The Editor,
The
government of Liberia has given these justifications for requesting the
Legislature to print LRD34 billion
• The new family of banknotes is to replace the
existing multiple families of banknotes
• To enable the CBL reset their accounting of
banknotes so that they can now determine the actual quantity of currency in
circulation
• To enable the CBL embark on a system to keep the
banknotes within the banking system so as to facilitate monetary policy
effectiveness
• To enable the CBL maintain a stable currency of LRD
vis-à-vis the USD.
The Minister of Finance and Development Planning also argues that the core
function of the CBL is to print money, hence the CBL should be allowed to carry
out its core function.
My first response is that the core function of the CBL is NOT to print money,
but to stabilize prices. Issuing currency (or printing money) is just one
of the functions or tools available to the CBL to achieve some of its monetary
policy objectives. That’s what the Act establishing the CBL says.
In the past, the CBL had delegated authority (by the Legislature) to print
money as a means of effecting monetary policy and ensuring price stability, but
that delegated authority has been revoked by the Legislature, which now
requires that every intent by the CBL to print money must first be approved by
the Legislature.
On the justifications provided, I am certain every rational Liberian wants to
see:
• One family of banknotes
• An accurate record of the currency in circulation
• CBL control over currency in circulation so as to
make effective monetary policy
• A stable LRD.
The problems we currently have however are multiple. The first is that
Liberia is in what appears to be a liquidity trap, as Keynesian Economists
would say. This is when almost everyone prefers cash rather than keep it
within the reach of the monetary authorities. Cash hoarding is a
characteristic symptom of a nation that is in a liquidity trap. When a
nation is in a liquidity trap, Central Banks or the monetary authorities are
rendered impotent because of loss of control over the currency. CBL’s
most recent annual report (2018) puts the figure at 94% of LRD in circulation
that is outside the control of CBL and the formal financial system.
The first question that therefore comes to mind is why are we in a liquidity
trap? I think it is for several reasons. The first is that high
depreciation of the Liberian dollar makes it imprudent to maintain financial
assets in LRD, as purchasing power erodes every time the exchange rate
deteriorates. LRD 1m at December 2016 was equivalent to US$11,100. This
was before the controversial LRD 16b Today however (October 1, 2019) that same
amount is equivalent to US$ 4,700. This is a loss of US$6,400. With
a daily deterioration of LRD, it makes more sense these days to spend ones LRD
than hang on to it.
Our payment system is also a culprit. We like cash- raw cash. The
vast majority of the residents prefer cash because in market places and stores
everyone finds it more convenient to pay for goods and services with
cash. The fish seller doesn’t want mobile money. Our low literacy
rate (UNESCO thinks more than half of the population are illiterate) is also a
factor. Few people accept checks, and fewer can accept payment by
plastic. We also have limited banking services in 14 of the 15
counties. Where there are banking services, customer service is usually
very poor, while operational efficiency is low due to constant banking system
downtime which results into long queues, etc. These and many issues
making doing business with banks stressful.
Will this “helicopter money drop” as the Economist Milton Friedman would say
get Liberia out of its liquidity trap? CBL says we have around LRD 21b in
circulation (even though they also say they no longer know now for sure how
much money we actually have in circulation), but they want to print LRD
34b. Is the extra LRD 13b intended to fund GoL’s budget deficits?
How is any of this going to get us out of the liquidity trap? Are we not
“pushing on a string” as Economist John Maynard Keynes is reported to have
metaphorically referred to limits of monetary policy and the impotence of
central banks, when emphasizing that sometimes monetary policy works in only
one direction, and that businesses and people cannot be forced to act a certain
way?
If Nicolaus Copernicus’ quantity theory of money (QTM) is anything to go by,
increasing the money in circulation will lead to a proportionate increase in
the general price level of goods and services, as this theory (Monetary
Economics) states that the general price level of goods and services is
directly proportional to the amount of money in circulation. Maybe this
is why the depreciation of the LRD accelerated beginning 2017 following the
beginning of the infusion of portions of the controversial LRD16b. Money
derives its value from goods and services. Increases in money supply is
therefore supposed to be a reflection of growth in the economy (GDP growth).
With the CBL and the IMF estimating near zero percent growth, how is printing
more money justified? Shouldn’t we maybe begin reducing the quantity of
LRD in circulation (mopping) to stabilize the value of LRD? Or is the color of
the banknotes more important than the value and the effect on the economy?
A fundamental concern also is the current state of the CBL’s systems and
processes. Kroll, the international firm of auditors (investigators),
painted a very troubling picture of the CBL’s systems and processes, and
concluded that the CBL could not account for the LRD 16b that was
printed. The Special Presidential Task Force comprising the LACC, FIU,
LNP, etc., also caused to be indicted some officials of the CBL because of the
same reasons as the Kroll findings. As if to confirm the state of affairs
at the CBL, there is now the issue of the US$25m mop up money. Do we
trust THIS central bank? Money is about trust!
Some have intimated that GoL’s main objective is to make a windfall profit
(seigniorage) of US$120m ((LRD 34b divided by LRD220)-US$34m). This is
not going to happen if the CBL actually demonetizes (recalls) the current
families of banknotes in circulation of LRD 21b. Instead, it is on the
difference of LRD 13b that the CBL can expect to make some profit – about
US$25m ((LRD34b-LRD21b) divided by LRD220) minus US$34m). However, if the
LRD experiences a sharp deterioration in value, even this profit will not be as
high as indicated. But this depends on whether the CBL recycles or
sterilizes the old banknotes as it did during the mop up exercise. I also
remember how the CBL did not keep its word of replacing mutilated banknotes
when it printed the LRD 16b. Can we trust THIS central bank?
To conclude, and I mean conclusively conclude , should Liberia print new
banknotes of LRD 34b? Will the exchange rate of LRD to USD hit LRD450 to 1USD
as my bankmanager friend has told me privately? How will losses in LRD assets
affect the economy? How will the loss in purchasing power of those whose
earnings are in LRD be compensated? If the payment system cannot be
improved now to make it less cash intensive, can we really improve it after the
printing of the new family of banknotes? OR ARE WE PUSHING ON A STRING TO GET
US OUT OF THIS LIQUIDITY TRAP WITH OUR HELICOPTER MONEY SIMPLY BECAUSE WE WANT
TO FUND OUR BUDGET DEFICIT?
Paul Collins
[email protected]