The Central Bank of Liberia (CBL) serves an important function in the country’s economic development, not only through its statutory role in regulating the financial system, but as a guardian of the value of the national currency. Unfortunately, there is limited public appreciation of the bank’s role in the national economy, thus contributing to the deep skepticism that accompanied its plans to print and distribute new bank notes. The role of the Bank in the expansion of the Liberian economy from the advent of democratic governance in 2006 to the present, including the challenging post Ebola years is largely unknown to the general public. The lack of appreciation for the Bank’s role is also mostly due to the nature of central banking, which is conducted by technocrats with little appreciation for conveying complex information to the general public.
The CBL does provide a treasure trove of information to financial literates, economists and policy wonks that includes some of the most reliable statistics on the Liberian economy from economic growth rates and figures, composition of gross domestic product (GDP) and the balance of payment position of the country. The information comes in monthly Economic Reviews, bi-Monthly Financial Statistics, Quarterly Economic bulletins, Policy Statements and Annual reports. Unfortunately, the information buried in these reports chronicling progress or challenges in the national economy is designed for a narrow portion of Liberian society and our development partners, and not the ordinary man in the street.
Thus the public is acutely unaware of the progress in the financial services sector, and mainly in the expansion of commercial banking in the country, including 9 banks with 89 branches in 11 counties and dozens of rural financial institutions, from 5 banks and a limited number of branches in 2005. Without the expansion of banks that has led to access to credits and some degree of progress in the overall goal of financial inclusion, the expansion of the Liberian economy from a low base in 2003 to its current challenging but hopeful position would not have been possible.
Certainly, public cynicism is the natural outgrowth of our dark past, wherein secrecy in banking and governance were used to mask official misconduct. Who cannot but frown at the miserable handling of the savings bonds scheme, initiated by the government with the National Bank of Liberia as a fiscal agent for the government of Liberia in the 1980s, when the life savings of thousands of Liberians, dead and alive evaporated into thin air? Or the spate of bank failures in the past that saw people reduced to paupers losing their hard earned money? Thus, the transformation of central banking in Liberia, which began in the late 1990’s led to the formation of a true reserve bank in 1999, which has sought to protect the public from the dark days of the past.
The CBL was formed in 1999 to replace the National Bank of Liberia and to serve as a reserve bank, regulating the financial services industry, which includes commercial banks, non-bank financial institutions, insurance companies and to ensure that the financial system operates in line minimum with prudential standards and international best practices. The CBL also must ensure that financial instruments such as stocks and bonds intended for sale to the public meet minimum prudential standards.
The CBL regulates commercial banks by requiring certain basic minimum requirements to allow them to operate in Liberia. The bank sets capital requirement, which is now US$10 million dollars, from the paltry US$2 million dollars in 2006, and ensures that commercial banks place a certain amount of their deposits into the CBL, a practice known in banking as reserve ratio requirement. The current reserve ratio is 15 percent for US dollar deposits and 22 percent for LD dollar deposits, meaning in broad terms, banks must surrender that percentage of their average deposits at the end of each month to the
Central Bank. The traditional function of reserve requirement is for monetary policy instrument to control money supply in the economy. However, this has not been the case in Liberia. Under the current situation, the reserve requirement serves as a “de facto” deposit protection fund which can and has been used in the past to settle depositors of failed banks.
The bank also manages the money supply, ensuring that the transactional needs for currency and credits are adequate to facilitate economic growth and development. This is the role least understood by the general public. The general public is mostly concerned with paper currency that is deposited in banks or hidden under mattresses or other safe places. The nature of money, its composition and role in expansion of the Liberian economy is an arcane science that requires adequate explanation to the public. As most economic students would know, there are two categories of money in the Liberian economy, known as M1 and M2. Other countries have M0 to M infinity. In Liberia, M1 refers to currency outside banks and demand deposits (checking accounts), while M2 is the combination of M1 and what bankers refer to as quasi money, mainly savings and time deposits. The main difference in the categorization of Liberian money is the liquidity feature.
Expansion of the money supply in both Liberian dollars and US dollars from a low base of 8 billion Liberian dollars in 2006 to 59 billion dollars at the end of 2015 has been accomplished due to economic growth which has been facilitated by the CBL through its regulation of banks, while not engaging in stringent capital controls. In fact, some people have called for capital controls, such as export proceeds surrender, but there is limited appetite for that among policy makers.
The CBL, as all central banks, is charged with the responsibility of ensuring macroeconomic stability. What this means in simple terms is that the bank must manage the money supply in a way that there are no wide swings in inflation. In order to keep inflation low and stable, it cannot expand the money supply without regards to productivity in the economy. Money is a store of value. Therefore the money supply must be an indication of growth or decline in economic activities.
The accounting of money by the CBL and its technical role in curbing inflation should be taken seriously. The Bank cannot print money and infuse it willy-nilly into the economy without the cooperation of the conduits, which are the commercial banks. The commercial banks have a major stake in maintaining the value of the Liberian dollar, since 30 percent of broad money (70 percent is in foreign currency) in Liberia is denominated in Liberian dollars, which includes a major part of their capital base. If the CBL were to tinker with the ratio of Liberian dollars in the money supply under the current level of low productivity in the economy and challenges in the external sector, with growing trade deficits, it would affect the value of the Liberian dollar quickly resulting in further depreciation of the currency and increase inflation with significant adverse consequences for the banking system through second-round effects on the ability of businesses, individuals and the government to honor their obligations to the banking system, which is exactly what is being experienced currently in the banking sector .
Therefore it should be clear that the CBL cannot undermine the stated goal of maintaining a low level of inflation in its role as guardian of the value of the national currency by expanding the money supply through the printing of additional bank notes.
According to the CBL, printing of money under current circumstances is being done to replace mutilated notes and not to add to the money supply. If the bank does the opposite, it would lead to inflation and increase the cost of living. The bank has steadfastly sought to maintain the value of the Liberian dollar as compared with other countries in the West African Monetary Zone show, such as Gambia, Ghana, Nigeria and Sierra Leone. Liberia’s currency has depreciated the least among its comparators.
The role of the CBL in the economy has not been sufficiently conveyed to the public in a manner and form that can be easily understood by the lay man and thus public cynicism exists. That might change if the CBL engages in a new engagement model with the public through its recent outreach program.
That, to me, is the challenge posed by the limited understanding of the role of the CBL in economic development and led to public cynicism. Hopefully, the bank’s outreach program to the Liberian public will expand understanding of its role in the national economy. And so it goes.