This Quarter

Road to Recovery
By Menipakei Dumoe

The Local State of the Crisis

Continued from homepage…
The good things happening to the recovering western economies have not yet reached Liberia. We are still struggling with the worst effect of the global financial meltdown in Liberia: the foreign exchange shortage. Our local currency, the Liberian Dollar (LD) has nearly collapsed.

The consequential inflation and high cost of living is being felt across the country; especially by the poor. The shortage in the United States Dollars has always been a threat and it is likely to get worse. The falling price of rubber, falling remittance from abroad, and cuts in aid that are being blamed for the foreign exchange shortage are really only responsible for half of the problem; and a temporary half at that. The main sources of our foreign exchange troubles are low exports and our awkward dual currency policy. The dual currency policy increases the function of the United States Dollar in the Liberian economy; thereby, causing higher demand for the US dollar. Our imports have always dwarfed our exports, the trade balance in 2008 widened to negative US$559 million, from a deficit of US$301.3 million in 2007. As rubber prices have started to respond to the gradual international recovery, it is important to know that even if rubber and other foreign exchange earners fully recover, they still won’t solve our foreign exchange crisis. We must take all the necessary steps to address the fundamental causes of our problem. The first step should be to address low exports. The diversification of exports and small medium exports development should be the main focus of this government. The appropriate first step to take will be to address the motivation constraints in the local Cocoa market. Farmers are still subjected to the control of the Liberia Produce Market (LPMC), which is a rent seeking state institution that reduces the income of local Cocoa farmers. The state intervention into the Cocoa market is unhealthy for the sector and should be reconsidered. Those calling for artificial fixing of the foreign exchange rate as a means of calming the burden of the poor are preaching wrong economics. If the central bank intervenes in the manner being suggested by the “reduce the rates band”, the resulting inflation will be disastrous. While I recognize and respect the intelligence coupled with fiscal discipline coming out of the central bank, I am disappointed in the inability of the CBL (Central Bank of Liberia) to develop a clear exit strategy from the awkward dual currency situation and the inactivity in the private capital market. Business is getting slower and slower in Liberia as commercial banks fear lending to the private sector. The vaults of all the banks operating in Liberia are full of cash but very little of it can be accessed by the business community who is supposed to use this capital to produce the goods and services our economy needs. The central bank needs to device a way of getting the commercial banks to loan more.

The next obstacle after the fear to lend is the cost of money. The lending rates are too high, at an average of 15%. In this regard, the bank can, and should, also help here. The reserve requirement, which is very conservative, is costing banks a significant amount of their capital. They transfer this cost to their borrowers in the form of higher rates. There is a need to guard against commercial banks’ fiscal indiscipline, but the current CBL policy has not struck the right balance between sound monetary policy and stimulating growth in the economy.

A monetary policy has its limitation, and political economics should take over matters from that limitation. The consequence of the analysis made above means harder times for the poor. The real challenge of economic policy in Liberia in these days of the crisis will be how to put money into the hands of the poor. The inflation and foreign exchange crisis has meant the poor can afford less and less of their needs. To remedy this problem I suggest the government introduce a civil servants loan scheme that allows low income civil servants to borrow and pay over a long period of time. The government and her donor partners should provide the loan guarantee, while the commercial banks provide the loans. The risk involved is very low as civil servants are paid through commercial banks these days, they can just deduct monthly loan servicing from workers salaries. The IMF should be willing to finance this scheme as it will put money into the hands of the most venerable families. As for those workers in the private sector, the National Social Security and Welfare Corporation (NASCORP) is well placed to provide such loan schemes. The agency needs to make long term investments anyways. This solution will stimulate spending from the bottom which will drive growth in the SMEs and get things rolling again for the Liberian economy. Borrowing private capital and workers money to low income earners is by far more effective than ditching out millions for “private sector development”. The latter approach will not succeed as such funds have the tendency to end up in the hands of party members and cronies who are often not good business men. The approach I am suggesting will meet the same end and will cost less, as there will be no need to set up commissions and whole new departments in ministries etc.

The Next Quarter
As we enter the second quarter of 2009/2010 business looks optimistic. Rubber and other commodities are picking up. This predicted price recovery will lead to increased spending in the next quarter. Major mining companies who slowed down production during the worst days of the crisis will start major operations again in order to cash in on increasing commodity prices. This increase in spending by the concessions will likely lead to growth in local trading, construction and agriculture. I am confident about growth in the balance sheet of importers and hope the government does all it can to increase profits to small exporters, especially those in Cocoa.