Liberia

Liberia continued to use the USD as its currency, but set up a central bank with limited powers. This arrangement was undermined by fiscal policy from the mid-1980s, with issues of Liberian dollar coins and then notes to finance budget deficits, and the monetary and financial system all but collapsed during the civil war period. The 2003 peace agreement allowed some recovery of both financial system and economy, but monetary policy remained heavily constrained by the very high degree of (USD) dollarisation and other factors.

YearsTargets and attainmentClassification
1974-84USD is legal tender, along with Liberian dollar (LD) coins at par (no Liberian notes); small, open, liberal economy with little scope for monetary policy; for years no central bank but some foreign-owned commercial banks, largest of which undertook various monetary functions; capital and reserve requirements but no other controls on banks; fiscal policy traditionally conservative; mid-1974 central bank with most monetary management powers other than note-issuing, sets reserve requirements and raises ceilings on interest rates 1975, by 1976 manages all government accounts, but its resources remain limited (and commercial banks draw on their overseas headquarters); 1978 ceilings on bank lending rates abolished; from late 1970s repeated fiscal deficits financed mainly by central bank; 1980 coup, central bank tries to stabilise banking system and prevent capital outflow; LD5 coins issued for first time; central bank operations impeded by lack of note-issuing power, government’s financing needs, low forex reserves, and costs of attempted rescue of major commercial bank (closed 1981); fiscal slippages, growing liquidity crisis, compartmentalisation of banking system; 1980 to early 1985 strong appreciation with USD, while world demand and main export prices depresseduse of another sovereign’s currency UASC
1985-20031984-5 central bank increases issue of Liberian coins, cuts reserve requirements and directs commercial banks to cut lending rates; by 1986 USD notes have largely vanished, Liberian coins are no longer fully convertible because of banking system’s lack of foreign resources; rising external arrears, LD falling vs USD in parallel market which covers increasing share of transactions; 1986 adoption of limited exchange controls; 1987 attempt to re-establish interbank clearing system and so orderly financial and payments system, but undermined by continued budget deficits; 1989 LD5 coins replaced by LD5 notes (later called ‘J J Roberts’ notes); deepening crisis, with increasing arrears to IMF and other external lenders; (first) civil war 1989-96 greatly worsens economic and social conditions, with GDP falling very heavily, much of population displaced, many banks closing, central bank largely ceasing to function, loss of statistical data and capacity, emigration of skilled labour; 1992 ‘Liberty’ LD5 notes issued by central bank to replace J J Roberts notes, which continue to circulate in other areas, Liberty notes at massive discount to USD, J J Roberts at small premium to Liberty notes; end of civil war 1996 with new President elected leads to short term economic rebound; 1998 official parity of LD with USD rescinded; late 1998 Liberian government gets involved in Sierra Leone civil war, with adverse effect on international standing; late 1999 new (but illiquid) central bank in place of old one, with shrunken banking system having very high level of non-performing loans; budget deficits still large, financed by central bank note issues and growing arrears; major continuing governance issues, including weak statistics and reporting; 1999-2003 intensifying second civil war, with sharp fall in GDP in 2003; 2001 central bank raises reserve requirements in attempt to stem depreciation of LD vs USD; late 2001 one commercial bank closed; late 2002 central bank issues 90-day CDs; monetary policy complicated by very high dollarisation (official currency is LD but USD is also legal tender); increasing conflict and international intervention leads to 2003 Accra peace agreementunstructured discretion UD
2004-17national transitional government moves to strengthen economic management, but keeping dual currency arrangement for now; central bank’s financial position improves but remains weak; 2004-5 reserve requirements on LDs and USDs harmonised (at lower level), central bank accommodates rebound in demand for LDs, forex auctions used mainly to manage liquidity, some discussion of return to full (USD) dollarisation; 2005 presidential election, 2006 new administration moves firmly towards reform and reconstruction; central bank treats exchange rate as key indicator and aims for broad stability as means of controlling inflation (given lack of ordinary monetary instruments); strengthening recovery, with return in 2009 to 2002 level; excess liquidity in banks; official long-term aim of de-dollarisation; credit to private sector and wider financial development remain relatively low; 2013 monthly issues of LD treasury bills, also central bank bills; 2014-15 epidemic of ebola with large adverse economic effects; as of 2017 central bank has reduced its emphasis on exchange rate stability, but it continues to lack effective instruments and to be in need of recapitalisation, while transmission mechanism is weak; statistical data improved but still weak or absent in many areasloosely structured discretion LSD

Selected IMF references: RED 1973 pp34-6, 57-60; RED 1974 pp31, 36-7; RED 1975 pp24-5; SR 1975 p4; RED 1977 pp28-30; RED 1978 30-2; RED 1981 pp47-9; RED 1983 pp36-9; SR 1984 p19; RED 1985 pp33-4, 38; SR 1985 pp11-13; RED 1986 pp34-5, 60; SR 1986 pp14-16; RED 1987 pp6-8, 11; SR 1987 pp12-16; RED 1988 pp27-34, 43; RED 1989 pp23-31, 40; SR 1989 pp4-6, 9-15, 19-20; Further Review following Declaration of Ineligibility August 1994 pp3-5, 7; Further Review following Declaration of Ineligibility February 1995 pp2-3; Memorandum of Economic and Financial Policies October 1998 ¶¶1-5; Review following Declaration of Ineligibility February 1999 pp3-6; SISA 2000 pp3, 13-14, 18; SR 2000 pp10, 18-19, 20; SR 2002 pp6-7, 10, 17-18; SISA 2003 pp11-13, 17-21; SR 2003 pp5-12, 16-17; Report on Post-conflict Economic Situation February 2004 pp5-6, 12-14; SISA 2005 pp9-10, 20-2; SR 2005 pp6, 13-16, 18-19; SR 2006 pp14-16; SR 2008 pp14, 17-20; SR 2010 pp16-18, 20-1; SR 2012 pp30-2; Second Review under ECF November 2013 pp12-16; Memorandum of Economic and Financial Policies November 2013 ¶¶29-35; SR 2016 pp4-5, 14-18; SR 2018 pp12-14, Annex VI, Statistical Issues.

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