By Kaiballah Conteh
Over the years, the economy of Liberia has been madly handled by politicians instead of statesmen. The population of Liberia is gradually increasing but unfortunately, there is a rise in the rate of unemployment, financial scarcity, industrial closure and poor investment.
If these politicians would have chosen the path of statesmanship, we would have seen tangible and positive changes in the economy such as a booming agriculture sector which would have buttressed the country’s financial sector and the opening of industries.
Sadly, Liberia is currently experiencing a cash shortage with government ministries and agencies unable to pay salaries in currency simply because the banking system cannot provide cash. People have deposited their finances in the bank, but the banks are unable to convert those deposits to cash. The banking sector has been suffering from the issue of cash outflow, leading to the loss of its role of financial intermediation and cash scarcity. If proper measures are not put in place, we are likely to experience a capital flight in the coming days because investors will no longer have confidence in the stability of the economy. This will cause the exchange rate to get even worse, making it difficult to finance our capital spending.
There are several underlying factors leading to the shortage of cash in the banking sector and economic hardship in Liberia; some of which include the coronavirus pandemic which has created a global economic crisis that has affected many countries around the world, massive salary harmonization and the growing population effect coupled with the mutilated banknotes.
✓ Coronavirus pandemic
The coronavirus pandemic has been more than a health crisis, affecting economies around the world. The presence of covid-19 is having an impact on the financial market and firm. There has been a disruption in economic activity due to the closure of businesses as well as some government institutions. The decrease in trade activity has led to a low rate of consumption around the world, especially a country like Liberia which survives on imported goods. As a result of covid-19, the government of Liberia is expected to lose huge revenue. Business people are also holding their finances for precautionary purposes. According to the Central Bank of Liberia recent report, we have experienced a rise on non-performing loans by 4.4 per cent. Currency outside the banking system rose by 8.2 per cent to 20.83 billion, while currency in the bank declined by 15.4 per cent to 1.27 billion during September. This has hugely affected the financial market.
✓ Growing population effect and mutilated banknotes
Liberia has an estimated population of 5,113,234 based on Worldometer December 22, 2020 report. In the last five years, we have experienced a yearly growth rate of 2.56, 2.52, 2.48, 2.46 and 2.44 respectively in the population size. Over the same period under review, the total currency and other liquid instruments circulating in the economy is over 21 billion Liberian Dollars, including the ones that are mutilated which have been rejected by business people for transactions. The 4 billion LD printed recently by the Central of Liberia is insufficient to replace the mutilated LD and also meet the liquidity demand in the banking system. With these estimated figures coupled with the economic hardship, it means that we need to print additional banknotes because as the population increases, the per capita available declines. Therefore, it lowers savings, investment and further retards capital formation.
✓Massive salary harmonization
From all indications, the massive salary harmonization has caused more harm than good for employees in the public sector. According to the world food program 2019 report, an estimated 64% of Liberians live below the poverty line, of which 1.3 million live in extreme poverty. The CIA World Factbook 2020 also reported that Liberia has a dependency ratio of 77.6; with youth ratio at 71.7 and elderly dependency ratio at 5.9. This means that the numbers of individuals that are likely to be economically dependent on the support of others are far more than those who are independent. With the massive salary harmonization, lack of industries to create job opportunities and a crawling agriculture sector, it means that the poverty rate is likely to increase. With these prevailing factors, people will find it difficult to save, since their disposable income is not already sufficient. The government of Liberia under the presidency of H.E George Weah has done tremendously well to accommodate people in the public sector through job creation, but the private sector remains our biggest problem. President Weah’s government is not doing sufficiently well to create avenues for job creations in the private sector. Covid-9 has even worsened the situation, leading to the downsizing of employees in the private sector.
~Introduce a cashless policy
Liberia is considered as “a cash-based” economy because 99% of our transactions are done through cash. There is a need for the government to introduce a cashless policy which will drive development and modernize our payment system. High cash usage encourages leakages, money laundering, counterfeiting, mutilation, mismanagement, keeping of cash in the house which leads to high rate of robbery and financial loss in the case of fire or flooding incidents etc. A cashless policy will help improve the monetary policy in managing inflation and ensuring economic growth.
Cash emission is also called money creation. Since there is a growing population coupled with the high sum of mutilated money, the government of Liberia through CBL needs to infuse cash into the economy by the means of commercial banks. This process will eliminate the cash shortage. If the banking system issues currency with real value, there will be enough cash to cover enterprise transactions. Cash emission will lead to inflation if not properly handled. This is a short-run measure. The Central of Liberia through commercial banks can also increase the interest rate, which will encourage deposits.
About the author
Kaiballah Conteh is a graduate of the United Methodist University and MSc candidate in Economics at Near East University in Northern Cyprus. He can be reached through the following mean: firstname.lastname@example.org
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