Antidote for Liberia’s Current Ailing Economic Condition
Liberia is presently at a crossroad. The economy is in shambles and the currency is experiencing an all-time low. The economy is in a virtual collapse; growth projections are very low; there’s little or no Foreign Direct Investment since the ascendency of the Weah-led Administration in January 2018. The only recurrent expenditure of the government now is the payment of salaries, which in most times is delayed. There has been news of multinational corporations like Firestone, ArcelorMittal, MNG Gold etc. laying off staff due to lack of business. The government is strained with implicit liability of the tuition free pronouncement at all public tertiary institutions. The recent plunge in worldwide prices of commodities in the extractive industries is also compounding our woes. This situation has heightened the acrimonious level within the society. It is at this stage that the governed look up to the governors for solutions. Leadership must be exhibited in order to salvage the situation.
The situation we are in currently was basically the same when President Sirleaf came to power in 2006. As a way of solving this situation, she initiated a policy of “downsizing and Rightsizing” and effected the establishment or operationalization of anti-graft institutions like the GAC, LACC and the IAA. Some of those measures were unpopular but arguably effective.
The IMF and World Bank projected further economic woes if nothing is done. These projections comes from the backdrop that the economy expanded by an estimated 1.2% in 2018, a significant slowdown from a growth rate of 2.5% in 2017. The modest growth was supported by expansion in the mining sector (24.2% year-over-year), iron ore and gold production, bolstered by the opening of a new mining site by ArcelorMittal and increased investment in the gold sector. However, the non-mining sector, which accounts for about 90% of gross domestic product (GDP) contracted by 1.3%. Rubber production, a key cash crop, grew by zero%.
According to the IMF, inflation was at an all-time high of 28.5% by the close of 2018 fuelled by significant depreciation of the Liberian Dollar against the US Dollar (20.3% y-o-y) and monetary expansion. The current account deficit remained high (23.3% of GDP in 2018) as improvements in the trade balance were offset by the decline in donor transfer. The trade deficit narrowed to 17.7% of GDP in 2018 from 20.2% of GDP in 2017. Donor transfers declined by five percentage points to 15% of GDP in 2018, increasing the pressure on foreign reserves.
Additionally, the fiscal deficit widened from 4.8% of GDP in FY2017 to 5.5% of GDP in FY2018 due to a significant shortfall in revenues and higher-than-anticipated non-discretionary expenditures. The shortfall in revenues (20% of the approved budget) reflected slower-than-anticipated economic activities, tax waiver policies in the run up to the presidential elections, unresolved court disputes with respect to the collection of petroleum levy, and lower-than-projected donor grants.
The IMF furthered that GDP’s growth is projected to slow to 0.4% in 2019 and remain at about 1.5% over the medium term (2020-2021), well below the rate of population growth of 2.6%. The mining sector is projected to expand at a slower pace, due to lack of new investments and a moderate improvement in the terms of trade. Agriculture performance is projected to improve modestly as the returns on earlier investments in agricultural commercial crops (especially, in new rubber and palm oil trees) begin to bear fruit –although the difficult agribusiness environment is expected to constrain productivity.
Any economy that is in such chaos as ours will need increased revenue collection, systemic improvements in expenditure efficiency and prudent debt policy among others. As things stand currently, the following measures are presented as suggestions to reviving the economy and saving the state.
On account of the Liberian Dollar being at an all-time low within the country and the admittance of the country’s “chief financial expert” that large amount of money is outside the banking sector, it is suggested that the Liberia Dollar be demonetized. Demonetizing the Liberian Dollar will ensure that the Ministry of Finance and the Central Bank account for the total amount of Liberian Dollar in circulation. The demonetization will also render all money unaccounted for useless thus compelling the hoarders to bring them into the banking system. Furthermore, the measure will ensure that those hoarding the Liberian Dollar will abandon their quest thereby giving control of the economy back to the Central Bank and the Ministry of Finance so that they can control the exchange rate.
Demonetization of the Liberia Dollar is not a lasting solution. It is just a short-term solution that will see some form of parity restored but for a short period if, nothing else is done. To avert the possible return to this point after the demonetization of the Liberian Dollar, the Ministry of Finance, Ministry of Commerce, Liberia Revenue Authority, and Central Bank in collaboration need to ensure that all businesses importing into the country conduct their purchase through the Central Bank or with the Central Banks’s approval. That is every import must go through the banking system. This measure will not only ensure that all the money remains in the banking system but also ensure that due diligence is done as to the quality of goods brought in the country. Standards will be kept high, prices could easily be regulated as the ministries and agencies that are relevant to such process (MFDP, CBL, MOC and LRA) will be in full knowledge of the entire expenses incurred by the business entities.
Additionally, the government will also be able to demand her rightful revenue without being short-changed due to some non-existent complicated reasons presented by business entities. This measure also curtails money laundering and terrorism financing.
Given that business entities are making transactions through these governmental institutions, it leaves no room for fly by night businesses to be in operation. Businesses that are in the habit of dubbing government and other actors (individual and other businesses) by changing or selling from one ownership to another as though they are changing clothes will not have the opportunity to do so. These measures will ensure proper registration and adequate collateral to do business and do it legitimately.
As a result of such measure, the acts of fronting and illegal wealth acquisition will also be gotten rid of. Liberian businesses will definitely breathe a sigh of relief knowing that they can fairly compete (even in their shortcoming) with foreign owned businesses and survive. Another advantage is that government can easily make intervention in the market without losing track and ensure that the market forces do not operate at the exploitation of the citizenry or at the expense of others.
With such a controlled system and proper regulation of the market (just for the purpose of stability), the much controversial issue comes to the floor: the use of single or dual currency. Understanding that the above measures are being implemented, the best way to go is the use of a single currency regime. The single currency (Liberian Dollar) regime will ensure that the Central Bank maintain its control over the exchange rate and keep the Liberian Dollar stable.
Additionally, the single currency regime will ensure that the Finance Ministry and Central Bank and other relevant institutions perform as legislated. It is no doubt that transitioning to a single currency regime will be challenging but the move is possible. First, the government should ensure that all its paid services are rendered in Liberian Dollar. Next, the budget must be legislated in Liberian Dollar. Legislating the budget in Liberian Dollar goes with the expectation that all transactions involving the government (within Liberia) will be done in Liberian Dollar.
For consolation in these early stages, foreign currency transaction will only be done through the banking system. All cash-based interaction must be conducted in the Liberian Dollar, including salary payment. Knowing that government is presently the highest employer in the country, business entities will be compelled to accept Liberian Dollars, as they will need same to pay their taxes or deposit with the Banks in order to make additional imports.
There are several benefits associated with this transformation. One of such is the insurance that capital flight is curtailed or regulated. Another is that the government will always have the appropriate foreign reserve to enable its external transaction and balance of economy. In addition, the transition to a cashless economy will be enabled. The issuance of transaction cards (i.e Visa, VPay, etc.) by the bank could be mandated on all accounts thus encouraging businesses to accept cashless transactions.
These measures ought to be considered in order to improve the economy and ensure we escape the looming danger predicted by the IMF as well as ensure that such improvement becomes long lasting. Where there are alternative views, those alternatives should be brought forward, and an examination conducted of all possible solutions. In this, we will come up with what is best for the country. These considerations must be made void of politics and partisanship realizing that it is only with collective effort can we build our country and not arrogance, pride or bigotry. As a means or reminding ourselves of this collective strength, we say, “When the muddy man prays for Heaven to fall, he himself is below it”.
About the authors:
Aloysius Juwee Morris is an emerging Economist; a candidate for MSc in Applied Economics at one of China’s C9 Universities: Xi’an Jiaotong University. Xi’an, China
Johnny Baryougar White, is a former President of the University of Liberia Student Union (ULSU), a Human Rights Practitioner and a Fellow with the United Nations Office of the High Commissioner for Human Rights in Geneva, Switzerland with Master of Arts in International Relations.