$6,672.4 million) recorded during the preceding quarter.
On the other hand, the Bank disclosed, yearly comparison shows that currency in circulation increased by 13.6 percent, compared with the Liberian dollars seven billion one hundred seventy three million five hundred thousand (L$7,173.5 million) reported for the same period a year ago.