In 2018 alone, the Liberian dollar has lost around 12.5 percent of its value, and its decline of more than three consecutive months marks the longest sustained fall it has suffered in at least 14 years. The dollar’s fall is even more remarkable given that June witnessed the currency notch its highest level in the history of the country.
A handful of factors have underpinned the dollar’s poor run this year. Among the most impactful appears to be what has come to be known as the “abrupt increase of the Liberia dollar on the market, according to Dr. Somah Paygai, vice president for administration of the African Methodist Episcopal University (AMEU) and former chair of the National Investment Commission (NIC).
Dr. Paygai made the observation when he served as one of the panelists on a policy dialogue forum with the overall theme, “Factors Impacting Liberia’s Exchange Rate Regime.”
The forum was jointly organized by the Governance Commission (GC), the University of Liberia and the Cuttington Graduate School.
Mr. David Vinton, former National Bank of Liberia now Central Bank Governor (CBL), and Mr. Charles Collins, also panelists suggested that there was a need for the CBL and the Ministry of Finance and Development Planning (MFDP) to work more closely together in solving the rapid increase of the exchange rate between the Liberian dollar and the United States dollar.
Paygai, who spoke on the topic, “Dual Currency Regime and the Global Outlook, Implantation on the Exchange Rate Regime,” stated that when too much money is in circulation then the supply of money is greater than the demand and the money loses its value.
“If the government simply printed more money when they needed it, that money would be worthless,” the financial expert noted.
Paygai suggested that for the country to move forward the structure and system of managing the economy must be overhauled to improve accountability, transparency and efficiency and make fiscal policies relevant and supportive of national economic and social development.
Exchange Rate and Infliction
Paygai stated that the exchange rate affects the rate of inflation in a number of direct and indirect ways, one of which he said was changes in the price of imported goods and services. “This has a direct effect on the consumer price index, for example, an appreciation of the exchange rate usually reduces the price of imported consumer goods and desirable raw materials and capital goods.”
Another factor, Paygai said, was that many commodities are priced in dollars, so a change in the Liberian dollar exchange rate has a direct impact on the price of the commodities like oil and foodstuff.
He further said “a stronger dollar makes it more expensive for Liberians to import these items.”
Paygai observed that a higher exchange rate was making it harder to sell overseas because of a rise in relative prices. If exports slowdown (price elasticity of demand is important in demanding the scale of any change in demand), then exporters may choose to cut their prices, reduce output and cut back employment levels.
Exchange rate and unemployment
Paygai explained that exchange rate and appreciation causes a slower growth of real Gross Domestic Product (GDP), because of the fall in net exports (reduced injection) and a rise in the demand for imports (an increased leakage in the circular flow).
According to AMEU vice president, reduction in demand and output may cause job losses as businesses seek to control costs. “Some job losses are temporary reflecting short term changes in export demand and import penetration.”
Monetary Policy and Financial Services
He said market of different countries are enabled and expedited by improved technology in banking and financial services, “We cannot achieve any appreciable level of economic progress with an outdated financial system,” he added.
He however suggested that there was an urgent need to accelerate the pace of the monetary sector reform to liberalize and integrate “our financial services into the international financial system and capital market.”