Central Bank Governor Patray Calls For Policy Coordination To Tackle Liberia’s Economic Woes

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Monrovia – Amid the rapid devaluation of the Liberian dollars and the increase in prices of commodities, the Executive Governor of the Central Bank of Liberia, Nathaniel Patray has called for a concerted effort among key government agencies to tackle the country’s economic problems.

According to Governor Patray, based on projected global and domestic economic indicators, the Liberian dollar is expected to face further pressure during 2019/2020, unless are strong policy measures, including monetary policy, fiscal policy, and structural reforms are implemented. 

“This calls for policy coordination and synergy among key government agencies – Ministry of Finance and Development Planning, Ministry of Commerce and Industry and Central Bank of Liberia,” he said.

Speaking when he launched the inaugural session of the CBL’s Monthly Economic Forum (CBLMEF) recently, Governor Patray stated that since he took over the leadership of the bank in June 2018, the CBL has been working actively as part of the Technical Economic Management Team (TEMT) to address the prevailing economic challenges, especially the exchange rate and inflation situation.

He revealed that the Bank did achieve stability in the exchange rate between July and December 2018 due to intervention in the FX markets. 

However, he said the gain has been reversed mainly due to uncertainty triggered by “negative publicity about alleged missing L$16 billion and the US$25.0 million mop-up exercise. Growth is expected to slow the Liberian economy while inflationary pressure remains in sight as the Liberian dollar weakens with inflation rates in double-digits beyond 20 percent.” 

Developments in the Liberian economy for the medium-term (2019-2024), he added, are expected to be largely influenced by global economic developments, which are characterized by a high degree of uncertainty, slow growth in a number of economies, tightening financial conditions, debt distress, and most importantly, the ongoing trade tension between the USA and China.

Real GDP growth is projected at 0.4 percent in 2019 from an estimated of 1.2 percent in 2018, while the projection in 2018 was revised from 3.2 percent to 1.2 percent due mainly to a slowdown in economic activity, unfavorable terms of trade for primary commodities and higher global fuel prices. 

Speaking further, he noted that forecast of economic activity reflects weak performances in production, consumption and monetary conditions, and in addition to constrained prices of the country’s major export commodities. 

Economic activity remained subdued during Q1 2019 from an initial weaker position in the last two quarters, mainly driven by declines in consumers’ spending and production.

According to him, the Liberian dollar has witnessed a double-digit depreciation year-on-year. 

From March 2018 to March 2019, he noted, the Liberian dollar depreciated by 23.72 percent on average while the end-of-period exchange rate showed depreciation of 23.86 percent. 

He added that since mid-April 2019, the Liberian dollar has come under significant pressure with the average exchange rate depreciating by 6.5 percent between December 31, 2018, and April 23, 2019.

Causes of Depreciation

According to the CBL Executive Governor, key factors that underpin the latest wave of depreciation pressure include low supply of foreign exchange in the economy even though net remittances inflows remain positive; net inflows of personal remittances as at end-April 2019 showed a 28.9 percent decline year-on-year while the net of total flows declined by 33.0 percent. 

Other factors responsible for the continuous depreciation the country’s currency include the high demand for foreign exchange to facilitate import payments as the July 26 festive period approaches; current account deficit due to deteriorating terms of trade as evidenced by weak export earnings; capital deficit due to decline in foreign direct investment; the lingering effect of UNMIL departure; scale down in the activities of some International Non-Governmental Organizations (INGOs) in the economy; and Low budget support.

Inflation and Its Causes 

Giving further statistics on the state of the economy, Governor Patray outlined that inflation trended downward in Q1-2019 to 22.8 percent from 28.4 percent in Q4-2018.

He asserted that inflation remains high above long term trend – far above the ECOWAS convergence criterion of single-digit, mainly due to exchange rate depreciation and structural issues. 

“Forecast of inflation for Q2 2019, though slightly high, is below the 22.8 percent recorded in March 2019, on account of favorable commodity prices. However, inflation is expected to rise beginning the last month of the quarter due to likely depreciation of the Liberian dollar as a result of increased demand for foreign currency.”

He outlined that sources of inflationary pressure include the pass-through effect of the depreciation of the Liberian dollar due to a relatively high Liberian dollar liquidity (about 92 percent of currency outside the bank); the high dependence of Liberia on import commodities (over 80 percent) which puts high demand on foreign exchange; surcharges on petroleum products; arbitrage practices by some businesses for profiteering; and infrastructural challenges, high energy and utility costs, according to the CBL boss, are all sources of inflation.

‘Concerted Efforts’ Needed

While calling for concerted policy coordination and synergy among key government agencies including the Ministry of Finance and Development Planning, Ministry of Commerce and Industry and Central Bank of Liberia to tackle the country’s economic problems, Executive Governor Patray noted that the CBL remains committed to promoting price stability as its principal objective.

Executive Governor Patray: “Based on projected global and domestic economic indicators, the Liberian dollar is expected to face further pressure during 2019/2020, unless there are strong policy measures, including monetary policy, fiscal policy, and structural reforms are implemented. This calls for policy coordination and synergy among key government agencies (Ministry of Finance and Development Planning, Ministry of Commerce and Industry and Central Bank of Liberia).”

He mentioned that the Bank’s policies are geared toward contractionary/tightening monetary policy.

To achieve its goal, he sated the Bank has introduced several monetary policy instruments under its new monetary policy framework, including but not limited to Sale of CBL-Indexed bills, Standing Deposit Facility, and Standing Credit Facility.

In addition, the Executive Governor indicated that the CBL continues to implement the Remittance Split Policy (RSP) as the key instrument for building the Gross International Reserves (GIR) for the purpose of withstanding unexpected external shocks to the economy.

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