Sudden Drop in Exchange Rate Heightens Vulnerability of Liberia’s Economy
Monrovia – The sudden drop in the exchange rate between the United States and the Liberian dollars few hours before President George Manneh Weah delivered his first address to the Legislature on Monday, January 29 was enigmatic.
For a fragile economy like Liberia’s, uncertainties can be uncontrollable and when the movers-and-shakers of the sector are anxious, the local foreign exchange market takes a warp.
It is the Liberian to U.S dollar’s exchange rate that sets the tone for most aspects of the local economy.
The unprecedented decline in the exchange rate is now generating concerns and uncertainties at the same time, while Liberians ponder the factors responsible.
Economists say one reason for such slump in the exchange rate was the suspicion conceived by businesses as the President readied his first address to the nation at the beginning of the week.
Such speech comes along with political uncertainties and businesses were anxious to hear which direction the new President would take because what he says affects people and the economy, says former Minister of Finance, David M. Farhat.
Mr. Farhat, now Director at the University of Liberia’s Graduate Program in Business & Administration, says the factors that triggered the exchange rate can be compare to “blood pressure.”
“What is happening is that we have a new administration and people are jittery; they don’t know what is going to happen and that is why the rate has quickly driven down. People are not importing – those who have the dollars are holding their money,” he said.
The expert financier’s analogy is evident by the abrupt declined in the exchange rate just hours before President Weah made his speech.
It dropped from LD$135 to LD$100 for US$1.
Importers determine the exchange rate since the Central Bank of Liberia is low on reserve to meet their demands. They deluge the market with tons of Liberian dollars and scramble to raise hard currency to fuel their imports.
Local money exchangers endure either the pain or gain when the rate fluctuates. In the past few days, some money exchangers are savoring the gains.
“Even though I am not really happy because I just bought plenty scratch cards in US dollars, the drop in the exchange rate will be good for us because it will help us to buy goods at a good rate and also enable us get profit,” says Steven Logan, a local money exchanger in Paynesville.
When Logan received words that the rate has drastically dropped from LD$138 to LD$118 and then to LD$100 on Monday, he already had a huge sum of Liberian dollars after selling his US dollars to importers. Luck was on his side and the circumstance worked in his favor.
Bernard Doe, a money exchanger in Congo Town, added that the drop in the exchange rate was “astonishing”.
“I got to know about the drop in rate around about 12:00 in the afternoon so I change my rate from 130 to 118.
The high rate has been a problem for us because it makes it difficult for us to get good profit,” Doe said.
He’s now wondering how the Central Bank of Liberia would reacts to the drop or fluctuation in the exchange rate.
In the main time, he’s relying on the speculations of the Forex market.
Meanwhile, Helena Sammie, a petit trader, is upbeat by the declined in the exchange rate.
“I even want for it to drop to LD$22. I never hear it but I am seeing what is happening and it’s good because it will help me,” said the single mother of four children.
“One bag of rice is very expensive, we can buy one bag for LD$2,000.00 and the market I am doing does not have plenty profit…; I want the rate to remain like this because when the rate goes down that’s the more time prices can go down.”
But unfortunately for Helena, the prices of major commodities remain unchanged.
The prices of gasoline, rice and transportation fares have not been affected by the new exchange rate.
In fact, the rate has increased to LD$120 to US$1 since Tuesday and some street money exchanges are ready to herd for the US dollars now that the dust is settling after the President’s speech.
Hamnson Gaye, a student of Business at Stella Maris Polytechnic, says the drop in the rate never impressed him.
He wanted it to commensurate with prices of basic commodities.
“If you’re dropping the rate, it’s fine but what about the prices of commodities on the Liberian market?
If the rate must drop than the prices of commodities must also drop,” Gaye said.
In plain Economics, Gaye’s theory is logical but it doesn’t apply to Liberia’s situation.
The CBL, the government arm responsible to regulate foreign exchange is incapable of controlling the situation and have adopted a lesser faire approach in dealing with such problems.
The CBL often stays mute, turn a blind eye and allow the streets to determine the exchange rate regardless the ramifications.
The CBL approved rate in several commercial banks is LD$128 to US$1.
And Prof. Frahat says unless the factors that are responsible to strengthen the Liberian dollar are considered and implemented, the exchange rate would increase.
“After a while you will see the rate will shoot up once things are stable it will go down,” he said.
“The exchange rate is like blood pressure – so our blood pressure is going up because of the political change.”
As the political change takes shape and President Weah admitting that he has inherited a “broke government” with a foreign reserve of US$155 million, Liberia’s economy is clearly in shambles.
The revenue intake is limited due to decreasing price of the country’s main exports on the world market, the challenge of collecting real estate taxes and tariff from importers, revenue-collecting expert said.
The former administration of Ellen Johnson-Sirleaf relied heavily on the extractive industry, while making little efforts to diversify the revenue base.”
“And with the prevailing constraints on the country’s major exports, Dr. Farhat says it is putting pressure on the exchange rate.
“When we export we get hard currency and the major one is US dollars, now because we don’t do that we are not earning hard currency so the rate increases,” he said.
The sudden drop in the exchange rate on Monday is reminiscent with events of former Liberian President Charles Taylor, who during his regime ordered the reduction of the US-Liberian dollars exchange rate.
But Prof Farhat warns that any attempts to demand the reduction of the exchange rate and ignore the economic variables would lead to artificial scarcity and demand for major commodities”.
“When Taylor made the pronouncement importers held back their money.”