Messy Economy: Who’s to Blame?

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There is confusion and noise in the country over the challenging state of the economy particularly as the Liberian dollar continues to depreciate against the United States dollar. Amid this confusion and noise, fingers are being pointed at the Ministry of Finance and the Central Bank of Liberia (CBL) for doing little or nothing to arrest the situation on the foreign exchange market. The rate currently stands at L$88.5 to US$1. Critics of the Ministry of Finance accused it of failing to finance critical government projects and failing to provide fiscal backing for the monetary side of the economy. The CBL is charged of pursuing bad monetary policy by allegedly infusing more money into the economy. The two institutions have denied these allegations and chided their accusers to provide evidence.  

As the economy undergoes this hysterical period, the government has repeatedly said that it does not have control over the exchange rate. Many people describe the government’s pronouncement as a blatant demonstration of a lack of commitment or will to ensuring macroeconomic stability.

But economic and financial experts believe that stability in the money market requires a greater responsibility from the private sector than just the government alone. They argued that as a free enterprise or market economy, the government does not produce or sell. Others are, however, of the view that the private sector needs stronger and committed government protection in order to take its place in the economy; a situation, they say, remains a promise from the government.

 Comparatively, it is the private sector that is creating more demand for the US dollar than the government.  

In the face of this debate, a financial expert has anonymously warned that unless the economy can shift towards manufacturing to raise the needed foreign exchange to pay for its balance of payments (BoP), the foreign exchange market will get worse.

The unfolding situation points to the fact that an attempt by the government to set the rate, as some people would want,  would lead to the creation of a ‘black market’ by unscrupulous individuals.

What a mess!  Though the CBL makes a weekly US$1.5 million auction and deals directly with registered businesses and Forex bureaus, the Bank does not have enough US dollars to meet the demand of the market, which needs over a billion dollars per quarter to import. The Bank’s foreign reserves position is estimated at about US$250 million, while the government of Liberia’s fiscal budget is to the tune of about US$580million.

The most professional way the Bank is handling this situation is to allow the market forces of supply and demand to dictate the exchange rate to a larger extent.

In microeconomics, supply and demand is an economic model of price determination in a market.

It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity.

Therefore, the four basic laws of supply and demand must be looked at. These laws state: if demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price; if demand decreases (demand curve shifts to the left) supply remains unchanged, a surplus occurs, leading to a lower equilibrium price; if demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price, and if demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price.

For our discussion on the money market in Liberia, we take the first law knowing that the demand for the US dollars has increased with supply remaining mainly unchanged. The shortage in the supply and availability of the US dollars in the market has led to a higher equilibrium price for the US dollars. Our Business Desk attempts to discuss some of the factors responsible for the increased demand for US dollars.

Trade Deficit as a factor Responsible for Huge US dollar Demand

Liberia is an import-dependent economy. Meaning, the economy imports more goods than its exports. According to CBL’s 2013 third quarter report, total import payments rose by 19.7% to US$300.5 million; while rubber and iron ore exports recorded a combined 81.1% of total export receipts from 78.1%; representing about 20.6% decline.

Their combined export receipts recorded was US$99.5 million at end-September, 2013 from US$125.4 million at end-June 2013. The CBL reported that the key driver of the country’s trade deficit was its huge import receipts, which is further exacerbated by its sole reliance on rubber and iron ore as its key export commodities.

The Bank acknowledged the decline as a troubling sign for the economy and immediately published a recommendation for the government to pursue a swift policy action aimed at widening the country’s export base towards non-traditional exports in order to reverse its sole dependence on iron ore and rubber.

It also traced the problem to the volatility of global prices of iron ore and rubber, which exposes the country to susceptible external shocks. Rubber and iron ore are Liberia’s chief export commodities.

Liberia’s Deteriorating Balance of Payments

It has been observed that the Liberian economy is not strong enough to generate needed foreign exchange earnings to settle its balance of payments (BoP). The BoP is a statement that summarizes an economy’s transactions with the rest of the world for a specified time period.

 Also known as balance of international payments, BoP encompasses all transactions between a country’s residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers.

Last year, the CBL has released a provisional statistics of Liberia’s overall BoP highlighting a deficit of about US$216.5 million.

The statistics, which was curled from the Bank’s third quarter Economic &Financial Bulletin, published the US$216.5 million from a revised surplus of US$38.0 at the end of the previous quarter.

According to the Bank, the overall BoP deteriorated on an annualized basis by US$338.0 million at the end of September, 2013 from a surplus of US$121.5 million at the end of September, 2012.

Tax Requirement in US Dollar by GOL

Another key factor is tax requirement in US dollars by the Government of Liberia. The GOL’s policy of collecting a very large segment of tax revenue in US dollar from the private sector also creates demand for the US dollar because businesses and other taxpayers required to pay their taxes in US dollar have to find the US dollar to pay their taxes. It must be registered, however, that the situation in the foreign exchange market, which is creating hardship for vast majority of the Liberian people, cannot be blamed on the government alone.

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