Monrovia – The Liberia Bankers Association is expressing concerns over the recent passage of a bill in the lower house of the national legislature looking to make the Liberian dollar to only currency in the country.
In a statement the LBA says its attention has been drawn to the Act of the National Legislature to amend Part V: Section 19, Sub-sections 1 and 2 of the ACT establishing the Central Bank of Liberia on March 18, 1999.
The Amendment seeks to “declare the Liberian Dollar the sole currency of Liberia and legal tender”.
The LBA, in a statement averred: “The Legislature, by the passage of this Act, is directing that “prices for all transactions in Liberia shall be solely indicated in Liberia Dollars and cents and the Liberian Dollar shall also be the sole currency for Accounting, Financial reporting and official purposes in Liberia” At the same time, the Act seeks to maintain the US$ as legal tender for the sole discharge of foreign public and private obligations”
“Hasty de-dollarization could spell the beginning of the collapse of the banking sector in particular and the financial sector in general. Hasty de-dollarization has not worked anywhere” – Liberia Bankers Association
The Association wishes to indicate that a legal tender is defined as a medium of payment recognized by a legal system to be valid for meeting financial obligations and conducting transactions. This includes paper currency and coins that are common forms of legal tender in many countries.
The statement added: “The LBA expresses grave concerns with regards to the timing and approach which has characterized the passage of this Act.
Firstly, clarity in the intent of the Act to retain the US Dollars as a legal tender and restrict its usage to settlement of foreign obligation is required.
To avoid ambiguity, mechanics of the basic delivery channels must be delineated for the purpose of understandability and avoidance of confusion. Clear perimeters must be set to determine what a transactional exchange is and what is considered ‘foreign public and private obligations’ in the utilization of the two legal tenders.”
No Consultation by Legislature
Additionally, the Association says it is of the opinion that the National Legislature has not consulted broadly enough and therefore did not receive important information on the eventual economic costs of hasty de-dollarization of the Liberian economy prior to the passage of the Act.
“There are economic imperatives which must be considered in de-dollarization such as macroeconomic variables including supply side and demand side implications for money supply, revenue and expenditure consequences, and effects on inflation.”
The Association agrees that at some point in Liberia’s socio-economic sojourn, the country will have to commence phased de-dollarization.
Nevertheless, the LBA declared: “It is against this backdrop that the Association fully supports the Draft Road Map which was formulated by the Central Bank of Liberia in 2012 as an integral part of the Agenda for Transformation.
Carefully taken measures have been consistent with that framework including denomination of 25% of diaspora remittances through money transfer operators in Liberian Dollars, the creation of treasury instruments and an interbank market to ensure that the financial system is not exposed to volatility and shocks.”
The Liberian Bankers’ Association wishes to remind the National Legislature that the Liberian economy is basically import oriented as evidenced by the high levels of trade deficits. Forced dedollarization will further exacerbate our liquidity crisis.
“There is no guarantee that we will be able to handle the exchange rate risks. All forced de-dollarization programmes initiated by countries globally have ended with bad economic experiences and a virtual re-dollarization. We are all aware of the Peruvian Experience.”
The Association says it is of the considered opinion that this anticipated forced de dollarization will affect the Liberian economy in the following ways:
1. The existing foreign correspondent bank relationship saga will worsen. This will hinder the ability of local banks to adequately maintain offshore accounts
2. Banks will not be able to pay depositors in the event of a run on the banks for huge US$ deposits;
3. Credit dollarization will be affected, thus impacting the banks’ balance sheet adversely and creating more nonperforming loans.
4. Some major concession agreements will be affected
5. Balance of payments deficit will increase and
6. The current pressure on the exchange rate will worsen leading to further undermining of the CBL ability to manage the exchange rate volatility.
In conclusion, the LBA urged all stakeholders in the governance, financial and monetary policy arena to prevent the looming crises the banks will experience should this Act becomes enforceable.
“Let us ensure that the strategic and scalable approach envisaged in the draft 2012 roadmap is respected, reviewed and followed.”
The LBA goes on to urge all to note that at least 75% of bank assets, 67% of bank liabilities and 90% of Banks capital are denominated in United States dollars.
“Hasty de-dollarization could spell the beginning of the collapse of the banking sector in particular and the financial sector in general. Hasty de-dollarization has not worked anywhere.”
The caution from the LBA follows a cause for concern last week by the Central Bank of Liberia over the passage by the Legislature an Act to make the Liberian Dollar the only legal tender for business transactions.
"The sponsors of this bill obviously had good intentions; however, the approach is wrong and will not produce the desired results.
The nature and the structure of the current monetary arrangement for Liberia, the dual currency regime, is complex; therefore, a decision that intends to alter such a regime should not be driven by mere public perceptions, or should not be propelled by political persuasion, rather it should be anchored on empirical findings and the structural dynamics of the economy," the CBL said.