Liberia: Central Bank Announces New Strategy After ‘Failed’ US$25 Million Mopping
Monrovia – Liberia’s Central Bank says it is preparing to embark on another venture to salvage the country’s declining currency, announcing on Wednesday a set of new strategies.
Report By: Alpha Daffae Senkpeni / [email protected]
Details about how these new approaches would impact the local economy is still unknown, but the CBL, in a press release, disclosed that it is “concluding arrangements on the use of various monetary policy instruments to ensure a more stable macroeconomic environment in 2019.”
“The measure includes the introduction of a standing deposit facility, a standing credit facility, and CBL indexed bills and notes,” the the release added.
The announcement by the CBL comes following President George Weah’s second State of the Nation Address on Monday, January 28, when he hinted that his government was formulating plans to rescue the struggling Liberian economy.
Said Weah: “As a sustainable remedy to the exchange rate problems, the Central Bank is concluding arrangements on the use of various monetary policy instruments, including the introduction of a Standing Deposit Facility, a Standing Credit Facility, and CBL indexed Bills and Notes, to ensure a more stable macroeconomic environment in 2019”.
What Are The Strategies?
Standing deposit facility or SDF is an economic strategy viewed by many economists as “a strong tool” to suck out the surplus liquidity and alleviate the banking system’s problem.
Applied by other countries including India, SDF also involves the lending of money by the central bank without a collateral guarantee on a rate which is less than the official government rate.
As for standing credit facility, it is the collateralization of loan facility that provides funds to financial institutions and businesses at a predetermined interest rate, so as to cover end-of-day shortfalls that may arise in the daily settlement of payments.
The CBL is yet to reveal details about how these reforms will impact the economy – the long and short term benefits.
Declining Liberian Dollar
The exchange rate between the US and Liberian dollars has been steadily increasing since 2018, leaving a massive impact on ordinary Liberians.
Efforts by the country’s Technical Economic Management Team headed by Finance Minister Samuel Tweah in 2018 to mop up excess liquidity of Liberian dollars have shown little or no impact, as the exchange rate is is now trading at L$162 to a US dollar.
The government has consistently backed its decision to infused the US$17 million out of a package of US$25 million in the economy.
The CBL on Wednesday claimed that the rate was “at its lowest value before the government intervention” adding that $1.00 United States dollar was being exchange at L$180 Liberia dollars.
“Prior to the intervention, the Liberian Dollar performed poorly against the United State Dollar. The average Liberian-dollar exchange rate with reference to the United States dollar, depreciated from L$117 Liberian dollars to $1.00 United States dollar in 2017; to L$157.8 Liberian dollars to $1.00 United States dollar at the end of 2018,” the release said.
President Weah had earlier said on Monday that the US$25 million mop-up was a “short-term quick-fix”, intended to enable the CBL intervene in the foreign exchange market.
Trade Deficit Issues
At the same time, President George Weah has blamed the situation on the deficit in Liberia’s balance of trade, which includes the increasing demand for United States dollars to service imports.
Said Pres. Weah in SONA: “This massive depreciation of the Liberian dollar was primarily driven by the deterioration of the country’s terms of trade, and an increase in demand for United States dollars to service imports. Other factors were the legacy of the UNMIL drawdown and the lingering adverse impact of the EBOLA crisis”.
Trade deficit is an amount by which the cost of a country’s imports exceeds the cost of its exports. A way of measuring international trade, calculated by subtracting the total value of a country’s exports from the total value of its imports.
Liberia’s real economy is performing very weak, characterized by low export earnings as compared to payments for imports.
Between January and November 2018, Liberia’s trade deficit was US$561.8 million, representing 17.1 percent improvement, as compared to $677.3 million for the same period in 2017, said President Weah.
The President, however, stressed that despite optimism of recovery, Liberia’s “projected growth rates are still below the pre-Ebola period, when the economy grew on average by 7.5 percent annually”.