Throughout its history, Liberia has been involved in the use of foreign currencies as legal tender in circulation with Liberian currencies. The first foreign currency was the British Pound and later (1944), the United States Dollar up to this day.
Selection of a nation’s foreign exchange rate is not an issue of a “quick fix”. It is a serious matter that requires graduate study and knowledge of the proven Theory of Macroeconomics and years of requisite training and experience; but its application as rational public policy measure is easier, since governments employ trained/experienced Economists as advisors.
But we noted today July 11, 2018, that the Governance Commission (GC), Liberia’s powerful all-public policy Advisor, announced that “it will hold a Policy Dialogue on the state of the country’s currency today (New Democrat, July 11, 2018) on the theme ‘Factors impacting Liberia’s Foreign Exchange rate Regime’”, just at the time when the Liberian nation is deeply-plunged in a “messy economy” and concerned about prevailing depreciation of its foreign exchange rate, has been so concerned for long. Is this a GC Quick fix?
Article in Response
This article is in response to “Liberia: How Messy (national) Economy Could be saved” (Front Page, July 10, 2018) with respect to the continuing depreciation of the Liberian currency. Earlier, our article entitled, “Single-Currency Bill Submitted” (Analyst Liberia, April 28, 2014), was, also, a response to a Bill submitted to the National Legislature of the same title.
In that response, we wrote that “depreciation of the Liberia dollar has been, and is, the concerns of the Liberian people, including producers, consumers, CBL monetary policy Authorities; Fiscal, Ministry of Finance & Development Planning, the National Legislature, etc.; and that it was these concerns – the perennial, ever-present depreciation or decrease in the value of the Liberian dollar with the results of disastrous price inflation - that gave rise to the proposed Bill”.
This condition, we held, is the outcome of the interaction of the free-market forces of demand and supply of goods and services in the marketplaces of local, national, international, economic activities – trade and commerce - based on proven Theory of Economics which holds, that the more, and more a commodity is demanded by consumers, the higher and higher the price of that commodity rises.
Now, in international trade and commerce, countries, business organizations and individuals, as consumers who desire to purchase goods and services from other countries need and must have the money/currency of the “other countries” in order to purchase desired goods and services. That is, that consumers must, first, purchase the money/currency of these other countries from banks or foreign exchange traders at a rate known as the Foreign exchange rate, a money/currency exchange rate regime established and maintained by, almost, all trading countries.
At this point, the foreign exchange rate of the exporting countries (USA, in our case, for example) has become and is, now, a commodity demanded more and more by consumers - Liberia, in this case - to purchase and import more and more of US goods and services. Therefore, the price of the US foreign exchange rate rises or has risen, in terms of or relative to the Liberian dollar, and that Liberia must, now, come up with more Liberia dollars per US dollar. Thus, the depreciation or decrease in value of the Liberian dollar and the buying power of the individual, Liberian consumer.
Value of Money/Currency
It is important to note, significantly, that although money/currency possesses no intrinsic (in and of itself) value in useful, human terms, but its worldwide acceptance as the medium of exchange for goods and services desired in the marketplace of economic activities, gave and renders it socio-cultural, economic, politico-psychological value or that which has come to be known as “Storehouse of Value or Convertible Currency”. But the Liberian currency, the Liberian dollar, does not possess or is without the recognition of international, Storehouse of value or Convertible Currency status, but declared a national currency “tied” or “pegged” to the court tails of the US dollar which circulates as legal tender with the Liberia dollar (a semi-official currency substitution, in the effort, apparently, to ease the peculiar conditions of developing countries’ inflations).
The major path to this Storehouse of Value or Convertible Currency of a country lies, among others, in the production of goods and services desired and demanded by other countries, that country’s trading partners and the general public. In other words, storehouse of value or convertibility depends on production of goods and services desired and demanded by other countries. This, in fact, is or translates to demand for the Liberian currency by others and, thereby, renders it the status of Storehouse of value or Convertible Currency.
Summary, Re-Statement of the Foregoing
We hold that depreciation or decrease in the value of a nation’s currency with result of price inflation are:
a) Expected outcome of the interaction of the free-market forces of Supply and demand consistent with the Theory of Economics;
b) That according to the Theory of Economics, the more and more a commodity is demanded, the higher and higher the price of that commodity rises, and that an exchange rate is the price paid by one country for the currency of other and, a commodity as well.
c) That a country which produces goods and services demanded more and more by other consumer-countries is the country whose exchange rate appreciates and currency increases in value; and
d) That conversely, the country which produces no goods and services but depends, excessively, on imported goods and services, as in the case of Liberia, is or will be the country whose exchange rate will continue to depreciate with decrease in the value of its currencies and price inflation.
Resolution of the Immediate Condition
In the light of the criticality of the prevailing condition what is or are the possible resolutions?
As indicated earlier, there are pre-conditions to the possibility of resolutions.
Pre-Conditions for Possible Resolution of Liberian Currency Depreciation
The satisfaction of these Pre-Conditions requires two, basic approaches (A), Production for Local Consumption and (B), Production for export Trade
A. Production for Local Consumption
a) Form, organize and develop industrial enterprises for production of goods and services for local consumption. This approach will discourage, reduce and, eventually, eliminate Liberia’s excessive and dangerous dependence on imports. Local production of food - rice (our staple), cooking oil, sugar; orange, pineapple, tomato juices, etc; coffee, cocoa, mineral water, poultry products, cumber, leaf lettuce, plantain, banana, fish & fish-farming, cassava, yams, pawpaw, plums, etc., etc.
b) Other products for local consumption include Liberian clothes, furniture (made here by Liberians with Liberian wood), trained/experienced talent – vocational, academic/intellectual – scientific, technological, IT, for example.
B. Production for export Trade
a) Form, organize and develop industrial enterprises for production of goods and services for the export Trade – all tropical products – plantain, banana, rice, palm oil, Pineapples; pineapple, orange, tomato juices, etc.; coffee, cocoa, cassava, yams, cucumber, timber, rubber, furniture, including iron ore, oil & gas, gold, diamond, etc., etc.
b) Why not manufacture tires from our rubber and steel products from iron ore that we produce?
These are not quick fixes. They are long-term endeavors which require long-term commitments. As such, this is not unexpected. Given the long-term nature of some of the projects, they cannot be satisfactorily addressed over-night. It will require sustained and durable efforts; structures development, process refinement, further consultations, planning and programming, and resource mobilization.
But in the absence of these examples – organized production for local consumption and the export trade – Liberia’s foreign exchange rate will continue to depreciate, the nation’s Terms of Trade will continue to deteriorate due Liberia’s increasing demand for imports, according to CBL Executive Governor, “since the beginning of 2013 the exchange rate has come under pressure with a depreciation of more than 8% due largely to 17% deterioration in Liberia’s Terms of Trade and increased demand on (or for) imports” (New Democrat, December 9, 2013).
The realization of points A and B above depend upon the necessary, enabling, infrastructure - all-weather roads/highways - for organization/establishment of organizations/enterprises for productions of Liberian goods and services. This requires priority, public policy diligently developed and implemented.