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LET’S LECTURE: Liberia’s Dual Currency Conundrum

first_imgLiberia allows the use of two currencies for financial transactions: the Liberian dollar and the US dollar. For 40 years from 1944 it was not a problem because the Liberian dollar was on par with the US dollar. One Liberian dollar was equivalent to one US dollar. Then in 1983, military Head of State Samuel Doe introduced a Liberian five dollar coin, and that’s when the Liberian dollar started depreciating. During the civil war paper currency was added to the mix, resulting in further depreciation.Legend has it that when a group of students asked President William V.S. Tubman why he had not switched from the greenback to an indigenous currency, he responded, “Because I do not trust myself.” By that he meant that he did not trust himself not to yield to the temptation of printing money in order for the government to spend money that it did not have.A currency’s exchange rate vis-a-vis other currencies is a measure of inflation. Samuel Doe wanted to give soldiers a huge pay increase and to do other spending that the government could not afford. Someone told him that he could accomplish that by simply minting his own money. As a young man, I remember writing him an open letter pleading with him not to introduce the five dollar coin. I argued, correctly as it turned out, that if the government simply circulated money that was not backed by any productive value, the Liberian dollar would separate from the US dollar and depreciate. And that is exactly what happened.With the introduction of the new coins the Liberian dollar depreciated by 50 percent. You now needed two Liberian dollars to buy one US dollar. Prior to this, the concept of “foreign exchange” was alien to most Liberians. After all, our local currency had been on par with the US dollar. We only had Liberian coins, the largest denomination being one dollar, and the amount in circulation was small compared to US currency. These coins were traded side by side with US coins: quarters, dimes, nickels and pennies.Operating an economy with two different currencies of varying exchange rates is expensive. Households, businesses, NGOs and government have to hold and trade in two currencies. Financial transactions—sales, purchases, loans—-have to be tracked in two currencies. Businesses have to keep their books in two currencies, the government has to collect taxes in two currencies, and so on and so forth. As the economy grows the problems and costs become greater. Understandably, there is a raging debate now about the need for us to adopt a single currency.The question then is which of the two currencies should we adopt, the Liberian dollar or the US dollar? Many of those debating this matter seem to assume that the currency of choice should be the Liberian dollar. I am not so sure. Probably the biggest competitive advantage we have relative to our neighbours is the fact that we use the US dollar. It is freely convertible currency and the currency of choice for international trade. Prices for commodities—oil, minerals, precious metals, etc.—are all denominated in US dollars. Moreover, using the US dollar opens up all kinds of opportunities that we have not yet fully tapped to bring in more foreign direct investment. In addition to extractive industries we should be looking at ourselves as a regional hub for manufacturing, banking, insurance and other financial services. In the 1970s, Liberia was the transshipment capital of West Africa. We lost that position as a result of our civil war and higher taxation of transshipment transactions. But there is no reason why we cannot reclaim that position. Many would argue that it was our use of the US dollar that prevented our economy being ravaged even more than it was by the civil war. If we settle on the Liberian dollar, we can expect an acceleration in the depreciation of our currency. Ghana presents a cautionary tale. When the decision was taken by the Kufuor administration to re-denominate the cedi, it was trading at 10,000 cedis to one dollar. The new cedi started out in 2008 at 90 pesewas (i.e. less than one cedi) to the dollar. Today, it is trading at almost 4 cedis to the dollar. Within the last year, it has been depreciating at a fast pace as the Ghanaian government continues to print money in order to spend money it doesn’t have.So, If you think ninety Liberian dollars to one US dollar is bad, brace yourself for the Liberian dollar to depreciate exponentially should we decide to move to the Liberian dollar as the single currency. The writer is a certified public accountant and a businessman. He can be reached at (hagreaves49@gmail.com).Share this:Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new window)last_img

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