The Paradox of a Dropping U.S. Dollar Exchange Rate in Liberia, While Commodity Prices Remain Stagnant
Amos Songor, MBA
I have been following the economic events in Liberia during recent weeks and have observed that many Liberians, both in country and in the diaspora, rich or poor, educated, or illiterate, have been concerned about the depreciation of the United States dollar toward the Liberian dollar without an equitable drop in the prices of commodities.
The situation is worrisome to many Liberians who can barely afford one meal a day. In fact, more than 50% of the population live on less than $1 a day, so you can see why a depreciation in the value of the United States dollar relative to the Liberian dollar, without a concomitant decrease in prices of commodities, would be a matter of concern.
Reports have it that in the last three to four weeks, the value of the U.S. dollar to the Liberian dollar has depreciated somewhat, from LD 170 to $1 to about LD150 to $1, which is a 5.7% drop. However, when the everyday Liberian goes to Waterside or Red-Light market or even Duallah to purchase commodities of any sort, they do not see an equivalent 5.7% or so in price reduction. Prices are astonishingly stagnant and unaffected by the exchange rate.
The question then is, why do prices of commodities in the local markets remain high or stagnant while the exchange rate between the United States dollar and the Liberian dollar drops? In other words, the value of the United States dollar toward the Liberian dollar is depreciating but prices of goods remain high, why is that the case?
To answer this important question, let’s look at others’ opinions on this issue. Many prominent Liberian financial experts find it difficult to come up with an unequivocal, concise, practical answer to this question. For example, Mr. Samuel Jackson, a well-known Liberian financial expert, struggled with this question on the Focus on Liberia Facebook platform. When asked on Saturday, he said that a study of the economy needed to be done to get the answer(s). Similarly, we haven’t got an answer from the Government either, not even from the Finance minister, Samuel Tweh, who seems to know everything and takes credit for every positive development within the economy.
Shall we then, under these circumstances, conclude that this irony or paradox of lower exchange rate concomitant with unchanging high prices is an economic myth that cannot be explained? Certainly not!
In my little understanding of economics, as well as having run a small business for over 13 years in the past, there are two main reasons that explain this situation.
1. Consider yourself a store owner down Waterside who sells men’s and women’s wear. To obtain your merchandise, you go to China two or three times a year depending on how good the business season is. When the goods are not selling fast enough, you arrange with your contacts there in China or other business owners in Liberia traveling to China to purchase your goods on your behalf. This would save you both time and money in a slow selling season.
Imagine that in January 2021 after a successful Christmas sale last December, you ordered $10,000 worth of clothes from China. Owing to the current global pandemic, exacerbated by lagging global shipping nightmares, you did not receive the goods until late February, about two months from the date of purchase. When the goods arrived at the Free Port of Monrovia, it took you another week or so plus $2,000 to clear. Now that you have new goods costing $12,000 total, and you must sell it in time with profit so that you can send for more goods during the year.
Imagine also that due to slow sales, it took you two months to sell this merchandise although profit was not as good as before. Now comes time for you to reorganize, purchase U.S. dollars with the equivalent Liberty in your possession and arrange to either go to China for new goods or use a surrogate to do the job. This process again takes you about another week. Meanwhile, the exchange rate is no longer the same as in January, it has dropped to LD150 to $1. Notwithstanding, the process from the time you ordered your merchandise in early January to the time you sell it, then reorder, the duration is about four months maximum. I would refer to this four-month period as purchasing and sales cycles.
It is important that you remember these key facts:
When you purchased the merchandise in January, the exchange rate was LD170.
Four months later, going to reorder, the rate has dropped to LD150 to $1, a 5.7 drop.
With these facts established, consider again that the rate actually started falling in January 2021, immediately after you sent for your merchandise and you still had some left-over merchandise from your December sale. As a savvy businessman or woman, considering that you bought the left-over items at LD170 rate, would you reduce the sales price simply because the rate is falling? No. Doing so would not only reduce your margins, but it could bankrupt the business.
Consider also that when your new goods arrived in late February 2021, the rate was still falling gradually. Knowing that you bought the merchandise at LD170 exchange rate, would you sell the clothing at a reduced price? If you did, what if there’s an uptake in the exchange rate by the time you get ready for the next purchase cycle? Instead of having $12,000 in hand plus profit from sales, the LD in your hands would now be worth less. In a nutshell, businesses consider the purchase and sales cycles of their individual business before reducing prices.
2. The second reason is exchange rate stability. As is the case with the business owner mentioned above, people want to make sure that when it comes time to reorder their merchandise, they would not have to add extra money to buy the same amount of goods. When that happens, they incur a loss and could lead up to going out of business. Therefore, businesses would not immediately reduce prices unless they are convinced that the reduced rate is here to stay, and that takes time, months, I should say.
In summary, purchase and sales cycles of a business (turnaround time) and exchange rate stability are the two major causes of stagnant high prices amid falling value of the United States dollar. Meanwhile, the reverse is also true. When the value of the Dollar increases, consumers would see an immediate rise in prices because businesses foresee a sharp rise in the cost of their next purchase.
The AuthorAmos Songor, MBA, Finance, Wilmington University, Delaware, U.S.; BSc, Economics, University of Liberia; can be reached via email on ASONGOR@AOL.COM.