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Should Liberia Print New Banknotes Of L$34bn

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The Editor,

The government of Liberia has given these justifications for requesting the Legislature to print LRD34 billion

•       The new family of banknotes is to replace the existing multiple families of banknotes

•       To enable the CBL reset their accounting of banknotes so that they can now determine the actual quantity of currency in circulation

•       To enable the CBL embark on a system to keep the banknotes within the banking system so as to facilitate monetary policy effectiveness

•       To enable the CBL maintain a stable currency of LRD vis-à-vis the USD.

The Minister of Finance and Development Planning also argues that the core function of the CBL is to print money, hence the CBL should be allowed to carry out its core function.

My first response is that the core function of the CBL is NOT to print money, but to stabilize prices.  Issuing currency (or printing money) is just one of the functions or tools available to the CBL to achieve some of its monetary policy objectives.  That’s what the Act establishing the CBL says.  In the past, the CBL had delegated authority (by the Legislature) to print money as a means of effecting monetary policy and ensuring price stability, but that delegated authority has been revoked by the Legislature, which now requires that every intent by the CBL to print money must first be approved by the Legislature.

On the justifications provided, I am certain every rational Liberian wants to see:

•       One family of banknotes

•       An accurate record of the currency in circulation

•       CBL control over currency in circulation so as to make effective monetary policy

•       A stable LRD.

The problems we currently have however are multiple.  The first is that Liberia is in what appears to be a liquidity trap, as Keynesian Economists would say.  This is when almost everyone prefers cash rather than keep it within the reach of the monetary authorities.  Cash hoarding is a characteristic symptom of a nation that is in a liquidity trap.  When a nation is in a liquidity trap, Central Banks or the monetary authorities are rendered impotent because of loss of control over the currency.  CBL’s most recent annual report (2018) puts the figure at 94% of LRD in circulation that is outside the control of CBL and the formal financial system. 

The first question that therefore comes to mind is why are we in a liquidity trap? I think it is for several reasons.  The first is that high depreciation of the Liberian dollar makes it imprudent to maintain financial assets in LRD, as purchasing power erodes every time the exchange rate deteriorates.  LRD 1m at December 2016 was equivalent to US$11,100. This was before the controversial LRD 16b Today however (October 1, 2019) that same amount is equivalent to US$ 4,700.  This is a loss of US$6,400.  With a daily deterioration of LRD, it makes more sense these days to spend ones LRD than hang on to it.

Our payment system is also a culprit.  We like cash- raw cash.  The vast majority of the residents prefer cash because in market places and stores everyone finds it more convenient to pay for goods and services with cash.  The fish seller doesn’t want mobile money.  Our low literacy rate (UNESCO thinks more than half of the population are illiterate) is also a factor.  Few people accept checks, and fewer can accept payment by plastic.  We also have limited banking services in 14 of the 15 counties.  Where there are banking services, customer service is usually very poor, while operational efficiency is low due to constant banking system downtime which results into long queues, etc.  These and many issues making doing business with banks stressful.

Will this “helicopter money drop” as the Economist Milton Friedman would say get Liberia out of its liquidity trap?  CBL says we have around LRD 21b in circulation (even though they also say they no longer know now for sure how much money we actually have in circulation), but they want to print LRD 34b.  Is the extra LRD 13b intended to fund GoL’s budget deficits?  How is any of this going to get us out of the liquidity trap? Are we not “pushing on a string” as Economist John Maynard Keynes is reported to have metaphorically referred to limits of monetary policy and the impotence of central banks, when emphasizing that sometimes monetary policy works in only one direction, and that businesses and people cannot be forced to act a certain way?

If Nicolaus Copernicus’ quantity theory of money (QTM) is anything to go by, increasing the money in circulation will lead to a proportionate increase in the general price level of goods and services, as this theory (Monetary Economics) states that the general price level of goods and services is directly proportional to the amount of money in circulation.  Maybe this is why the depreciation of the LRD accelerated beginning 2017 following the beginning of the infusion of portions of the controversial LRD16b.  Money derives its value from goods and services.  Increases in money supply is therefore supposed to be a reflection of growth in the economy (GDP growth). With the CBL and the IMF estimating near zero percent growth, how is printing more money justified?  Shouldn’t we maybe begin reducing the quantity of LRD in circulation (mopping) to stabilize the value of LRD? Or is the color of the banknotes more important than the value and the effect on the economy?

A fundamental concern also is the current state of the CBL’s systems and processes.  Kroll, the international firm of auditors (investigators), painted a very troubling picture of the CBL’s systems and processes, and concluded that the CBL could not account for the LRD 16b that was printed.  The Special Presidential Task Force comprising the LACC, FIU, LNP, etc., also caused to be indicted some officials of the CBL because of the same reasons as the Kroll findings.  As if to confirm the state of affairs at the CBL, there is now the issue of the US$25m mop up money.  Do we trust THIS central bank? Money is about trust!

Some have intimated that GoL’s main objective is to make a windfall profit (seigniorage) of US$120m ((LRD 34b divided by LRD220)-US$34m).  This is not going to happen if the CBL actually demonetizes (recalls) the current families of banknotes in circulation of LRD 21b.  Instead, it is on the difference of LRD 13b that the CBL can expect to make some profit – about US$25m ((LRD34b-LRD21b) divided by LRD220) minus US$34m).  However, if the LRD experiences a sharp deterioration in value, even this profit will not be as high as indicated.  But this depends on whether the CBL recycles or sterilizes the old banknotes as it did during the mop up exercise.  I also remember how the CBL did not keep its word of replacing mutilated banknotes when it printed the LRD 16b.  Can we trust THIS central bank?

To conclude, and I mean conclusively conclude , should Liberia print new banknotes of LRD 34b? Will the exchange rate of LRD to USD hit LRD450 to 1USD as my bankmanager friend has told me privately? How will losses in LRD assets affect the economy?  How will the loss in purchasing power of those whose earnings are in LRD be compensated?  If the payment system cannot be improved now to make it less cash intensive, can we really improve it after the printing of the new family of banknotes? OR ARE WE PUSHING ON A STRING TO GET US OUT OF THIS LIQUIDITY TRAP WITH OUR HELICOPTER MONEY SIMPLY BECAUSE WE WANT TO FUND OUR BUDGET DEFICIT?

Paul Collins
[email protected]

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