Liberia: Inflation is Miscalculated

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The Editor,

Fiscal deficit, the condition when the expenditure of the government exceeds its revenue in a year, is the difference between the two. Our PFM law requires fiscal balance ie balanced budgeting: we only spend what we generate. This is therefore a given. Since the war we have always deliberately avoided fiscal deficits.

2. Central Bank financing was also frowned upon and prohibited by the partners, so this too is a given. We are not allowed to borrow from the CBL.

The article says (verbatim) “The country satisfied the criterion on fiscal deficit, central bank financing, and gross external reserves in months of import cover, and slightly miss out the benchmark on average inflation. Provisional projections indicate that by end June 2022 review, the country’s performance on the primary convergence criteria would be sustained at three.”

Conclusion: even if the government doesn’t do anything, or if the government continues to be useless as it is, Liberia would still pass those 3 criteria.

1. Inflation is being miscalculated, as the computation model in use directly correlates the exchange rate between the LD and the USD to the calculated inflation rate.

Regardless of actual price movements, if the LD exchange value goes up for USD computed inflation increases; and if LD value goes down for USD, computed inflation goes down. See illustration in the below Facebook post

https://m.facebook.com/story.php?story_fbid=pfbid02BtuFBBvPdVtu8zB4Xy3hjC1rrCPK6FLRL922QfYEm7wXtSybowpnK6QVJ838bXkkl&id=100000953083241&sfnsn=mo

The cost of living is a good indicator of the fairness of the inflation rate. If we have to assess the performance of this government, we compare this government with the previous government.

2. The IMF through SDR allocations ($350m in August 2021 for Liberia) and ECF ($214m in 2019 for 5yrs) to Liberia is supporting CBL in two areas: (a) reserves accretion to ensure at least 3months of import cover and (b) stabilization of the exchange rate between LD and USD. Inflation computation is also tied to this support from the IMF as indicated in 1 above. In other words, the IMF financial assistance is responsible for the statistics that GoL wants to take credit for.

Paul Collins

[email protected]

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