Can, or Should the Government of Liberia Intervene in the Lagging Prices While the U.S Rate Depreciates?

My recent article published in the Daily Observer regarding the stagnant high prices amid falling United States dollar exchange rate garnered a lot of feedback, most of which was complimentary. However, one of those comments was followed with an intriguing question that had me pondering all morning. In essence, the writer’s question was whether the Government of Liberia can or should intervene in this prevailing microeconomic quagmire. After I responded to him, I had a lingering feeling that like him, this question probably bothers many other Liberians. That feeling thus propelled me to write this short piece on the question, “can or should the Government intervene to force commodity prices to drop, commensurate with the prevailing exchange rate”?

The answer to this question is two-fold. First, the Government “can” intervene because it is the Government, the lord of the land, so it can do anything it wants within the bailiwick of the country, but not without consequences. The Government has the sole authority to manage its economy, therefore the answer to the “can” question is a resounding YES.

Second, “should” the Government intervene to reduce prices? The answer to that is an unquestionable NO, because the repercussions for intervening by forcing people to short sell their products at their expense in a free-market economy are many. If Government forces people to sell their goods at a cheaper price than necessary, that’s without profit at best or at the losing end at worse, for example, their first reaction will be ‘hoarding’.  Hoarding situation occurs when businesses decide to hold on to their goods and refuse to sell them until at such time when it becomes convenient or necessary, meaning when they can make profit. Therefore, the Government should let the cycle complete itself and eventually commodity prices would stabilize.

Is there anything at all that the Government can do at the moment to help the situation?

Yes, there’s something the Government can and should do right now. The one important thing the Central Bank can do is ensure exchange rate stability somewhat. When businesses and consumers see that the lower rate is here to stay for a while, they would have no choice but to embrace it. The fact is that high exchanges affect both buyers and sellers. Reluctant or not, market players would have to buy and sell at the prevailing rate considering that they have confidence in the ability to purchase more goods at a future date without fear of paying more.

Which branch of Government has the key to exchange rate stability?

The Central Bank of Liberia has the sole authority and capability to stabilize the exchange rate. You probably have heard people from the Ministry of Finance taking credit for every gain within the economy. But the fact is that, apart from its statutory mandate to collect revenue, pay civil servants, etc., the Ministry of Finance has done little to stabilize the economy. The most they have done was to stop borrowing from the Central Bank because the International Monetary Fund (IMF) warned them against it. To be sure, GOL borrowing from Central Bank coffers was bankrupting the monetary system of the country, thus reducing currency reserves and pushing up the exchange rate.

Few basic facts about the Liberian economy for the man or woman living in New Kru town, Logan town, West Point, Sinkor, etc:

The Liberian economy, like all free market economies in the world, has two main components. Below are the two components and their basic functions:

1. Fiscal component (Fiscal Policy). Government uses Fiscal Policy to influence the Liberian economy through revenue collection, borrowing and spending. Simply put, Government can attract the flow of the U.S. dollar into Liberia in many ways. In the short term, they can borrow U.S dollars from other sources and make it available into the market through the Central Bank, thus temporarily bringing down the U.S. rate. Government can also reduce the tax rate to attract investment, thus bringing in U.S. currency and eventually reducing the exchange rate. This, however, is a long-term strategy that smart economies employ to boost economic growth and create more jobs. 

On the other hand, Government can also outrightly cause inflation and push up the exchange rate by borrowing from the Central Bank. This is the bad practice that was carried on by GOL until the IMF demanded that it stop. When the Government borrows from the Central Bank, it reduces the amount of U.S. dollar reserves left to lend to commercial banks when they need it. Therefore, when a businessman needs U.S. dollars to purchase his Christmas goods from China, he goes to the LBDI or other banks. Since Central Bank does not have enough U.S dollars due to Government borrowing, he’s told by the bank that there’s not enough money. What do you think happens next? He goes out to buy the money at a higher rate. The ripple effect trickles down to the cup of rice you buy at the market down Waterside.

The Liberia Ministry of Finance and Development Planning effects this policy.

2. Monetary policy. The Central Bank of Liberia controls the country’s monetary policy. This policy must be free of political pressure if it is to function properly. In this policy, the Bank can use interest rates, infuse money into the economy, reduce money supply, etc. to effect a desired change in the economy. The Central Bank can also influence the exchange rate either way if it wants to, in the immediate term, unlike the Ministry of Finance.

After considering these two components of our economy, which branch of Government should take credit for the depreciating U.S. dollar against the LD, MOF or Central Bank? I’m hard-pressed to ask this question because nowadays, it seems the Central Bank of Liberia doesn’t exist. The Ministry of Finance is taking credit for a function that it neither owns nor performs. 

In summary, Government does not need to and should not intervene in the lagging prices against the depreciating U.S. dollar. If anything, all the Central Bank of Liberia needs to do is ensure exchange rate stability in the long term, thus inspiring confidence within the marketplace.

As for who takes credit for the downward trend of the exchange rate, as well as some other factors affecting the Liberian economy, it is the Central Bank of Liberia and not the Ministry of Finance. However, since the Central Bank should be nonpolitical, they do not speak out as much, that’s the job of the MFDP. However, Minister Tweah should be giving credit to the Bank rather than adorning it himself.