By: Wonderr K. Freeman Originally Published in February 2012

Liberians, they say, love their America.  And most of all they love their US Visa and the US dollar. Truth be told, it is now more easy for a “camel to pass through the eye of a needle” than for the average Liberian to land a US Visa, so Liberians have realistically settle for pursuit of the latter  – the Almighty US dollar. Matter of fact, it matches any color of handbag mommy chooses to use and makes papa to go home without fear. It is a sometimes called (and for the right reasons) the universal passport.  With the Almighty dollar, everything comes easy, the plush cars, the girls, the mansion on the hill – everything short of heaven. With a virtual imported government, the US dollar makes it so much easier for Mr. Minister to keep wife and kids in Minnesota or Philadelphia, while the hustle goes on in Liberia. Is it any wonder then Liberia’s Dual Current Policy has proved a hard nut to crack, granted, in fact, that there is a will to crack. After four years of Unity Party rule, the Government has yet to recognize the dilemma of the Dual Currency as a national economic policy imperative.

Notwithstanding this lack of recognition of the dual currency dilemma by the Government of Liberia (GOL), this economic [monetary] policy is proving to be Liberia’s porcupine gut, too greasy too throw away and too bitter to swallow.  While the policy has its fair share of merits, its disadvantages are numerous and glaring. No wonder about ninety percent (90%) of African nations rather have their own currency or join a common currency! Why this basic fact is taking ages for the Liberian authorities to recognize is mind-boggling. But the intent of this treatise is to lay bare the crippling effects of our Dual Currency Policy and explain why our national currency will continue its march to the abyss while we pursue our love affair with the US dollar.

How the Parallel Use of the US Dollar Affects the Purchasing Power of the Liberia Dollar

The degree of dollarization measures the rate of use (saturation) of the US dollar in the official economy. It is generally agreed that it is unusually high. While the Central Bank of Liberia (CBL) likes to quote the figure at 68% of broad money (CBL Annual report, 2008), this figure is, in fact, an understatement, since this figure includes the currency (LD) outside the banking system, but excludes the US dollar outside the banking system. Given the peculiarity of Liberian situation, a better estimate is to use only the figures in the banking sector. In this respect, many scholars put the degree of dollarization at a hefty 85% – 90% (Honda and Schumacher 2006,/ Eramus, Leichter & Menkulasi, 2009). On the fiscal front, dollarization is even more pronounced with 95% of the government revenues being collected in US dollars; while 80-85% of the expenditure similarly dollarized (Eramus et al, 2009). Below is a table (1) showing the degree of dollarization in the banking sector (all figure from CBL Financial and Economic Bulletins).      

From Table 1, one can see that the Liberian financial sector is highly dollarized and given that the rate of growth of the US dollar and the LD are nearly at pace (38% apiece 5-year average), the problem is not going to solve itself. There is a glaring need for policy intervention. But after years of official hands-off policy towards the dual currency issue, it remains to be seen what are on the GOL’s cards. The Ministry of Finance (MOF) belated attempt (October 1, 2009) via a MOF Circular (GOL/MF/2-1/AKN/agm/4655/’09 calling on spending entities attention to a selected LD payout amounts to window dressing. This Government needs a comprehensive (fiscal and monetary) strategy to counteract the harmful effects of such high incidence of dollarization.

Looking at the charts below, one cannot help but wonder why the LD, but for the year 2003, has been losing value since the establishment of the CBL, notwithstanding the fact that the CBL was created to stabilize price level and shore up the value of the national currency (CBL Act Part II3a). Can it be mere coincidence that the LD has not appreciated against the US$ for the past six (6) years running, during which period the US$ average 85% of total bank deposits?  Looking at the charts below, it seems pretty clear that the Dual Currency Policy (which is causing this high degree of dollarization) is the prime reason why the LD has never appreciated against the US$ in so many years. As long as the US$ continues to be the currency of choice for the GOL and every body else in Liberia, the LD is going to consistently lose value.

The issue of the Dual Currency Policy ostensibly causing the year-after-year devaluation in the LD is basic common sense. How is the LD ever going to gain value if the GOL does not promote it and the business community does not want it? And the locals: they have no option but to comply with the preference GOL and the business community!  The sad reality is that: the Liberian dollar will continue to lose value until common sense prevails. Of course, this consistent depreciation of the LD means increased poverty for the vast majority of Liberians whose only access to currency is the LD.

How Poor Liberia Helps Bankrolls the Colossus US Economy by Using the US Dollars.

No one needs to be an economist to know that when one uses another country currency one create a demand for that currency. To the extent that such demand creates the need for issuance of currency, then there arises a benefit (seigniorage revenues) for issuing new currency. In essence, seigniorage is a revenue/income/profit that accrues to a country because the paper that government prints money on is worth far less that the value government places on the money. For example, the US Government (USG) can print a piece of paper and give it a value of US$100 in terms of real goods and services, but the actual cost of the paper is 4 cents. Thus the difference ($99.96) is clean profit for the USG (no questions asked, no taxes) – of course this profits is subject to inflation costs, replacement costs and other associated economics cost, but the key fact is that government gets a windfall by printing money. Hence, the key logic here is that the more Liberia, Panama, Argentina, Cambodia and other such countries use the US dollar, the more Uncle Sam prints, the more profits (seigniorage) Uncle Sam gets. It is estimated that net seignorage [revenues] from issuing Dollars is roughly US$25 billion a year. With foreigners holding somewhere between 55-70 percent of the total value of US notes in circulation, they (including poor Liberia) contribute a least US$14 – 18 billion a year to the US treasury  (Kurt Schuler, 2000). If you think Liberia’s contribution may be negligible then consider this: most estimates put the cost of dollarization at 1-2% of GDP. So Liberia, by adopting the US currency, could very well be contributing not less than US$12-24 million per year to the US treasury – with no thanks from the USG. The Americans only talk of the millions they spend on aid to Liberia. Why don’t they tell about our subsidy to the US economy? Why don’t they tell us about our share of the seigniorage revenues as they do with Argentineans (85% rebate, International Monetary Stability Act) or as South Africa does with Namibia and Lesotho? Or are we contented to suffer from lack of knowledge?

How the Dual Currency Policy Undermines the Government Declared war on Poverty

The GOL much-hyped war on poverty dubbed “Lift Liberia” or Poverty Reduction Strategy is under siege by the Government own Dual Currency Policy. While the GOL is on record for claiming 88% success on the poverty reduction strategy, every one but the Government knows that the war on poverty is being lost. Not because the GOL is not bringing about economic development, but because the Dual Currency Policy has made it impossible to maintain price level stability. So while the government is busy raising the LD income of government employees, for example, Dual Currency Policy, by contributing to the year-on-year devaluation of the LD, is also busy taking away by ensuring weekly price increases. Since price increases in basic goods and services tend to have a multiplier effect, the common man soon finds out that the much talk about salary increases is much ado about nothing. So again in this case the porcupine gut analogy holds true, that this Policy is too greasy to be thrown away for the likes of Mr. Minister, LoneStar Cell, and Bridgeway Corporation, it’s too bitter to swallow, for the average government employee, the average rural farmer or the average Joe who see US$ only in the hands of other people. So while the IMF and the World Bank are busy reading voluminous HIPC documents and giving thumbs up to GOL on the economic situation, the citizens of Jahtondo town, Palala, and Soniwein and other like places are finding the economic situation too bitter to swallow, as measured by the prices of basic goods and services and [you know what] in the end they (the common people) call the shots. You can call that a hint to the wise.

Why Regime Change Has Never Changed the Currency Regime

Over the course of our conflict, there has been a host of interim governments and two [de jure] governments, and irrespective of which government is in power, the ruling elite have generally found the Dual Currency Policy too greasy to throw away. Like I said initially, Liberians love their America; they love their Minnesota, and above all they love their US dollar. How will this Government change such a policy, when most of the high ranking members have mortgages to pay, spouses and concubines to support and tuition fees to pay in the US? Why should government officials rock the boat, when so many are members of the land-owning class that owns virtually all the real property in Monrovia, where the rent is paid in US$ and spent in the USA? And why should Mr. Governor or Madam Minister bother about the devaluation in the LD, when about 95% of his/her remuneration is in US dollar.  So while the governing elite is bending over backward to institutionalize the US$, the vast majority of Liberians (with access to only LD) have to contend with the BITTER half of the porcupine’s gut.

Research Findings, Conclusion and Recommendations

Even an avowed opponent of dollarization has to admit that the policy has its beneficial effects as studies have shown. For example, most studies have found that dollarized economies do a better job at battling inflation (Honda and Schumacher, 2006). Other findings such as fiscal discipline and economic growth are not well supported and are thus generally held to be inconclusive at best. Liberian and Panama, both standard bearers of de facto and de jure of dollarization respectively, have both had fiscal deficits alongside their respective type of dollarization. Notwithstanding, the above acclaimed benefits, dollarization comes with much excess baggage as most researchers generally concur, prominent among which include: (a) partial to complete loss of control over monetary policy, (b) loss of seigniorage revenues, (c) loss of effective exchange rate policy, (d) lower economic growth, (e) vulnerability to external shocks, etc. (Erasmus et al, 2009, LeBaron and McCulloch, 2000).

The table below enumerates the policy options to ameliorate the drawbacks of the Policy.

TABLE 2        Option for Addressing the Dual Currency Policy and Drawbacks

Leave the Dual Currency Policy as is.	Continuous devaluation in the Liberian dollar,  and frustration of CBL’s core mandate
Move to Full (de jure) Dollarization	Complete loss of control over monetary policy,
Completely Abandon the US dollar	Too risky, may trigger capital flight
De-dollarize, with the view of abandonment	Less risky, de-dollarization is a precondition in moving toward eventual exclusive use of the LD

De-dollarization is the best way forward for Liberia. There are no hard and fast rules as long as it is gradual and systemic. The GOL must make the LD attractive. It must improve the divisibility and portability (i.e.,denominations of, $1/$1,000/$5,000 LD bills). It must offer premium to financial intermediaries for transacting in LD. The GOL must tax and spend as much as possible in LD. The alternatives for de-dollarization are diverse, reasonable, numerous and possible as long as there is a will. Now, is there a political will? Or is it this porcupine’s gut too greasy to throw away?