Fiscal-Monetary Policy Coordination: Former Liberian Finance Minster Amara Konneh Sets Record Straight on Liberian Economy

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Washington DC, U.S.A.- Some of our uninformed fellow citizens have attempted to draw a comparison between the way the Sirleaf Administration managed fiscal and monetary policies and the current administration’s approach using CBL’s Auction Matrix to confuse the public. They are doing so by attempting to distort our records, as reflected by these screenshots. Here are the facts:

Liberia, as we all know, is a dollarized economy. That is, both USD and the Liberian dollar (LRD) are legally accepted in all transactions. The LRD is government issued currency while the USD is issued by the Federal Reserve of the US. Whenever there is depreciation of the exchange rate, prices of commodities and services will begin to go up, imposing hardship on ordinary citizens.

The government must find a way to intervene to halt such a trend. The two main authorities responsible for these interventions are the Ministry of Finance and Development Planning (MFDP) and the Central Bank of Liberia (CBL).

The CBL formulates and implements monetary policy, while the MFDP does the same for fiscal policy. A stable exchange rate, a major indicator for macroeconomic stability, is a monetary policy objective. But achieving that requires tight coordination between the fiscal and monetary policies of Government.

As part of their monetary policy interventions to stabilize the exchange rate and uphold the value of their local currencies, central banks in dual currency regimes conduct “Mop-up” exercises. A Mop-up is the process through which a central bank withdraws excess liquidity from circulation in the economy. Excess liquidity arises when the local currency in circulation is in higher supply than its foreign counterpart (i.e., US Dollar, Euros, etc.). Such an imbalance in supply between the two currencies reduces the value of the local currency as the exchange rate goes up (depreciates) relative to the USD/Euro.

While we were in Government, we signed up to an IMF Extended Credit Facility Program to facilitate “reserve creation,” while keeping the exchange rate stable. Under this program, the Ministry of Finance provided USD to the CBL from revenues generated in foreign currency to enable the Bank to boost its reserve position, while at the same time maintaining a stable exchange rate. Under our leadership, the Ministry of Finance sold US$3.25M monthly to the CBL to facilitate a weekly sale of over US$800,000 to stabilize the exchange rate. We sterilized (held in vault for one year) the LD equivalent of the $3.25M brought in through the Mop Up. During the Christmas and July 26 seasons, Liberia’s peak economic seasons when the LRD usually depreciates due to increased demand for the USD, we topped up our FX sale to CBL to about US$7.25M just to minimize the impact of the depreciation on the ordinary people at the bottom of the income ladder – who bear the brunt of any adverse change in economic conditions.

In addition to providing foreign exchange to the CBL for its auction programs, we also issued treasury bonds to mop up excess Liberian dollars from the economy. These bonds were sold at interest rates close to the rate of inflation to incentivize businesses to subscribe. All these interventions helped us to stabilize the exchange rate.

We also established key channels to enhance collaboration and technical information sharing with the CBL. The Governor and I set-up a technical Liquidity Working Group that included research and banking departments of the CBL, the Liberia Revenue Authority (LRA) and the technical team at MFDP. That team operated under the supervision of the Deputy Minister for Economic Management and the Deputy Governor for Economic Policy. On every major policy issue that required a decision from the MFDP and CBL, the Liquidity Working Group met, diagnosed, analyzed and recommended at least two policy options for decision making. It worked for us. I don’t see why it can’t work now. Most of these technicians are still in the service of our country. We just need to use their skills appropriately. There were times when the technical team would challenge our policy decision with compelling evidence and we’d be compelled to make course corrections based on their analysis.

Being the Governor or Minister doesn’t give you superior knowledge. Most times, the know-how to get things done is resident in people without the political authority or who are not members of the ruling political party. In fact, we made it a policy to include members of the opposition. We hired the brightest Liberian opposition professionals and held them accountable for results like everyone else. Part of our leadership challenge was to find these people and use their skills for the good of the country.

While we worked closely with the CBL, at no point did we interfere with the exercise of their independent role of monetary policy management, contrary to what is being speculated in the Liberian press and on social media. The CBL designed and implemented its foreign exchange auctions and mop up exercises without any interference from the fiscal authorities. The reason is, we knew very well that once there is fiscal domination of monetary policy, it will have adverse impact on the banking system as well as investments in the country. The CBL must not only be seen as independent, but it must actually be fully independent in the design and implementation of monetary policy interventions. In fact, while I was Finance Minister, Dr. J. Mills Jones was CBL Governor. As a former IMF economist, he went to all lengths to protect the independence of the CBL from executive interference. I openly challenge anyone to refute this!

Below are some specific outcomes of our actions:

  1. Foreign Exchange Auctions were strictly carried out through the commercial banks. Banks submitted bids for themselves and their customers and the respective accounts were credited with the USD equivalent of the LRD bought by CBL. The downside to this: banks and companies were mainly trading on their vault (idle cash), which didn’t significantly impact the exchange rate.
  2. CBL at some point established an auction window. Companies with huge sales in LRD (Petroleum retailers, Beer Factory, Coca Cola factory, etc.) and registered forex bureaus had to carry their LRD directly to CBL where it was bought, and payment made to the companies in USD. This also had a somewhat minimal risk of companies withdrawing from their idle accounts at commercial banks and taking it to the CBL, which did not significantly affect the actual level of money outside the bank.

Some question my use of Facebook to share these stories. They claim they have political overtones and that I am trying to whitewash my image to run for office. This claim is a flimsy attempt to dismiss the facts I am presenting. The truth is, I willingly left government service and have a role that I find fulfilling. I am happy and am thriving professionally and personally. Nonetheless, I keep my ear to the ground and follow the goings on in Liberia because I care deeply about my country. That said, from time to time, when I hear scrutiny and criticisms of my record that is not backed by factual evidence but driven by political posturing, hate, jealousy or otherwise, I will defend myself. Beyond self-defense, I also share these stories to remind all of us of the work we all have put into rebuilding what we destroyed and serve as a guide for new, young leaders who may find them useful. I can tell you that I appreciated efforts by elder statesmen like Dr. Amos Sawyer, who shared their experiences with me. They did not try to force their views down my throat, nor try to treat me like a child in need of their tutelage. Instead, they sought to impart wisdom and left me to make use of it however I deemed best. In these posts, I hope to do the same, to share my experience and leave it up to today’s policymakers to make use of if and how they choose to.

The above analysis was penned exclusively by former Liberian Finance Minister and current World Bank Executive, Amara M. Konneh. The views expressed above are exclusively are his, and permission was given to The Liberian Billboard to publish same.

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