Monrovia – In the past week, the George Weah-led government ushered in a new governor of the Central Bank of Liberia in what many say was a frantic response to rising cost of living and rapid depreciation of the local currency.
Report by Rodney D. Sieh, [email protected]
On Monday, the Senate Committee on Banking and Finance convened an extraordinary session in a bid to address the constant depreciation of the Liberian Dollar against the US Dollar and inject some insight into the state of the economy.
The session was held behind closed doors but the list of invitees which included Finance Minister Samuel Tweh, Commerce Minister Prof. Wilson Tarpeh, Acting Central Bank Governor (CBL), the Officer In Charge at the Liberia Revenue Authority (LRA) Decontee King Sackey and the former LRA Director General Madam Elfreda Tamba illustrated the seriousness the administration is paying to the concerns being expressed by Liberians far and wide.
Monday also marked the start of a CBL June 25, 2018 directive to all commercial banks requiring them to stop payment of all LRD Legacy Banknotes effective July 9, 2018. The directive in possession of FrontPageAfrica reads: “Banknotes in their vaults to the CBL to be exchanged for the new enhanced Liberian dollar banknotes. This directive, however, does not prohibit banks from accepting LRD Legacy Banknotes from the public. Commercial banks are in fact encouraged to continue to accept LRD Legacy Banknotes from the public and surrender same to the CBL. Commercial banks are advised to immediately commence sorting and presenting their LRD Legacy Banknotes to the CBL.”
The July 9, 2018 effective date only applies to the following counties: Montserrado and Margibi
While many are hopeful that a change at the CBL, the nerve center of the economy, could help curb the rise in inflation and the LD, others are not so sure that immediate impact would be felt on the exchange rate which is racing against time to edge the country’s 171st independence anniversary.
Many economists and observers say the dilemma of the economy warrants an entire overhaul of the governance structure if any real impact is to be felt on the exchange rate.
Additionally, production, import substitution, commercial and banking laws, single currency ($LD), investment incentives for Liberian-owned businesses may be the key to beefing up national savings and domestic capital mobilization, while leveraging regional trade and currency integration.
Currency Change a Gamble
One economist put it succinctly Monday: “You can’t simply change the currency as have been done in previous administrations and expect all to be well. Someone illegally prints more of the new currency – you arrest and take him to court, he bribes the judge / police and gets out and keeps printing – how is the problem solved. You’ll also need a buffer from the fiscal space to ensure an effective monetary policy. CBL cannot have any meaningful monetary policy in the midst of a non-policy driven economy and pro-poor means nothing at this point; a lop-sided judicial system, and a heavily subsidized national budget. Several factors underpinning the exchange rate crisis existed before but may now be on steroids due to anxiety – anxiety over an unclear development agenda. Our solution to the exchange rate crisis may not all be economics – they could be found in vision, governance and the rule of law.”
Ex-Minister Farhat: Export Concerns Key
“The major thing that is generating interest right now is the rate. But there is nothing we can do right now because we are not exporting. Since we are not exporting we are not earning high currency.”
– Mr. David Farhat, Former Minister of Finance
Mr. David Farhat, a former Minister of Finance and currently the director of the Graduate Program of Business and Public Administration, says the it could take some time before the economy turns around for the better, partly due to the lack of a strong export policy. “The major thing that is generating interest right now is the rate. But there is nothing we can do right now because we are not exporting. Since we are not exporting we are not earning high currency.”
What needs to be done, according to Mr. Farhat is the immediate cancellation of the Import Permit Declaration(IPD), a controversial policy which has been one of the major bottlenecks deterring local business people from attempting to enter the rice and other importation businesses.
Under the IPD policy, importers must request permission from the Ministry of Commerce and Industry (MOCI) to import specific goods from a particular country or trading zone, specifying the quantity and quality of the goods. Written requests must accompany the invoice and bill of lading. When importers receive import authorization, they then purchase an Import Permit Declaration (IPD) from Ministry of Finance and Development Planning. Importers arrange pre-shipment/destination inspection through a pre-shipment inspection company (currently – Bureau Veritas or BIVAC), at a cost of 1.5 percent of the shipment’s value.
For Mr. Farhat, abandoning the IPD step is crucial to alleviating the struggles many local businesses are experiencing today. “Even though we subscribe to the free trade economy, we are not doing it. Because in a free trade economy anybody can order and anyone can buy and bring into the market. To import goods, you have to go to the commerce ministry to get permission. So, they need to stop that.”
The former Finance Minister says it is important for the government to give support like foreign exchange for essential commodities for the economy. “This will help to reduce the prices and the government itself needs to reduce her expenditures – that’s another thing. They need to reduce their consumption pattern and start to pay domestic debts. The government owes a lot of debts and they need to start paying their domestic debts. They also need to meet with the businesspeople and reach some understanding on how they can meet these obligations. Because by paying them it will help find ways to put foreign exchange back into circulation.”
‘Lack of Confidence’ in Economy
Asked whether he sees the rate declining any time soon, Mr. Farhat says it is unlikely for now due to several factors. “One of the reasons the rate is going up so high is because there is uncertainty in the country, in the economy and that uncertainty in the country manifests itself in the economy. Even the businesspeople when they reduce the tariff, you won’t feel the effect of it because people will not be importing right now because they are afraid, they don’t know what will happen.”
Mr. Farhat explained that many Liberians and businesspeople are taking precautions and holding tight to their foreign exchange while others are avoiding putting their money in the bank for fear of a shortage in the not too distant future. “Even the Liberians themselves they not putting their money in the bank. So, the businesspeople, what is happening is because of the lack of confidence that exist now they are chasing the US dollar in the market.”
Mr. Farhat said some businesspeople are willing to pay high prices for exchange so that they can hold their money.
This is why he says the government needs to let the people know what is unfolding and curb the aggressive assaults on businesses. “When the commerce ministry started to fine the people 100,000, 25,000 and so forth, the economy you inherited is of such that you need to call the business people and talk to them. They can help too to reduce the pressure and that pressure you putting on them, it’s like you are going to war with them. They will hold back. So, what is happening too with the prices is that the people are selling on future replacement costs.”
Mr. Farhat explained that some of the major businesses are inventing smart ways just to stay afloat. “The goods they have in store they are selling on replacement costs, what it would cost them to replace two weeks from now or one month from now. They will increase it because they know what it would cost them to get the Liberian dollar – that’s one of the reason why the prices are going that way.”
Dialogue with Businesses Key
He said the government needs to call the business community and have a dialogue with them and let them hear some of their problems – and see how best it can help solve them. “Some of them the government owes them a lot of money and the way the government came to them in the beginning it scared the living daylight out of them. Even you or myself you got some money you don’t’ know what is going to happen – because if you go to the bank tomorrow the bank might say they don’t have any foreign exchange – so you will hold on.”
The former minister also said the uncertainty over the issue of the Eton and Ebamof loans is casting dark clouds over the economy. “This is a serious thing and they are not doing anything about it. These people can’t give Liberia any money. They don’t have it. And so, what they are going to do those papers they are signing they are putting themselves in the position that they are government agents off to go find money. Even if they don’t find it, government will have to pay them because they are agents. There are charges they will fine government, they will ask for a percentage. So, what will happen is that they will go turn around and come back and say they were not able to find anything because of X,Y, Z.”
Ex-Minister Barnes on Cash Collection Issues
Mr. Nathaniel Barnes, another former Finance Minister favors recalibrating the fiscal policy to a more balanced approach as opposed to a total focus on cash revenue collection.
Over the last two decades, he said fiscal planners in Liberia have created and driven strategies which focused almost exclusively on maximizing revenue collections. “It appears that, in the pursuit of this “ultimate objective”, they have lost the critical distinction between “cash” and “value”. While maximizing revenue collection is a critical cornerstone of economic growth and development, the astute planner and strategist must understand this objective can be effectively achieved by applying strategies which focus on creating value that will lead to an expanded revenue base.”
Mr. Barnes, who is also a former Ambassador to the United States of America wondered: “What if the government implemented a strategy/policy of providing tax incentives to entrepreneurs and investors who increase their number of employees?)After the appropriate analysis and projections, provide percentage reductions in applicable tax rates to selected businesses for an incremental number of Liberians they employ; i.e. employ 10 additional Liberians and LRA reduces your Corporate Income Tax Rate by 1%).
On the surface, he says, the associated opportunity cost is the tax revenue foregone. “However, upon closer examination and analysis, the derived value associated with such a scheme far outweighs the cost. First and foremost, this scheme expands employment thus purchasing power. Second, the incremental employees will pay taxes also offsetting the opportunity cost incurred and expand the tax base. Third and finally, the recipient of the incentive can use the tax savings to expand his/her business contributing to economic growth.”
“While maximizing revenue collection is a critical cornerstone of economic growth and development, the astute planner and strategist must understand this objective can be effectively achieved by applying strategies which focus on creating value that will lead to an expanded”
– Mr. Nathaniel Barnes, Former Minister of Finance
Managing, Controlling Waste Key
Such a scheme he argues, requires thorough study and analysis and must be implemented with strict monitoring driven by transparency and accountability.
Regarding the management and controlling of spending and wasted in government, the former minister averred that it is clear that the current government lacks requisite discipline to control its expenditures. This phenomenon, he says, is further exacerbated by the relatively small revenue base resulting in a very limited source of funding to offset the “runaway” expenses.
Mr. Barnes recommended that the government immediately implements strict austerity measures which should include an immediate hiring freeze, a significant reduction in foreign travel, freeze on procurement of major assets (vehicles etc.); close examination and possible curtail of benefits like gas, telephone credits, per diems, etc. and the implementation of a process to closely monitor and redeploy associated costs savings.
Mr. Barnes also called on the Weah-led government to consider purchasing cheaper vehicles and allowing custodians (those to whom the vehicles are assigned) to own them after a certain period of monthly salary reductions. “This would result in the exercise of more responsible care of the vehicles; but more importantly, this arrangement will shift the associated repair costs from the GOL to the new owner. Usually an automobile transitions from maintenance to repair costs by year three.”
Sin Tax Suggestion
Mr. Barnes also suggested that the administration implements a plan to levy a “sin tax” on tobacco products, alcohol and gambling to be used to exclusively finance education. “By Far, The Most Significant Obstacle to effective education in Liberia has been the absence of focused, consistent, fully dedicated, sustainable funding for an effective education strategy.”
Sin taxes are excise taxes levied on goods deemed harmful to society, such as alcohol, cigarettes and gambling.
The former Ambassador explained that in order to effectively address the challenge in a sustainable manner, the administration must develop and implement a mechanism which will source funding exclusively for education that will be predictable, consistent, sustainable and “extra budgetary.
He further called for the establishment of the Liberia Education Fund Trust with all proceeds directly deposited in the trust fund. “Every dollar from the fund must be utilized exclusively for education,” he said.
Explaining why the education angle is an economically sensible approach, Mr. Barnes said low elasticity of demand for these commodities (cigarettes, alcohol, and gambling), and so increase in taxes – and hence prices – will have only marginal effects on demand and hence import volume/ gov’t revenue. “Consumption of these commodities creates social externalities, and so consumers need to internalize the externalities (re: higher prices). There is a lot of room to strengthen policy to global standards. For instance, the excise tax is only 6 percent of the retail price of cigarettes in Liberia, while the WHO recommended benchmark excise tax is 75 percent of the retail price.”
With many Liberian still unsure how quickly the downturn of the economic decline will see a reversal for the better, veteran economist Samuel P. Jackson believes that the current state in which the dual currency regime has been prevalent have not been all that bad. “Both the United States dollar and the Liberian dollar as legal tenders freely floating has effectively stabilized price levels and supported the country’s economic recovery efforts in the postwar period. Inflation has been in single digits, from 9.9 percent in 2014 to 7.8 percent in 2015 according to the CBL Annual Report of 2015.”
Mr. Jackson however argues that the increased dollarization of the nation’s broad money supply, which according to the Central Bank of Liberia was at a ratio 70:30 at the end of 2015, limits the ability of monetary authorities to control the money supply and interest rates and obstructs the creation of a myriad of interventions to spur economic development. “The Central Bank, working with fiscal authorities should have the ability to sync policies that can control inflation while supporting the demands of the financial system.”
