The International Monetary Fund (IMF) says the depreciation is due to factors like excessive borrowing, the use of foreign currency to pay for imported goods and services, currency speculation, high interest rate and inflation.
If the Annual Reports of 2016-2018 are correct, Liberia has, allegedly, used US $600M to fight the decline of the Liberian currency exchange rate. The payment is comprised of $381M from the 25% of remittances withheld, $105M from the sales of T-bonds and the $119M withdrawals from the “Specific Accumulated Rainy-Day Money.” Yet, the depreciation continues, and it is now L$201 to US $1, from L$62 to US $1 in 2006.
The decline is due to many factors, including, but not limited to excessive borrowing by Liberian administrations, the demand to use foreign currency to pay for imported goods and services, speculation, high interest rate, inflation, etc., according to the International Monetary Fund (IMF). If Liberia produces rice, for example, merchants will use local currency to buy rice for sales, thereby, improving the value of the country’s exchange rate.
What is an exchange rate? It is the value of one currency when measured against the currency of a foreign country, according to Investopedia.
Currency exchange rate usually moves up and down, and the frequency is not good for any government and/or for investors. Therefore a government should develop economic tools to increase/decrease the local currency or increase/decrease the foreign currency in order to balance the exchange rate.
If a government wants to increase the value of the local currency, it will reduce the local currency by using foreign currency to buy up the excess local currency. Alternatively, it can reduce the value of the local currency, by printing new banknotes, of course not to replace the old banknotes.
It is not difficult to print new banknotes and increase the local currency, but it is difficult to generate/raise foreign currency to buy up the excess local currency. Nowadays, as Liberia demonstrated during the three years, the administrations generated cash from three sources: (1) withheld 25% of foreign remittance, (2) money withdrawn from the Net International Foreign Exchange Reserves, and (3) money received from the sales of T-Bonds.
Economic tool number 1: Mr. Nathaniel Paltry, the Governor of the Central Bank of Liberia stated, according to FrontPage Africa article dated 7/15/19, that the CBL will continue “… to implement the Remittance Split Policy, which was introduced in 2016. The total remittances were US $549.7M, US $571M and US $408M in 2016, 2017 and 2018 respectively. By applying the 25%, the government withheld US $137M, US $142M and US $102M in 2016, 2017 and 2018 respectively.
Economic tool number 2: At the end of 2017, the total unredeemed Treasury bond was L$7.6 billion (i.e., about the equivalent of US $60M cash received from customers). (See page # 28 of the 2017 Central Bank of Liberia Annual Report). mAnd at the end December 2018, the total T-bond issued in 2018 was L$6.0 billion (i.e., the equivalent of US $45M cash received from customers). (See page # 28 of the 2018 Central Bank of Liberia Annual Report).
Economic tool number 3: On page # 28 of the 2018 Annual Report of the Central Bank of Liberia, President George Weah Administration withdrew US $54.7M from the Liberian International Foreign Exchange Reserves. Former President Ellen Johnson Sirleaf administration withdrew US currency of $42M, $24.5M, and $53.2M in 2015, 2016, and 2017 respectively. (See page # 29 of the 2017 Central Bank of Liberia Annual Reports).
SCHEDULE OF CASH AVAILABLE TO BUY LIBERIAN EXCESS LIQUIDITY
DECEMBER DECEMBER DECEMBER
31, 2016 31, 2017 31, 2018 TOTAL
AMOUNTS FROM RAINY-DAY-SAVINGS 42,000,000 24,000,000 53,000,000 119,000,000.00
PROCEEDS FROM THE SALES OF T-BONDS N/A 60,000,000 45,000,000 105,000,000.00
25% OF REMITTANCES WITHHELD 137,000,000 142,000,000 102,000,000 381,000,000.00
TOTAL CASH RECEIVED 179,000,000 226,000,000 200,000,000 605,000,000.00
Having on hand US $600M during the three years, why did the government fail to improve the value of the Liberian currency? Additionally, if the government used the $600M to buy the excess Liberian banknotes, where are the old banknotes the government purchased? The two investigating Teams (PIT and KROLL) stated that L$4.3B old banknotes (i.e., US $36M) were ruined and L$1.4B banknotes (I.e., US $12M) were left in CBL vaults, a combined amount less than the US $605M. Better yet, why did the government print new banknotes in 2016, 2017 and 2018, if the country had excess local currency, which was depreciating the country’s exchange rate?
Did the government use the US $600M to reduce the local currency since t lhere is excess, which is depreciating the exchange rate? In the absence of records, let us revisit PIT’s and KROLL’s account of how the government accounted for the US $17M used in 2018. The government withdrew US $25M from the “Specific Accumulated Rainy-Day-Savings,” re-deposited US $8M, bought excess Liberian currency with the US $17M. Also, reported by the two Teams, the government did not destroy the old banknotes it purchased from money exchangers or transfer them into CBL reserved vaults.
Well, if the US $17M Mop Up exercise is an example of the method the government used to improve the Liberian currency exchange rate, the method indicates why Liberia has excess currency, which is depreciating its exchange rate.
2018 Central Bank of Liberia Annual Reports
2017 Central Bank of Liberia Annual Reports
2016 Central bank of Liberia Annual Reports
Credit: Observer through Allafrica