Economic Stimulus (Monetary Stimulus and Fiscal Stimulus) Explained in One Minute
By: William F. Ponder, Jr.
Paper developed from my presentation notes as a panelist at the Globe Afrique forum held on Saturday, February 24th, 2018 and from additional research
Liberia is one of the world’s poorest economies. About 60 percent of the population of Liberia lives below the poverty line. Latest available Human Development Index (HDI) rates Liberia at 0.427 whereas Norway, which leads the world is rated at 0.949. According to the Atlas method in (current US$).
Liberia’s GNI per capita is recorded at $370 annually. (World Development Report, Liberia At A Glance – Economic Growth Data, 2015 -2017)
The Liberian economy like those of many developing countries in Sub-Sahara Africa is dualistic in nature. It is characterized by a formal and an informal economy. Beyond this dichotomy, the Liberian economy is largely controlled by foreigners. Multinational companies and foreign wholesale and retail businesses are the major importers and exporters. Consequently, they contribute the largest share of taxes to the government. The informal economy comprises of a mix of rudimentary economic activities and interactions. They include menial labor and other subsistent forms of livelihood including farming and petty trading. These economic activities are neither taxed nor regulated by the government. For the most part, activities in the informal economy are not included in the Gross National Product (GDP) or the Gross Domestic Product (GDP).
According to the World Bank data, Liberia recorded a GDP of 2.101 billion (US dollars) as of 2016. The real GDP of Liberia contracted by 1.64 percent in 2016 and grew at approximately 2.1 percent in 2017. Reports by the Central Bank of Liberia (CBL 2017 Annual Report), reveals that the projected expansion in real GDP is attributed to significant increase in output in the mining and panning sectors because of the anticipated rise in industrial gold production and manufacturing. (CBL 2017 Annual Report)
Based on data from the Liberia Labor Force Survey and Trading Economics, Liberia’s national workforce is recorded at 1.6 million and comprises of workers between the ages of 16-65. Of this amount, 195,000 or 12.18 percent represents the wage-earning employment workforce and 87.82 constitutes the vulnerable unemployed.
The formal economy is characterized by a heavy reliance on the extraction of non-renewable natural resources such as iron ore and gold; as well as renewable natural resources such as rubber and oil palm. Such a resource-dependent economy or otherwise referred to as an “enclave economy” produces fewer jobs and thus does not induce employment growth.
The recessionary trends in the economy came about as a backdrop to the 2014-2015 Ebola epidemic and came close on the heels of the precipitous decline in global prices for iron ore and rubber, Liberia’s two primary exports.
By the end of June 2016, the Ebola outbreak had further decimated an already fragile economy. The Sirleaf administration had admittedly failed to diversify the country’s productive output through the introduction of labor-intensive industries that would have expanded the domestic production of goods and services.
As a result, we have witnessed an increase in inflationary pressures. The annual average headline inflation in 2017 was 12.4 percent from 8.8 percent at the period ended 2016, mainly underpinned by a 24.5 percent depreciation of the Liberian dollar. Reflectively, there was an exchange rate decline of
L$125.50/US$1.00 in December 2017 compared with L$100.80/US$1.00 in December 2016. These economic trends have led to an increase in the cost of living. (CBL 2017 Annual Report)
According to Trading Economics, Liberia recorded a current account deficit of
25.10 percent of the country’s GDP in 2016. The latest reports by the Central Bank of Liberia revels that the current account balance deteriorated by 6.5 percent to a deficit of US$346.5 million during 2017, from US$325.4 million deficit reported in 2016. It is stated that the deterioration in Liberia’s current account deficit in 2017 was due to a sharp deterioration in net secondary income owing to a 43.6 percent projected a reduction in receipts. However, the latest current account deficit when compared to the US$852.3 million deficit recorded in 2015, did register an improvement of 59.
The need for a robust economic stimulus program:
While the recent election of 2017 brought with it opportunities for a newly elected government to infuse dynamism into the affairs of government, it has also brought to the forefront some of the intractable challenges that the Liberian economy has been faced with in recent years.
As such, I’m of the opinion that the economy will require major reforms in the real and financial services sectors along with an ambitious infrastructural development program if it is rid itself of the current recession. The broad goals of economic diversification, inclusiveness, and sustainability should form the primary goal of structural reforms.
We have witnessed that the government’s much heralded Pro-Poor Agenda although garnering a high degree of anticipation, has yet to be comprehensively adopted. Such an agenda will need to be well-crafted. In addition, it must provide specific core policy objectives, targeted capacity building programs, and a set of well-defined outcomes.
By all indications, the Liberian economy is not producing adequately to meet current budget demands or to support a 4.02 percent growth in real GDP that has been forecasted for 2018. Many of the earlier forecasts, however, did not account for a deteriorating term of trade condition and the accompanied liquidity crisis we have since witnessed. According to recent reports, amidst the need for rigid austerity measures, the government released its recast national budget for FY 2017/2018.
According to the release, the recast budget is registered at US$536.2 million, a decline of US$27 million from the original budget that had been signed by the former president Ellen Johnson-Sirleaf of US$563.5 million. (Henry Karmo, FrontPage Africa, “Executive Presents Revised Budget to Legislature with Major Austerity”, March 9, 2017)
Austerity measures and the current recast budget.
The government has announced a set of austerity measures. While an important initial step, US$27 million doesn’t seem to go far enough. It will require an approximate 30 percent of additional cuts in wasteful spending particularly of recurrent expenditures, to be able to level off major imbalances in the budget. With a downturn in business activities, it is expected that the government will experience major a challenge to raise the expected tax revenues of US$401.4 million which represents 71.2 percent of the recast budget. If appropriate measures are not taken in the short-term to go beyond the existing cuts earmarked in the recast budget to further strengthen fiscal management and curtail waste and corruption, the government may find itself running an intractable budget deficit by the close of the FY 2017/2018.
Import Substitution and Export Diversification.
Along with drastic austerity measures, the government will need to institute a robust short-term stimulus program. These measures should involve the employment of monetary and fiscal policy changes that are aimed at jumpstarting growth in the economy.
In my dialogue with some colleagues, I have laid emphasis on the broad goal of instituting import substitution measures alongside a gradual diversification of exports. We’ve already noticed that the options available in an already tight liquidity situation will require adherence to a well-targeted set of initiatives that would include the streamlining of trade barriers. In addition, authorities may seek external support to recapitalize the banking sector as a way of funding agriculture and agro-based industries and an expansion of labor-intensive low-cost manufacturing.
Expanding agriculture and agro-based industries with an emphasis on mechanized rice production.
Discussions and actions taken so far in an attempt to reduce the price of imported rice have been gravely inadequate. Observably, with the economy spending on average of approximately $US240 million per year on rice imports, this is one area where import substitution policies could work. The Central Bank of Liberia (CBL) reports that the international price of rice has witnessed a rising trend from the beginning of 2017. At end-2017, the international price of rice was projected to rise by 3.5 percent to US$401.9 per metric ton, from US$388.3 per metric ton recorded at end-2016 and by 5.7 percent when compared with the value per metric ton recorded in 2015. The estimated rise in the price of the commodity during 2017 was significantly occasioned by scarcity amid increased demand mainly from the Asian region. (CBL 2017 Annual Report)
Agriculture is a major sector of the Liberian economy worth 38 percent of GDP and employs 70 percent of the population. Unfortunately, much of this production is at subsistence level and provides a very little contribution in the way of tax revenues to the government. Liberia has a climate that is favorable to farming with vast forested land and abundance of water. Notwithstanding, the low yield from food production including rice has precipitated 60 percent of local food consumption to be imported. This has led to the significant loss of foreign exchange.
Any actions taken to introduce mechanize farming to increase food production and expand agricultural export will not only markedly reduce the country’s high import bill but also lead to growth in tax revenues through a boost in trade and employment activities.
Alternative solutions to infrastructural development.
I would recommend seeking concessional loan arrangements from either the Exim Bank of China or that of India to support agricultural financing and infrastructural development. Along those lines, the government should also consider reopening the Agricultural Cooperative Development Bank (ACDB) and the National Housing and Development Bank (NHSB) with the goal of harnessing financial resources in both the agricultural and housing sectors. It is significant that loans in these areas consider Socio-Economic Impact Assessments with quantifiable outcomes that reflects long-term benefits to the economy.
The government should also seek to establish a formal low-cost housing market that is supported by the introduction of mortgage-backed securities. If the 60,000-member government workforce could be adopted as a test case, we could later have principal private sector employers buy into the scheme, and gradually housing development could become tied to market forces.
Another targeted stimulus endeavor by the government should involve road development. Liberia is said to have a deficit of paved roads recorded at 7 percent of total roads. Road transportation access is critical to the movement of people, goods, and services. I would suggest that a stakeholders meeting be held between government and development partners to study the possibility of halting the financing of the continuous reconditioning of laterite roads but rather, concentrate on adopting a framework of only funding the all-weather pavement of all roads in the country. The repeated financing of laterite roads on an annual basis is not only a waste of resources since the roads are subjected to a deterioration during the raining season but overall, it’s an ineffective use of aid resources.
The government should consider reviewing its tax code with the goal of adopting measures to ease the process of tax administration. By working with commercial banks tax payment arrangements could be incentivized and digitized. I would also recommend that certain new taxes be introduced such as a luxury tax or taxes on certain cigarettes and liquors that would go toward expanding infrastructure development in the education and healthcare sectors.
Instituting a digitized Universal Identification System
To support the expansion of the formal economy and to strategically allocate where appropriate an engagement of a larger segment of the national workforce into wage-earning employment endeavors, the government must embark on a Universal Identification System (UIS). During the period of the election, a national ID process was commissioned by the previous government. However, much like several other attempts to set up a national identification system, it is either not properly implemented, or not comprehensively administered. To ensure that a national identification system is useful in tracking and deploying of both human and financial resources, the system must be digitally tied to wage-earning, insurance, banking, telecommunications, education, healthcare, and business activities.
Mobilize domestic savings and capital formation through mobile banking.
In the last decade, mobile money services have expanded in several African countries with the diversification of activities in Kenya and Tanzania.
The mobile money has proven to be an accessible tool for payments. Moreover, other financial services, such as credit, insurance, and savings have been rolled out in several markets, allowing people to better manage financial risks and household shocks. Credit services enabled by mobile money have proliferated in the region: from six services in Kenya in 2011 to 39 services in 11 other countries in 2016. The inclusion of mobile money has led to expansion and growth of formal economies and has introduced new ways of tracking transactions and markets to promote the growth of banking and insurance. Utility companies have also been able to introduce mobile money in their attempts to institute digital billing and payment arrangements with clients in remotest regions of these countries.
I would thus recommend that Liberia expands its drive to institutionalize mobile money platforms in the country. The critical tasks of safeguarding the telecommunications infrastructure and setting up the regulatory and legal framework to protect consumers and users would be the major challenge. Moreover, the government can seek external training for those involved in this emerging industry.
Engagement with the Diaspora
In the last 10-20 years, increasing focus has been placed on the diaspora’s role in Sub-Saharan Africa. It has been recorded that over US$ 3 billion dollars of remittances have been transferred to the region annually. Liberia has similarly benefitted from not only remittances but direct investment in local construction and the retail trading business. More recently, several other countries in the region have involved their diaspora citizens in the bridging the skills gap in training and establishing business partnerships across the continent. (Trading Economics – Economic Data, 1990 -2016).
The World Bank’s ease of doing business index ranks Liberia 172 out of 190 countries. This means that there are major challenges faced by would-be investors interested in doing business in Liberia. This is an area where the involvement of the government must improve to encourage a shift from a heighten appetite to seek government jobs toward a broader participation of diaspora Liberian citizens in the private sector. The various bottlenecks and bureaucratic red-tape needs to be eliminated. Along these lines, a database of diaspora Liberians interested in doing business should be commissioned. If possible, an ombudsman should be established to administer a one-stop shop registration process for the opening of new businesses. Some areas of streamlining and improvement should include assisting with construction permits, getting access to electricity, registering of property, clearing of goods from the port, and acquiring credit. There must also be laws to protect Liberian businesses from unfair foreign competition. This would mean that a diaspora business venture should not be viewed as a foreign business but rather, should benefit from certain protections as laid out in the laws to protect the indigenous home-grown business.
The government should also seek support from the World Bank to establish an Open Knowledge Repository that would be accessible via the internet and through mobile phones. It should provide the opportunity for the sharing of ideas in every major field or business undertaking. As a networking platform, it would serve to bring Liberians in the diaspora together through virtual links.
The Liberian government could also endeavor to engage its diaspora citizens in the establishment of a Diaspora Investment for Liberia. The process could start whereby the contributions from diaspora citizens is pooled into a registered fund that is then registered with any of the world’s top stock exchanges most preferably in the United States. The capital gains from the investment could be plowed or converted into major economic development initiatives such as mortgage-backed lending packages for the construction and sale of middle to high-income housing development. It will also provide recapitalization of local banks by expanding capital investment within the economy.
Liberia’s monetary system and policies for reform:
The primary role of a central bank is to manage a nation’s financial system and promote long-term conducive pricing conditions. There are several instruments that should be at the disposal of a central bank to achieve these goals. In Liberia’s case, due to the uniqueness of its monetary system, the central bank has never operated as a “bank of issue “. This happens to be an important role of a full-fledged monetary authority. Since Liberia decided many years ago to adopt the use of the US dollar as a legal tender, the country’s monetary system has depended to a large extent on its political and economic relations with the United States. This also meant that the domestic economy has been traditionally subjected to the negative impact of exogenous currency shocks.
During the period before the global oil crises of the mid-1970s when Liberia experienced relative stability and good relations with the United States, the country did benefit from what I would call a pseudo sense of economic and financial stability by its use of the US dollar as a national currency. The very sustenance of the economy was driven by foreigners mainly the United States for which Liberia promoted by adopting an Open-Door Policy during the Tubman Administration. Unfortunately, this policy arrangement kept the economic base unrealistically small and placed a heavy fiscal reliance on foreign multinationals (i.e. Firestone, LAMCO, LMC, Bong Mines, etc.). The ruling class did not capitalize on our special political and economic relations with the United States to expand and diversify the domestic economy, strengthen the productive base, or harness the adoption of a national currency backed by strong external reserves. I call this period, a very lazy approach toward national economic management. The structural and managerial deficiencies of the Liberian economy was being covered up by us using the world’s most convertible currency. As such, the US dollar stood as a type of guarantor of Liberia’s monetary and financial system.
Reports, however, suggest that after the spiraling events of the 1970 oil-crises, the Tolbert Administration had begun to hold talks with authorities at the United States Federal Reserve and with the IMF to gradually institute a national currency regime for Liberia that would’ve been backed by a strong US dollar external reserve position. Unfortunately, that was short-lived as the 1980 coup derailed those possibilities. Everyone knows that the political and economic conditions in Liberia which prevailed between 1943 and 1980 did not last.
Since 1982 when Liberia first found it necessary to introduce the Liberian five-dollar coin as a solution to addressing the devastating deflationary effects of capital flight; the drawbacks from a de facto application of the US dollar as national currency has become evident. I once stated in a paper that proponents of what I then referred as the “dollar myth concept” view the US dollar as a panacea to all of Liberia’s monetary and trade problems. I also recommended at the time that Liberia needed to adopt an official national currency within a framework and a timetable that would allow for the strengthening of the domestic currency by building strong external reserves. Unfortunately, that was in 1997, and everyone knows what was politically pertaining in Liberia during that time.
Whereas I wouldn’t blame the current financial sector administrators for the structural limitations of the relatively weak monetary system which they’ve inherited, I would believe that immediate attention should be made toward adopting a comprehensive set of new policies. These policies should be geared toward curtailing the impact of a currency system that is vulnerable to external shocks. We must come to the realization that we can’t and will never again return to the days when Liberia depended solely on the United States and its currency as a guarantor of domestic economic stability. And even today, to place a heavy reliance on foreign direct investment driven by the new wave of multinationals like China Union and Accelor Mittal as an approach toward alleviating the employment crisis; is just sheer policy laziness in my opinion. This indicates that even today there are some Liberian economic managers who are relying on approaches and policies of the past which had kept the economy small and under-productive and largely driven by external factors.
Liberia’s reliance on imports has placed a burden on our foreign exchange position. Thus, the government should work along with the Central Bank of Liberia (CBL) which is the fiscal agent of the government to institute expenditure switching macroeconomic policy. The aim of the policy would be to balance the country’s current account by altering the composition of expenditures on foreign and domestic goods.
Consequently, the Ministry of Finance and Development Planning needs to develop some revenue-and-expenditure-switching policies to expand the revenue base and reduce expenditures on activities that provide limited socio-economic returns. This will also include controlling corruption and waste of financial resources.
The main challenge to this undertaking is that Liberia’s current financial system is still very underdeveloped despite the expansion of the banking system within the last 12 years. There is still a lot of room for the legitimate application of capital and portfolio investment that could be harnessed to spur home-grown economic development. To start, the CBL will have to get more involved in open market operations which are supposed to be one of its cardinal roles; the buying and selling of government-issued bonds. We are learning that there is a movement toward that endeavor, but more transparency is required to promote participation and bring about positive results. Such a move would cause adjustments to short-term interest rates and impact money supply levels. Without such capacity, the CBL will have limited influence over adverse pricing conditions or to expand and contract money in circulation. It is also evident that the Liberian financial sector needs to undergo a major policy shift by instituting structural reforms that would enable the central bank to operate as a full-fledged monetary authority. Without such reforms of the financial system, the goal of achieving long-term price stability in Liberia will continue to be elusive.
Liberia’s ongoing development paradigm has led to a huge import bill to meet the needs of heavy-duty capital equipment that was required to jump-start the operations of many large multinationals that are starting to operate in the country during the beginning of the Sirleaf administration. Also, the drive to construct new roads, rebuild the energy grid, and meet the demands for housing expansion etc. has placed pressures on demand for hard currency. This is going to be a trend for some time to come if expenditure-switching policies along with import substitution policies are not embarked upon. Therefore, the Ministry of Finance and Development Planning along with other government stakeholders need to analyze imports to evaluate where out-flows of US dollars to pay for non-essentials can be curtailed or taxed upward and where through the switching of tax rates, government can generate more revenue of hard currency from certain types of for-profit foreign-emanated services i.e. bank transfers, Western Union, insurance etc.). In short, we need to be smarter in managing the demand for foreign consumption and expand access to domestic production.
Lastly, I would like to state that several central banks particularly those going through financial crisis have adopted “inflation-targeting policies” as a pragmatic response to the failure of other types of monetary policy regimes. To be brief, “inflation targeting” is an economic policy in which a central bank estimates and publishes a projected, or “target” inflation rate and then attempts to steer the actual inflation level toward the target inflation rate. The Liberian central bank should consider inflation-targeting as a significant policy objective in controlling inflation. Again, it would go back to my earlier statement of operating as a full-fledged central bank. But I remain convinced that inflation-targeting measures are necessary for the Liberian economy which continues to exhibit a heavy demand for imported goods and services.
De-Dollarization and when to adopt a national currency
As for the problems associated with operating under a dual currency regime, I’m convinced that dollarization fuels socioeconomic disparities in the country whereby shadow winners (those with institutional access to hard currency) and shadow losers, (those having absolutely no such access to hard currency) are made perpetually better or worse off without having to invest a dime. Until there is a long-term strategy to move Liberia toward an official national currency while building our external reserve position and avoiding external shocks, the Liberian economy will continue to be impacted by exchange rate depreciation and inflationary pressures. So far, we’ve seen that the response by authorities toward alleviating currency shocks and mitigating the effects of liquidity crisis caused by capital flight has posed a bit of a challenge. I must, however, give credit to the monetary authorities for employing the tools at their disposal toward maintaining a protractive level of price stability before we experienced the inflationary pressures witnessed between 2016/2017. It is clear however that these pressures will continue it into the near future if robust macroeconomic measures that I’ve expounded on are not instituted to strengthen the economy’s ability ward off externalities. The government will need to strengthen its external reserves and state policies to promote capital formation within the economy.
Conclusion and Acknowledgement:
The need for targeted reforms to achieve growth cannot be overemphasis. Once the implementation of policies is geared toward expanding and redistributing income such that the lowest percentile of income earners is lifted out of poverty, the aim of a pro-poor policy agenda would be deemed achievable. Furthermore, if growth can be accompanied by the breaching of the gap between the formal and informal economies and adding of more wage-earning jobs, Liberia’s path of promoting sustainable economic recovery would be guaranteed. However, these goals cannot be achieved by mere happenstance. It will require the political will and fiscal discipline to substantially reduce waste and corruption. Concomitantly, the government will need to target a robust set of short-to-medium-term policies several of which I’ve enumerated on in this paper.
I wish to express my thanks and appreciation to the administrators of Globe Afrique in the persons of Messrs. Lawrence Kennedy and J. Nhinson Williams; first, for the opportunity to share these views as part of a two-person panel during the weekly forum of Saturday, February 24th, 2018 and at this instant; through the presentation of this paper.
Central Bank of Liberia, (CBL) Annual Report, 2017, CBL (Highlights and Statistical References), January 23, 2018
Ponder W. “Macroeconomic Stabilization and the Budgetary Implication for Liberia in Post 2017”. Published in the Global News Network (GNN) online magazine – August 27, 2017
Ponder W. “The Macroeconomic Challenges of Adopting a Realistic Exchange
Rate Regime for Liberia”; Lead Article – Liberia Studies Journal, XXII, 2 (1997) – Published by the Liberia Studies Association
Ponder W. “My Response to Developing an Inclusive Financial Sector:
Liberia’s Case Study”, Presenter – African Studies Association Lecture Series, Boston University African Studies Program, 2001
Karmo, H. FrontPage Africa, “Executive Presents Revised Budget to Legislature. with Major Austerity”, March 9, 2017
Report on the Liberia Labor Force Survey 2010, Liberia Institute of Statistics and Geo‐Information Services (LISGIS)
World Development Report, Liberia At A Glance – Economic Growth Data 2015 -2017, the World Bank Group
Trading Economics, Liberia – Economic Indicators 2010 – 2017
About the author:
Mr. William Ponder is a graduate of the University of Liberia where he earned a BSc in Economics and from Boston University where he earned an MBA in Public Management.
Mr. Ponder has had over 30 years of work experience as a public policy specialist and banker. He once served as an economic researcher with the National Bank of Liberia (NBL), the precursor to what is today, the Central Bank of Liberia (CBL). More recently he worked for several years in private banking and investor services with the Brown Brothers Harriman and Company, the oldest private banking firm in the United States. The author is an avid researcher and has published several articles major among which includes, “The Macroeconomic Challenges of Adopting a Realistic Exchange Rate Regime for Liberia” a 38-page leading article published in the Liberia Studies Journal, XXII 2, 1997