Liberian People’s Party Press Release
The Liberian People’s Party calls on Liberian Lawmakers and stakeholders to encourage President George Weah to end the practice of reducing cash kept by commercial banks, which will strangulate the economy. The Central Bank of Liberia (CBL), instead of instituting measures to increase cash reserves at commercial banks, is offering attractive interest rate for commercial banks (CB) to lend money to the government.
Subsequently, CB, with limited cash, will not be in the position to lend adequate loans to businesses nor will customers withdraw portion of their deposits. And, rightly so, disenchanted depositors have and will continue to complain.
Previous and current administrations, commenting on the shortage of cash, have stated the following: (1) former President Ellen Johnson Sirleaf, in September of 2016, stated that global prices were affecting Liberia’s cash position; (2) in 2017, former Governor of CBL, Mr. Milton Weeks stated that Liberia’s cash position was low because cash outflow remittances were higher than cash inflow remittances; and (3) in 2018, Speaker of the House of Representatives, Mr. Bhofa Chambers stated that vaults of CB were empty because some elites were hoarding money, etc.to undermine the Weah administration.
Soliciting cash, once again, from investors, CBL is offering 20% as its monetary rate. Unfortunately, the offer will not only reduce cash held at commercial banks, but it will undermine Liberia’s stability. Businesses, the engine of economic growth, will not borrow adequate cash to expand; (2) borrowing money from banks will not be necessary since government had already saved USD $44M in 2020/21, 2021/22 and 2022/23 respectively from cut in spending on “Use of goods and Services; and (3) giving additional cash to authorities who have not accounted for proceeds from previous sale of promissory notes might not encourage them to practice proper record keeping.
In short, if a country depends on the expansion of businesses to grow, then government, whose total revenue ($523M) is about 50% of Liberia’s real gross national Product, should not reduce government spending and at the same time reduce cash deposited at commercial banks.
How and why managers of commercial banks choose government promissory notes and reject promissory notes from businesses and individuals? It is simple to understand. Remember, commercial banks (i.e., like any investors) are searching for not only higher interest rates (i.e., or a higher income), but also are looking for favorable payment conditions. Moreover, money-lenders can use government promissory notes as collaterals for other financial arrangements.
Government officials know that investors searching for profits will buy promissory notes that offer attractive interest rates. Therefore, in 2019, government offered to pay 30% interest for its promissory notes. It was reduced to 25% in 2020, and it is now 20% in 2021. On the other side, in 2018, businesses paid 12.4% interest to commercial banks, and the interest rate remained unchanged in 2019, and 2020. In addition, government offered to repay its debts within “…tenor of 2-weeks, 1-month, 3-months,6-months, and 12 months. (Webster defines tenor: “the length of time until a loan is due.”
The statements below were culled from page 43 of the 2020 annual report of CBL.
“The financial market operations were characterized by issuance of CBL bills. During the first quarter of the year, the Bank offered L$7.0 billion in various tenors (2-weeks, 1-month, 3-months, 6-months, and 12-months) on an effective annual return of 30.0 percent. However, during the second quarter of the year, the Board, at its sitting, reduced the interest rate by 500 basis points to 25.0 percent in line with the inflation projection for the second quarter of 2020…”
The Liberian local paper, “the Analyst,” stated that “…following its quarterly meeting of 18th and 20th of August 2021, the Board of Governors of CBL cut Policy rate to 20%.” The cut might indicate that CBL is aware of the fact that reducing cash reserves at commercial banks is not good for the economy. However, since CBL’s interest rate is 7.6% higher (i.e., 30% minus 12.4%) than the interest rate offered by businesses, commercial banks will still buy government’s promissory notes. Page # 42 of the 2020 annual report of CBL shows that average interest rates for lending was 12.4 percent.
Is it prudent decision to cut USD $44M from buying goods and services and at the same time reduce cash held by commercial banks? The Liberian People’s Party does not think the cut in spending and the decision to take money away from commercial banks are good for the country.
Therefore, LPP calls on stakeholders to advise President Weah administration to inject money into the economy, thereby, allowing employers (newspapers, local merchant, farmers, etc.) to buy goods and services such as paying employees. Let us remember that a hungry population is an angry population.
Leave a Reply