Monrovia – The government of Liberia through the Ministry of Finance and Development Planning in a circular to all Ministries and Agencies dated August 25, 2017 has instructed payments of recurring expenditure for most expenditure line items to be made in Liberian dollars.
The de-dollarization circular stated “By directive of the Minister of Finance and Development Planning, please be informed that as of this communication which began effective August 25, 2017 , the following fiscal decisions will be implemented as part of a prudent budget execution.
Expenses in the following categories will be paid on a split between Liberian Dollars and United States dollars”.
According to the circular, signed by the Acting Comptroller and Accountant General, Ezekiel B. Korvah and Adolphus D. Forkpa, Deputy Minister Fiscal Affairs 100% (hundred percent) Liberian dollars payments are being made for Allowance, Stipend, Honorarium, Bonus, Consultancy(local), operation, special operation, domestic travel, rental and intelligence expenditure.
Partial Liberian Dollars and United States dollars payments are also being made in Consultancy (Local) 40 percent Liberian Dollars and 60 percent United States dollars, Goods and Services 70 percent Liberian dollars and 30 percent United States dollars, subsidy 80 percent Liberian Dollars and 20 percent United States dollars, Road contract (s) 50 percent Liberian dollars and 50 percent United States dollars, Purchase vehicle(s) 30 percent Liberian dollars and 70 percent united States dollars and petroleum 30percent Liberian Dollars and 70 percent United States dollars, and Hundred percent United States dollars payments are being made for foreign travels and transfers.
Before the circular, payments of government recurring expenditure especially payroll was made on the basis of 80 percent United States dollars and 20 percent Liberian dollars.
It is not clear what prompted the policy change but a source at the Ministry of Finance and Development Planning indicated that given the Government official exchange rate which is always lower than the market, taxpayers prefer to pay their taxes in Liberian dollars.
For example, at the current official (Government) rate of LD$116.33 and market rate of LD$123 a tax payer who owes US$100 in taxes gains LD$667 (12,300LD$ -11,633) if he/she pays the taxes in Liberian dollars.
The preference for tax payments in Liberian dollars has left the Government holding large sum of Liberian dollars as compared to United States Dollars.
The circular seems to run counter to recent statement by the Liberian Bankers Association quoted by FPA that “ 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”
It is not known what prompted the policy change, whether the Ministry of Finance and Development Planning considered the economic impact before initiating this fiscal policy action.
It is not also known whether the MFDP consulted with the Central Bank of Liberia and the Liberia Bankers Association before initiating this fiscal policy action.
Whatever the MFDP reason, the action is likely to have profound impact on the Liberian economy as more Liberian dollars are dumped on the local economy without corresponding increase in the amount of United States dollars that enter the local economy, the demand for US dollars increases thereby putting downward pressure on the Liberian dollars exchange rate.
For example according to the Third Quarter Fiscal Outturn (March 31, 2017), the Government of Liberia wage bill for the 2016/2017 fiscal year was US$287 million, or t about US$24 million monthly .
This means that in September 2017, the Government dumped about LD$27. 9 billion in the Liberian economy.
As a result of this commercial banks are rationing the withdrawals of Liberian dollars.
This situation is causing serious problems for banking customers are finding it difficult to cash higher denomination Liberian dollar checks.
According to the bank of Liberia Executive Governor quoted by the Liberian Daily Observer, there are about LD$12.7 billion in circulation as of 2016. Of this amount LD$1.5 billion is circulating in the banks and LD$10.7 billion outside the banking sector.
This means that the payments of Government salaries in Liberian dollars poses serious constraints on the banking sector given the limited amounts of Liberian dollars in circulation.
This also means that prices denominated in Liberian dollars mostly of imported commodities would rise sharply at the detriment of majority of the Liberian people who earnings are denominated in Liberian dollars.
According to the government third quarter fiscal outturn, the economy deteriorated at 0.00 in 2015 mainly due to the Ebola virus decease, it grew at 2.6 percent in 2016 but has been projected to deteriorate to 0.00 percent.
The decline in the economy, according to the report, is due to decline in the prices of Liberia’s key export earnings, UNMIL drawdown, depreciation in the domestic currency, financial sector vulnerability, and the 2017 general and presidential elections.
The infusion of billions of dollars of Liberian dollars by way of Government spending is likely to have adverse an impact on the financial sector as indicated by the Liberia Bankers Association.
The Central Bank of Liberia needs to initiate a swift policy action to address the situation.
Also, the economic implication could be profound for the next administration as it could inherit a cash scrap economy.