By: Wonderr K Freeman, Attorney, Monrovia. Liberia Originally Published in July 2017

Liberians have generally accepted an [LRD/USD] exchange rate in the 50s-60s, and have tolerated an exchange rate in the 70s-80s. They have murmured and grumbled as the rate approached 90s-100s. But an exchange rate above LRD100:USD1, and in fact approaching LRD120:USD1, is a whole new ballgame.  At this stage, prices are running through the roof and mere anarchy has been loosed upon the Liberian economy. Our highly-cherished 5LRD bag of cold water is suddenly facing the threat of extinction, and anger is beginning to replace our usual complacency. Even amidst this nightmarish scenario of a currency spiraling out of control, we still get the same platitudes: that there is going to be a policy intervention, after which, all will be well.  But how long can we keep doing the same thing and expect a different solution? Perhaps, it’s time for a totally different solution – a “Big Bang” solution. In analyzing this phenomenon, and before proffering this solution, it is necessary to analyze this situation, objectively, by discounting the platitudes and making use of some cold facts.

Fact No 1:   

The Liberian dollar has been depreciating for the past 12 years.

The Liberian dollar has never appreciated (gained value) since 2005. That’s 12 years of continuous depreciation of the local currency.  The table below shows the evidence of the Liberian dollar perpetual downward spiral – negative for 12 years running.

Now, if you ask me, I will tell you, outright, that somethings aren’t working. In a normally functioning situation, a currency will depreciate sometimes, and appreciate sometimes. If a local currency has only known depreciation for twelve year running, it’s the boldest indication that “somethings” are definitely not working. One of those “somethings” looks more to me like the dual currency policy. We shall explore the link later in this piece.

Fact No 2:   

In an import-based economy, continuous depreciation of the local currency is simply bad news.

The figure of the rate (whether 50, 150, or 550) is generally not the issue. What is important is that this rate must be stable in order for the economy to function properly. If I place my LRD1m in a savings account in January when the rate is 100:1, hoping to use this money by December of the same year; the last thing I want is a rate of 150:1 in December. That would cut the value of my money by a third (-33.3%). The same can be said of contract signed in local currency. In an ideal business deal, it is presumed that each party expects to walk away satisfied. However, where payment is not immediate, any serious fluctuation of the transactional currency means one party is bound to end up unhappy. And, of course, this is bad for business. In Liberia’s dual currency regime, economic actors have a way out of this impasse – they save and transact in the USD. But like most economic options, there is a downside; the more and more economic actors denominate their transactions in the USD, the less and less demand there is for the LRD, culminating into a devaluation of the LRD, even if the underlying economic realities do not change. Now, where a country (like Liberia) lives essentially off imports, it means an ever-spiraling rise in prices denominated in the local currency. On this score, a dual currency regime simply cannot co-exist with a strong local currency.

Fact No 3:    

Liberia’s economic fundamentals and corruption contribute to the downward pressure on the LRD.

Many persons who write on the issue of dual currency do mention this reality: that Liberia’s economic fundamentals are weak. Our trade balance (exports – imports) has been negative for the past 25 years and counting. As of the most recent national stats (2016), the deficit is still in excess of USD1.0 billion annually. And given the nature and level of our exports (essentially primary products averaging at most 20% of the value of imports), this is unlikely to change any time soon. Even the Central Bank of Liberia (CBL) acknowledges that the problem with addressing the foreign exchange conundrum is so huge that its policy instruments, options and choices are limited and can only chirp away at the problem.

On the fiscal front, the Government of Liberia’s (GOL) budget is so small (averaging no more than USD600m/annum), it’s such a tough job making meaningful public sector investment in infrastructure and social services. Even amidst this small budget, only about 15% gets invested in public sector development projects (that’s about USD90m/annum). As far as financing major development projects is concerned, even USD100m is peanuts.  And so, poor Liberia goes begging most of the time to finance major development projects.  But a small budget is only one-half the problem. The other half is corruption. When public officials comment on the deteriorating Liberian currency, they never mention this – leakages in the system emanating from public and private sector corruption is clearly making matters worse. In Liberia, it is open secret that corruption is a free-for-all no-consequence activity. Just think of the recent Ministry of Finance’s (MFDP) Private Sector Development Initiative (PSDI) that went belly-up because corruption in Liberia does not carry any consequences. So, in the words of Hon. Forh (Monts Dist. #16 CDC)… It’s a you-eat-I-eat society, in which the bulk of the citizenry are constrained to carry the burden of an underperforming economy made even worse by brazen corruption. This is clearly not an economic environment in which the Liberian dollar, or any local currency (for that matter), can thrive.

Fact No 4:    

Numbers don’t lie, the dual currency policy is partly to blame for LRD depreciation.

In discussing fact no. 3, we agreed that Liberia economic fundamentals are not so good, and that even without dollarization, Liberia’s economic prospects aren’t so rosy. But that does not mean that our dual currency policy is making matters better. In fact, it is part of the problem. A significant part of the problem is caused by the high concentration of the USD in the Liberian economy – degree of dollarization. Using statistics from the CBL’s annual reports, and employing a computer-generated slope, we find that the two variables correlate positively – increase in one variable leads to increase in the other. In essence, a highly dollarized economy comes at the expense of a strong and stable Liberian dollar. While in this diagram the slope is not steep (ie, relationship seemingly not so strong), this can partly be explained by the fact that so much of our financial transactions occurs outside of the banking system; hence, any projection [based on official statistics] is likely to be underestimated. If we factor in the USD sitting in peoples’ homes, the line of regression will certainly be much steeper – that the dual currency policy it is a much bigger contributor to the problem. All this statistical stuff is for the clever people, because the common man already knows this fact, just by using his God-given common sense.

It high time we employ the “Big Bang” solution

We need to discount the views of all those clever people who keep telling us that things will be okay with the Liberian dollar; that the dual currency policy is okay and things will get better. It has not happened for the past 12 years. Having seen twelve years of empirical evidence, we have no confidence that things are suddenly going to get better, under the current economic arrangement. Let the Liberian people themselves decide whether or not they prefer to use American people’s money in Liberia. Yes, you got it right! A NATIONAL REFERENDUM is the answer to this long-running problem. I have no doubt that the average Liberian understands that the perpetually depreciating Liberian dollar is a “drastic sore” that needs a “drastic medicine”. The clever people are not going to allow a national referendum on this issue. They have 101 reasons not to. However, Liberians who are being adversely affected must demand it. If this dual currency policy is so good, as the clever people want us to believe, then let’s try the Big Bang Solution. Let’s have a national referendum on the dual currency policy! My common sense tells me that the average Liberian, if allowed to make a decision, will make a better judgment on this matter. This is where I stand on this matter. Where do you stand?

Wonderr K. Freeman