By J. Yanqui Zaza
What factor(s) continue to depreciate the Liberian currency against the American currency? The rate was LD 54 to US $1 in 2005; LD 131 to U.S. $1 in 2017; and now it is LD160 to US $1 in 2018. Former Governor of the Central Bank of Liberia (CBL), Mr. Milton Weeks, during a Press Conference in 2017, asserted that the outflow of $144 million remittances was the culprit. In 2016, former President Ellen Johnson Sirleaf implied that a decline in the global commodity prices was the reason behind the fall in government revenue, and by extension the Liberian Exchange rate.
Adding to the two factors, the International Monetary Fund listed UNMIL drawdown, reduction in inflow remittances, sharp reduction in donors’ grants and the political uncertainty in 2017. Additionally, the IMF, in its June 8, 2018 Report No. 17/172, accused CBL for abandoning its responsibility to stabilize Liberia’s exchange rate. “The CBL has not attempted… at providing the funds needed to intervene in the foreign exchange market to smooth the depreciation path of the LD against the USD,” explained the author of the Report.
Interestingly, within the same Report, the IMF acknowledged that CBL did not have the liquidity to intervene and mitigate the depreciation of the exchange rate. CBL is cash trapped because it was undercapitalized, and it continued to lend money to the government. For instance, CBL, in the last six months, lent two separate loans to the national government. In addition, CBL had been managed poorly, resulting into overrun of expenses and budget deficits.
Consequently, CBL did not pay debts owed to commercial banks and local merchants, contractors and neither did it fund budgetary allotments to intergovernmental agencies, universities, state-owned entities, etc. And, of course the non-payment of debts owed has added pressure on Liberia’s exchange rate.
Was the IMF unaware of Liberia’s liquidity problem in 2013 when the CBL reported a negative cash position, according to CBL’s 2013 audited financial statements? In any case, does the chart below support the views that the decline in global prices generated minuscule revenue, for example in 2017?
|TOTAL REVENUE||USD $1.07B||USD $1B||USD$949M||USD$974M||USD$1.0B|
|REV. EXC. GRANT||452||464||436||467||520|
Contrary to the views that revenue was down, it was up by USD $12M in 2017 from USD $452M in 2016 to USD $436M in 2017, according to the IMF Report No. 17/172. True, grants were down by USD $82M in 2017. Yet, the difference between 2016 and 2017 was not a sharp reduction as claimed by the IMF. Specifically, tax collected from international trade (import and export) was USD $185M in 2016 and USD $185M 2017.
Again, on page # 47 of the same Report, the author identified Current Account(CA) as one of the three approaches that is used to determine an exchange rate, if my understanding is correct. And this model focuses on savings-investment gap. “The CA model looks at determinants of national savings and investment since when the former falls short of the latter, the country has to borrow from abroad.” This theory helps me to understand why, with a revenue of USD $80M in 2005, the exchange rate was LD$54 to US $1, but it depreciated to LD130 to USD $1 in 2017, with a revenue of US $436M. To put it in a simple way, old folks usually say, it is not how much salary you make, but how well you manage or how much of the salary you save.
On page # 48, the author discussed the mechanism, economic fundamentals, variables and the use of assumptions to calculate exchange rate. For now, let us review some of the factors that can help to increase the savings-investment gap. The IMF stated that the government overestimated its revenue projections. This overestimation of revenue had encouraged and lured administrators to hire contractors and undertake projects that could not be funded. Contractors, trusting that the country could honor its contracts and reimburse contractors, went and borrowed money from commercial banks. Non-payment of debts contributed to the loss of confidence in CBL.
Corruption was another factor that contributed to the country’s poor savings-investment gap. During former President Sirleaf regime many profiteers such as concessionaires, non-governmental agencies, contractors, IMF, the World Bank, wanted to do business with administrators who would accept bribes. This is because these institutions, like any profiteers, have to grease the wheels of business in order to make profits. So, the former President appointed subordinates who could not challenge her, thereby, ensuring that they (subordinates) implemented the wishes of profiteers. That was part of the reason why Liberia signed 66 fraudulent concessionary agreements, resulting into an increase in the savings-investment gap.
A third factor that has impact on the savings-investment gap (exchange rate) is productivity. The savings-investment gap decreases if a country increases its productivity. For instance, an increase in rice production would reduce investment in the importation of rice. So, yes, productivity and a reduction in the saving-investment gap is important, but who takes the lead. Preceding April 12, 1980 coup, government created the Agricultural Development Bank and the Liberian Bank of Development and Investment for profiteers to increase productivity. Unfortunately, profiteers failed to increase productivity.
The story is the same today. The 2017 loan portfolios of the commercial banks indicate that agriculture accounts for less than 2% of the loan portfolios of the commercial banks. Manufacturing accounts for less than 7%. Instead, they invest in the country’s lucrative assets without adding value. So, until the private investors can see good profits prospect in producing rice, livestock, etc., government should take the lead, which could help the public to save and also reduce the savings-investment gap, the economic fundamentals used in calculating an exchange rate, says the IMF.
The Report detailed many measures on how best Liberia can manage its debt, the fourth factor that affects the savings-investment gap. So, I do not understand why the IMF used a higher denominator (USD $3B), thereby, resulting into a lower ratio (25%) of debt to Gross National Product that the government could use to obtain more debt. The 25% debt to GDP is distortive because Liberia’s real gross national product is about USD $1B, a denominator that brings the debt ratio close to 73% ($736M/$1B).