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UNCLAS SECTION 01 OF 03 MONROVIA 000673 
 
SENSITIVE 
SIPDIS 
 
E.O.12958: N/A 
TAGS: ECON LI
SUBJECT: LIBERIAN DOLLAR'S DOWNWARD SLIDE PRESENTS FRESH HARDSHIPS 
FOR THE POOR 
 
¶1. (SBU) SUMMARY:  For the past three years, the Liberian Dollar 
(LD) maintained relative exchange rate stability, weathering 
double-digit inflation, ever-increasing import prices, and delayed 
revenue from lucrative mining and timber contracts, thanks to 
cautious monetary and fiscal policy.  Yet, as exports fail to 
rebound and remittances continue to sag, the Liberian Dollar has 
depreciated 12 percent since May, and commercial bankers, currency 
traders and the International Monetary Fund fear an absence of 
fundamental demand for the LD points to an ongoing decline in value 
for the rest of the year.  In an import-dependent economy such as 
Liberia, further LD depreciation weakens the purchasing power of 
lower-income consumers, who are the primary users of the local 
currency.  However, it could also provide the political cover the 
Central Bank of Liberia (CBL) may require to implement reforms that 
would stimulate long-term demand for local currency, including local 
currency tax payments and ultimately issuance of government 
securities.  END SUMMARY 
 
Why the Sudden Crash? 
--------------------- 
 
¶2. (SBU) When Liberia relinquished a longstanding one-to-one peg to 
the USD in 1988, the LD buckled under fiscal profligacy, a collapse 
in exports, and political instability.  Yet after President Sirleaf 
entered office in January 2006, the CBL maintained laudable exchange 
rate stability; the LD hovered between 58 and 62 to the U.S. dollar 
(USD) for over three years.  However, in May the LD began its 
persistent descent, reaching a low of 73 to 1 USD on August 28. 
[Note: The LD stood at 71.5 on September 16, following a temporary 
uptick in demand for local currency to pay school fees.  End Note.] 
Given that civil servant salaries in Liberia are paid in LD, this 
depreciation constitutes a 17 percent erosion in purchasing power 
for those who subsist on imported foodstuffs. 
 
¶3. (SBU) Liberia sustained exchange rate stability throughout 2008, 
even as headline inflation peaked at 25 percent, and the global 
financial crisis put downward pressure on remittances, export and 
mining revenues, thanks to countervailing forces that buoyed the 
currency.  Notably, the price of rubber, which constitutes over 85 
percent of Liberia's export earnings, crested in mid-2008, and the 
rally continued in late-2008 when the GOL sold off USD to pay 35,000 
civil servants two months' of salary arrears. 
 
¶4. (SBU) A currency in the LD's situation, bolstered by anemic 
export demand and less than USD 60 million in foreign reserves, 
could not be expected to withstand the consequences of a global 
financial crisis for a long period.  The LD now faces a double 
squeeze: the supply of foreign currency is tightening and the CBL 
lacks the monetary instruments to reign in growth in the domestic 
money supply. 
 
Contributing Factors 
-------------------- 
 
¶5. (SBU) Factors that contribute to the excess demand for USD 
include dwindling remittances, deteriorating terms of trade, and 
disappointing revenues from the extractive industries. 
International Bank-Liberia President Patrick Anumel estimates 
inbound remittances declined 20 percent in the second quarter, as 
members of the Liberian diaspora face job losses or straitened 
circumstances in their country of residence.  At the same time, 
UNMIL peacekeepers are repatriating more money, while NGOs, 
themselves struggling with a shrinking donor base, are scaling down 
operations and downsizing large staffs once compensated in foreign 
currency.  Further, a slump in rubber prices, delays in the advent 
of iron ore and timber exports and consumer demand for imported 
goods and services exacerbate a longstanding current account 
deficit.  And the failure of cash-strapped concessionaires to 
disburse promised payments to the GOL stymies CBL efforts to 
reinforce foreign exchange reserves. 
 
¶6. (SBU) At the same time, a political desire to address social 
inequities trumped the CBL's public commitment to exchange rate 
stability and inflation-busting.  The GOL instituted a series of 
incremental increases in civil servant salaries from LD 1,000 to LD 
5,280 in the past two years, while LD expenditures on social safety 
nets jumped 16 percent year on year, swelling the number of LD in 
circulation by 15 percent, according to CBL statistics.  Given the 
absence of government securities, a weekly foreign exchange auction 
- which is limited to USD 500,000 - constitutes the only meager 
mechanism by which the CBL can absorb this excess liquidity. 
 
How Low Will It Go? 
------------------- 
 
¶7. (SBU) Foreign exchange dealers, commercial and central bankers, 
and the IMF share a belief that the Liberian dollar will trend 
 
MONROVIA 00000673  002 OF 003 
 
 
downward through the end of the year.  Lawrence Appleton, President 
of the Money Changers Association of Liberia, IMF senior economist 
Alexander Deline, and Milton Weeks, Secretary General of the Liberia 
Bankers Association, predicted the LD could hit 75 by year's end, 
while a bearish Anumel forecast a downside of 80.  Not surprisingly, 
bulls still reside at the central bank.  Richard Dorley, director of 
research, policy and planning, believes the CBL will steady the 
currency at 72 to 1 USD.  In any case, all agree that seasonal 
trends in currency markets make a further short-term depreciation 
inevitable, as local merchants import goods in advance of the 
holiday season. 
 
A Currency that Nobody Wants 
----------------------------- 
 
¶8. (SBU) Global financial crisis notwithstanding, the fundamental 
cause of Liberia's exchange rate malaise comes down to an absence of 
demand for the LD.  Local currency comprises only 30 percent of the 
broad money supply, a rate of dollarization reinforced by government 
regulation, import demand and inflation expectations.  The Ministry 
of Finance requires taxes to be paid in USD; the Ministry of 
Commerce and Industry fixes prices for cement, fuel and rice in USD; 
and importers purchase goods in USD.  Merchants therefore adjust 
local currency prices to the USD cost and some merchants even quote 
prices only in USD, despite unenforced requirements to list prices 
in both currencies. 
 
¶9. (SBU) Local currency functions narrowly as a unit of account in 
small transactions and as change for USD-denominated purchases. 
Employees of UNMIL, foreign embassies, NGOs, large concessionaires, 
and the country's thousands of rubber tappers receive paychecks in 
USD.  Even the LD's role as a store of value is limited, as 
commercial banks report that higher interest rates on local currency 
savings accounts fail to entice depositors to convert their foreign 
currency accounts. 
 
The Social Costs of a Weak Liberian Dollar 
------------------------------------------ 
 
¶10. (SBU) Despite its limited role, the LD's depreciation causes 
mischief throughout the Liberian economy.  The immediate victims of 
depreciation include civil servants and employees of small business 
who are paid in local currency, petty traders who sell imported 
goods in the local markets, and the low-end consumers of goods and 
services whose modest purchasing power dwindles further each time 
the price of imported rice increases.  However, the Liberian economy 
is so inured to chronic inflation, that even importers and those 
highly-skilled workers paid in USD are not insulated from the 
depreciation.  Merchants vigilantly monitor daily exchange rates, 
and LD prices change regularly to reflect not only the current cost 
of currency, but the expected future depreciation.  So, while 
consumers pay higher prices, importers bear greater transaction 
costs as they increase the regularity and reduce the size of each 
currency exchange.  Rural Liberians, once insulated from the 
vicissitudes of Monrovia's import-oriented economy, also share the 
pain of ongoing depreciation, thanks to improving transportation and 
distribution networks that increase their access to imported goods. 
 
 
¶11. (SBU) Given that Liberia lacks exporters who could benefit from 
an uptick in demand for their increasingly inexpensive goods, the 
only entity that stands to gain from the depreciation is the GOL 
itself.  Businesses and citizens alike must pay taxes in hard 
currency, while the GOL's principal liabilities remain in local 
currency.  For example, although the civil servant pay scale is 
denominated in USD, civil servants are paid in local currency, fixed 
for this fiscal year at a rate of 66 LD to 1 USD.  So, only three 
months into the fiscal year, a minimum wage civil servant who 
ostensibly receives a monthly wage of USD 80 (LD 5,280) has suffered 
a 10% reduction in purchasing power. 
 
COMMENT 
------- 
 
¶12. (SBU) In the short-term, multilateral support and favorable 
commodity prices may avert a balance of payments crisis.  There are 
signs that natural rubber prices may rally.  The IMF is readying a 
USD 160.7 million (SDR 103 million) allocation to Liberia (Liberia's 
share of the IMF's $250 billion global package to offset the 
financial crisis), which would bolster the CBL's foreign assets, and 
steady the exchange rate for at least one year.  Yet exogenous 
solutions are no long-term panacea for what ails Liberia's currency. 
 Export diversification and a reversal of the chronic current 
account deficit are the only definitive guarantees of exchange rate 
stability, but these require years of sound investment policy, a 
strong commercial code, and updated infrastructure to nurture. 
 
 
MONROVIA 00000673  003 OF 003 
 
 
¶13. (SBU) A more immediate solution lies with the CBL, a chronically 
passive regulator, but one that may be energized by the political 
consequences of depreciation.  While cautiously avoiding definitive 
pronouncements on a policy of de-dollarization, the CBL may be 
taking steps that would improve food security and steady the 
purchasing power of Liberia's most vulnerable.  Governor Mills Jones 
has begun urging the Ministry of Finance to repeal the longstanding 
requirement that taxes be paid in USD, and is in the early stages of 
developing a strategy for selective issuance of short-term 
government securities after Liberia reaches HIPC Completion Point. 
The CBL also has a vested interest in financial deepening: as 
commercial banks expand services outside Monrovia, they can channel 
excess supply of local currency into loans to rural businesses and 
agricultural projects. 
 
 
 
ROBINSON