Liberia president targets central bank reform

Liberia is looking to move past a series of financial scandals at the Central Bank of Liberia (CBL) and strengthen the bank’s governance with new leadership. Lowering inflation and keeping the exchange rate in check will be top on the agenda for the incoming executive governor. These goals are feasible if matched by fiscal discipline and reduced political interference.

Situation Report

President George Weah will pick a new CBL executive governor and restructure the bank’s management this October, his office announced last week. This follows opposition-led demonstrations in June where the Liberian people protested inflation at 23% and depreciation of the Liberian dollar, which had lost a third of its value since 2018. Amid the pressure, the president had questioned the bank’s capacity to manage monetary policy and pointed to recent financial scandals involving the bank.

Former CBL governor Milton Weeks and four other executives are currently facing trial after an independent probe by US firm Kroll Associates showed inconsistencies in CBL payments for over-printing of new banknotes in 2016.[1] The 2018 probe also covered a monetary programme, under current governor Nathaniel Patray, to ‘mop up’ excess Liberian dollars in order to curb currency depreciation. In that programme, CBL officials were dispatched to physically buy Liberian dollars from businesses in exchange for US dollars. The probe showed this practice was prone to the misappropriation of banknotes.

While the CBL has been accused of mismanagement, the Weah government has also been complicit in impairing the central bank’s capacity to manage the currency difficulties. Central bank lending to the government, often in US dollars, has put pressure on foreign reserves. In May, the EU delegation to Liberia and eight donor embassies jointly wrote to Weah expressing concerns about his government’s borrowing from donor aid deposited at the central bank, and stating that there appeared to have been “a greater scale of irregular withdrawals than was previously and collectively known.” Information minister Eugene Nagbe admitted that the government had indeed borrowed from the funds to pay salaries.

The government has since begun a ‘salary harmonization’ scheme to cut the wage bill, which gulps two-thirds of public expenditure. Salaries for civil servants and lawmakers are being reviewed and about 10,000 out of 70,000 civil servants have reportedly been affected by a pay cut. Finance minister Samuel Tweah has unsuccessfully convinced parliament to back the scheme and there were protests in July from affected civil servants working at the Liberia Revenue Authority.

Outlook

Weah has said he will set up a vetting committee to help him select the next executive governor, and that the application process will be open to the general public (he personally picked the outgoing governor). If this is done, it will set the tone for minimizing political influence, increasing transparency and strengthening internal controls at the CBL. Otherwise, the precedent suggests the next governor will look to the presidential mansion for direction and pursue little reform. The outgoing one once told reporters in Monrovia that the central bank’s first priority is pursuing the president’s ‘pro-poor’ agenda.

In the medium term, foreign exchange inflows from rubber and iron ore exports will remain subdued due to low global prices—keeping pressure on the Liberian dollar. However, the currency’s value and price stability will also hinge on restoring public confidence in the central bank and clarifying the policy framework. On that front, the government’s ongoing efforts to minimize overhead costs and check borrowing from the CBL will complement a sound monetary policy, if made by the new management.

Although this is a difficult environment in which to restrain the wage bill[2] and we note pushback from constituents, fiscal reform will likely be sustained to a significant degree as part of commitments to the IMF and other donors. Without grants, Liberia’s fiscal deficit would go from -6.1% of GDP to -20.4% in 2019 by IMF estimates. There is strong incentive to convince development partners.

[1] https://www.usaid.gov/sites/default/files/documents/1860/Kroll_Missing_Currency_Report_2019_508.pdf

[2] Real GDP growth was an estimated 1.2% in 2018 and is forecast at 0.4% for 2019, against 2.5% year-on-year population growth.