CBL Shifts Monetary Policy from Inflation to Interest

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CBL Headquarters in Monrovia

The Central Bank of Liberia has announced that it is making a transition from an exchange rate targeting framework to interest rate-based framework. Up to now, the bank said in a release, the CBL’s exchange rate targeting policy has involved keeping the exchange rate generally and broadly stable in the short-term, because of the significant impact of Liberian dollar depreciation on domestic prices. But, this requires huge foreign exchange holdings of the CBL, called International Foreign Exchange Reserves. Given the current low inflows of foreign exchange into the economy, the CBL has decided to change its monetary policy framework to a new regime.

By adopting the new monetary policy framework, CBL will start using interest rate as its key monetary policy instrument, to control inflation and bring down the high prices of goods and services in the Liberian economy. The current high prices of commodities, especially food, is significantly affecting the poor people, which is something that the CBL is not happy with.

The Executive Governor of the Central Bank of Liberia (CBL), Hon. Nathaniel Patray, III, made the announcement on recently when he launched the CBL Economic Forum. He said, by adopting the new monetary policy framework, in the medium term interest rates will serve as an effective channel of monetary transmission.

Executive Governor Patray said the success of the new monetary policy framework will require the development of financial markets (money and capital markets, which are currently  at a low level of development in the country. He said the new policy framework will prepare CBL to adopt inflation targeting in the long term, something that is consistent with the global trend and the convergence criteria for the ECOWAS Monetary Union.

The new CBL monetary policy re-affirms its independence, consistent with the recent pledge made by President George M. Weah when he told a World Bank team that recently made a courtesy call on him that he will continue to uphold the independence of the Central Bank of Liberia as it endeavors to resuscitate  Liberia’s economy. At that meeting, the President said that the Government has taken the decision to stop all future borrowings from the CBL in an effort to stabilize the economy and bring down inflation.

The CBL Executive Governor said although  inflation, to a large  extent is a monetary phenomenon, it requires the collective efforts of all key stakeholders to fight it.   “As enshrined in the Pro-Poor Agenda for Prosperity and development (PAPD), the key role of the CBL is to promote price stability, in concert with all stakeholders, which is critical in ensuring a conducive macroeconomic environment”, the CBL Executive Governor said.

The recently launched CBL Economic Forum is aimed at creating public awareness and understanding about CBL monetary policies and regulatory functions and promote public feedback on such policy, thereby creating transparency and renewing confidence in the CBL. The forum is also intended to engender public debates about topical and trending economic issues in Liberia and exploring the public views on such economic issues for better policy formulation.

2 COMMENTS

  1. This is not serious. High interest rate to cure inflation would increase the private sector’s cost of borrowing, and could lead to bankruptcy of firms and more unemployment, worsening poverty in the country.

    As Benjamin Franklin said no pain no gain.

    The root cause of inflation in Liberia is government living beyond its means which resulted in budget deficits funded by borrowing. So the government needs to embark on structural reform to reduce the size of government, confine expenses to available revenue, and improve the productivity of public sector, and protect the most vulnerable segment of the population through targeted spending. Structural reform would be painful in the short term but properly implemented would lead in the medium term to lower inflation, encourage the inflow of foreign direct investment, and generate inclusive growth.

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