Economic Stabilization and Liberia’s Looming Recession

I can confidently predict that without a strong monetary policy framework from the Central Bank of Liberia, on December 31, 2019, the Liberian dollar will fall to a selling price of 1 USD to 228.22 LRD – the worst level in Liberia’s history.

The keys to stabilizing the Liberian economy include a strategic plan to boost Liberia’s credit rating, invest in residential construction, boost remittances from the diaspora, develop information repositories to make informed decisions, reduce political tensions, improve Liberia’s standing on the World Bank’s Doing Business report and allow the Central Bank of Liberia to operate independently.

The big three global credit rating agencies, Fitch, Moody’s and Standard & Poors do not rate the creditworthiness of 11 out of 15 ECOWAS [1]countries. Consequently, these countries are ranked at the bottom layer of the United Nations Human Development Index.

Why Global Credit Rating Matter

Ratings are key determinants in the amount and cost of capital inflows to countries through the international bond, loan, and equity markets. International investors use the services of the big three international credit rating agencies (Fitch, Moody’s, and Standard & Poors) to gauge the creditworthiness of sovereign government debt before investing in those debts.

For example, on August 5th, the Government of Ghana, which recently enjoyed a credit upgrade from Moody’s, was able to raise nearly one hundred and thirty-eight million dollars ($137,924,297) through an offering of 90-day T-Bills. On the other hand, the Central Bank of Liberia was able to raise an estimated three hundred and ninety-six thousand dollars ($396,094), even though the CBL T-Bills pays a higher yield.

The unrated countries: Benin, Burkina Faso, Cape Verde, Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Sierra Leone, and Togo fall in this unrated category because they either have large capital payments in arrears or in the case of Liberia, has received a substantial amount of debt forgiveness which show they are not a good credit risk. The unrated countries have serious liquidity issues, an inadequate capacity to generate revenue, and a high level of risk that international investors cannot measure beyond junk status.

A country that loses its credit ratings or one that has its ratings downgraded usually suffers a fatal economic consequence because it restricts the country’s ability to borrow money on the international markets. Without access to capital, growing the Liberian economy becomes an exercise in futility; not unless the CBL reconceptualizes how to access external capital. Hence, one solution to growing the Liberian economy and stabilizing the Liberian dollar lies in rethinking how the country access external capital and invests in human development. The solution lies in an economic approach that has worked extremely well in other countries.

Rebuilding the Liberian Economy

Again, I can safely predict, that without a strong monetary policy framework from the Central Bank of Liberia, one should expect the Liberian dollar to fall to 228.22 against the U.S. dollar on or about December 31, 2019. Sure, Liberia could hope for an escalation in the trade war between China and the United States, which may lead to a currency war, thus weakening the dollar against other currencies – that is hopeful thinking and not an economic policy or strategy!

On August 5, 2019, China’s yuan fell to an 11-year low as trade tensions with the Trump administration intensified. Nevertheless, as Dr. Benjamin Ola Akande stated in his 2008 open letter to President Obama, “Yet, the fact remains that hope does not stop a recession, Hope cannot create jobs. Hope will not prevent catastrophic failures of banks. Hope is not a strategy.” 

To be clear, Dr. Akande was not being critical. He was encouraging a new president to give hope and strength through his leadership. Liberians will become more enthusiastic about investing in Liberia when there’s something to look forward to and when the current leadership can put forth a vision that shows the way forward.

In light of Liberia’s inability to access capital markets due to its poor or nonexistent credit rating and its reliance on selling itself short through concessionary agreements that aren’t been properly assessed, an immediate solution to improving the Liberian economy lies in an influx of personal remittances from the diaspora. Then again, the political tension in Liberia is so high that many in the diaspora may withhold remitting to family members if they believed it would harm their perceived enemies. Hence, the message to encourage remittances should come from a credible source with an ability to inspire nationalism.

Over the years, personal remittances to Liberia have fallen dramatically. All things being equaled, remittances can spur economic growth. The World Bank’s Financing for Development states migrants’ remittances and other diaspora capital are among the vital resources underdeveloped countries could use to finance their development objectives. Funds transferred for non-personal consumption can serve as a source of financing.

Remittances to Liberia: 2015 – 2018

The chart above shows, Liberia is losing its number one ranking among countries in the region receiving personal remittances. From 2016 to 2018, the amount (in U.S. dollars) of remittances to Liberia fell dramatically from $654,424,479.48 to $387,336,827.52, while amounts to Sierra Leone increased year over year. The value of remittances to rebuilding the Liberian economy will increase if the Central Bank of Liberia becomes more innovative. Today, personal remittances now account for over a third of global external finance.

Although remittances to Liberia have fallen from 20.6 percent of GDP in 2015 to around 12 percent in 2018, the overall amount contributed as a percent of GDP is still doubled that of Ghana and many times over the amount going to neighboring Sierra Leone, Guinea, and Cote d’Ivoire.

The solution is relatively simple – to influence the number of remittances sent to Liberia, the CBL should reduce remittance costs – a significant factor for small transfers.

Remittances as a percent of GDP

The Imminent Recession

On August 14, 2019, the yield on the 2-year U.S. Treasury note (TMUBMUSD02Y, -4.38%) traded slightly above the yield on the 10-year Treasury note (TMUBMUSD10Y, -5.40%) for the first time in over a decade, thus, highlighting concerns of a  U.S. recession.

Austrian diplomat, Klemens von Metternich once said, when the French economy sneezes, Europe catches a cold. The same must be said of the United States economy and its relationship with the rest of the world, especially economies in sub-Saharan Africa.

In the autumn of 2007, the U.S. economy caught a cold, and it triggered one of the worst financial disruptions in almost all corners of the global economy.  The response from monetary policymakers in the U.S. was unique. The U.S. Federal Reserve Bank (“Fed”), and many modern central banks around the world deployed unconventional monetary policy tools including quantitative easing, forward guidance, and targeted asset purchases to counteract the collapse of intermediation and the instability of financial markets.

Although the U.S. monetary policy structure was more reactive than proactive in restraining the global crisis, it nevertheless helped to contain economic freefall. Contrast the response by central banks in the United States, Europe, and Asia to that of central banks in Africa, especially the Central Bank of Liberia (CBL) in its current economic distress, and you will quickly come to realize that the Central Bank of Liberia is misinformed and ill-equipped in addressing the macroeconomic challenges facing Liberia’s fragile economy.

Liberia is on its way to a deep, long, and agonizing recession. The precipitous fall of the Liberian dollar, coupled with rising inflation, falling productivity, high-interest rates, and a lack of capital inflows due to a significant drop in remittances and foreign investments are clear indicators of the major challenges facing monetary policymakers at the CBL.

Connect these challenges with Liberia’s rising debt stock, and it is relatively easy to understand why the impending recession will be long, painful, and distressing. Solving Liberia’s economic challenges is essential in maintaining peace and improving the lives of the poor which makes up a majority of the population.

According to Collier et at., (2009, p.15), economic conditions are important determinants of outbreak and recurrence of conflict. Strong economic slowdowns and low levels of income per capita appear to increase the probability of conflicts, especially in sub-Saharan Africa. Fortunately, Liberia is enjoying a decade-long peace, and its citizens have shown a formidable intolerance to reversing course.

The CBL Monetary Policy Framework

The Liberian economy relies on the CBL to ensure stability. That is, the CBL’s directive is driven by a demand to stabilize prices, output, the financial system, the Liberian dollar, inflation, and interest rates. Moreover, the credibility of the CBL with the public is crucial, especially in resolving how the CBL deals with the government.

However, on August 14, 2018, the Governor of the CBL, Nathaniel Patray, stated, “What we are doing in the bank right now is we are working at the President’s mandate.” Central banks do not work on the president’s directive because history has shown that governments do not act responsibly when it comes to implementing monetary policy.

Instances in Zimbabwe where the government went on a currency printing bonanza forced the country into hyperinflation. In 2014, the Government of Liberia printed and released into the economy and enormous amount of Liberia dollars. Whether their monetary policy was a means to address the macroeconomic challenges from Ebola – it led to an immediate spike in prices. The CBL responded with the issuance of treasury bills to mop up excess Liberian dollars. Between 2015 – 2016, the inflation rate in Liberia was far better than rates in Ghana and Sierra Leone. Today, inflation in Liberia is nearly 2½ times the rate in Ghana and Guinea.

Source: World Bank

Stabilizing the Liberian dollar and the economy will require strong leadership, charisma, and innovation. The issues in Liberia are not unique – these problems have been deciphered over a dozen times by countries that had serious macroeconomic challenges.

A core principle in economic decision-making is – information is the basis for decisions – that means, economic decisions must be evidence-based and should derive from reliable and timely data. Most of us collect information before making decisions. The more significant or valuable the decision, the more important we will go out and gather information.

The collection and processing of information is the foundation of a financial system. If you were to ask monetary policymakers at the CBL to list their source for economic data printed on the CBL’s website, you will quickly learn that their information is based on unrealistic and outdated assumption models that border on “voodoo economics.”

You will find one faulty assumption following another and after some time, everyone starts believing the first assumption must be accurate because everyone else has come to accept it. The CBL needs to develop and strengthen its data collection process to make informed decisions. Another solution to solving Liberia’s economic challenges can be found in developing a strong data collection process that will lead to making informed decisions.

See; Ramirez (2013), Lartey (2011), Pradhan et al. (2008), and Adenutsi (2011)

Economic Community of West African States is a regional organization of 15 West African Countries.

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