The Central Bank of Liberia has issued a policy statement in Monrovia terming the House of Representatives decision to legislate a single currency regime as “force de-dollarization” that would adversely affect the national economy with potential for financial crisis.
“The CBL views the process of forced de-dollarization without due consideration of the fundamental pre-conditions as being in the wrong direction,” the Bank said.
“ The sponsors of this bill obviously had good intentions; however, the approach is wrong and will not produce the desired results. The nature and the structure of the current monetary arrangement for Liberia, the dual currency regime, is complexe; therefore, a decision that intends to alter such a regime should not be driven by mere public perceptions, or should not be propelled by political persuasion, rather it should be anchored on empirical findings and the structural dynamics of the economy. For example, the Liberian economy is highly import driven with very low level of manufacturing.”
The Central Bank said having the Liberian dollar as the sole legal tender does not preclude the necessity of taking key economic actions in order to support the local currency.
CBL: Many of our neighbors in the sub-region have adopted single currency regimes, yet their currencies are under immense exchange rate pressure with high inflation as compared to Liberia. The productivity of the real sector, value chain production made possible by the availability of adequate infrastructure and reliable energy supplies, institutional reforms, collective adherence to the rule of law, adequate human resource capacity are the main requirements for a country to achieve a middle-income country status, but not merely a country’s currency regime as has been construed and forcefully expressed in some quarters
In an effort to de-dollarize, the CBL in 2012 drafted a De-dollarization Roadmap, pending Board approval, to guide its steps in meeting the fundamental pre-conditions necessary for successful de-dollarization. The four-year de-dollarization roadmap follows a gradual, market-driven approach with well-defined roles and responsibilities of both the monetary and the fiscal authorities. Since the development of the roadmap, the CBL has taken a number of steps in its quest to transition the economy to a single currency regime for effective implementation of monetary policy. The Bank began the issuance of market instruments including treasury bills, treasury bonds, and CBL bills to absorb excess liquidity while raising returns on Liberian dollars assets. The Bank has also established a Liquidity Working Group to proffer recommendations to policy makers, aimed at managing liquidity and has also established a Financial Markets Department as the vehicle for deepening the financial sector. The Bank has developed and will continue to refine the comprehensive road map to guide actions over a period of at least four years that will lead to de-dollarization.
Conclusion and Recommendations
In conclusion, forced de-dollarization without due consideration of the fundamental pre-conditions is a step in the wrong direction. This could lead to macroeconomic imbalances characterized by huge capital flight, low remittance inflows, and less financial intermediation. The nature and the structure of the current monetary arrangement for Liberia, the dual currency regime, is complex; therefore, a decision that intends to alter such regime should not be driven by mere public perceptions, or should not be propelled by political persuasion, rather it should be anchored on empirical findings and the structural dynamics of the country. Hence, the CBL believes that it is only prudent to move to a single currency through sequential collaboration with the fiscal authorities and consultation with the Economic Management Team. Against this backdrop, the CBL recommends the following:
• That the draft roadmap developed be reviewed and subsequently adopted by all stakeholders to guide the process of De-dollarization.
• That in order to achieve De-dollarization, a gradual market approach be pursued, as set out in the roadmap: 1) Transactional De-dollarization followed by 2) Financial De-dollarization.