Printing currency – My thoughts on next steps

I have provided reflections on the conversations that I had with a friend, the non-economist, over the past few days and now I have decided to provide my own thoughts on what the next steps should be.

First, we have to print some money. There are no two ways about it. It is an imperative. We MUST increase the amount of Liberian Dollars in circulation, period.

The fact remains that the amount of currency in circulation is grossly inagequate to support an economy that is arguably about US$5 billion even though official statistics puts the GDP at US$3.4 billion.

I believe that the size of the informal sector makes the US$3.4 billion GDP to be severely understated and this why I am estimating that the true GDP is US$5 billion. The exact amount of currency to be printed will be based on the actual data that policy makers have in their possession. I am not privy to that number and the underlying justifications and assumptions.

However, from every data available in the public domain coupled with a general understanding of the economic situation, all indications point to a conclusion that unless we print additional currency, we might be heading for bigger economic woes.

I am not oblivious to the fact that there are explanations required about the previous printing of the L$16 billion currency. However, I am arguing that the lack of satisfactory explanation is no reason to argue that currencies should not be printed. What I believe policy makers should be more interested in is what mechanisms are being put in place to ensure that the “confusion” or whatever lapses there were, do not occur again. But to prevent the printing of currency will be equivalent to committing suicide. It will like proverbial “throwing the baby away with the bath water.”

Again, I m not arguing that printing of the currency will solve the problems. It is not a panacea! Printing of currency, while necessary, is not sufficient to deal with the economic problems we are faced with. However, there is no way we can solve the problems we have if we don’t print currency. Again, let me emphasise that printing will not solve the problems but not printing will amplify the problems.

For an estimated US$5 billion economy, we need the equivalence of approximately US$250 million (or L$50 billion) to support transactions within the economy.

However, printing L$50 billion alone will not be enough. I will encourage the introduction of various forms of currencies such as digital money (mobile money, mobile wallet, etc) and electronic payment systems. Additionally, the Central Bank will need to quickly implement a “payment switch” platform that will allow banks to talk to another seamlessly and support the movement of money from one account to another. This will enable folks to be able to move money from bank accounts to mobile wallets and it will also make it possible for businesses to accept various electronic payments directly into their bank accounts. If such platform exist, then the increased need for paper money will be severely diminished and we won’t be at this point anymore.

I am also aware that printing currency will bring about inflationary pressure and increase in exchange rates. The economists will have to devise mechanisms to handle these issues. However, I think opening up new sources of revenue or expanding existing sources of earning foreign exchange will be the necessary next step.

Now, to achieve anything will require doing some unorthodox things. By that I mean that some things that our traditional partners may not like. But if they really care about us, they won’t allow us to be in this situation, in the first place and so I guess we have to look out for ourselves.

I think we need to jump start logging in a big way especially as we approach the logging season (dry season). I believe that logging is the lowest hanging fruit in terms of raising big US$. I am not talking about selling fire extinguishers or license plates or work permits. I am talking about raising tens of millions of US$: exporting hundreds of cubic meters of logs. If not logging then what else?

We have iron ore and we have fish stock. It will take aleast 24 or 36 months to get any iron ore project off the ground; even Arcelor Mittal that is already in production.

On fisheries, we need to take some radical actions and forget about EU preconditions. Do we really have to sell fish to the EU market? There are about 513 million people in the EU. In China alone, there are about 1.4 billion people. So why the EU?

So I think we have choices before us but we have to bite the bullet and make them. However, we first need to start with authorizing the printing of currency while at the same time introducing the enabling policies and platforms to support alternative currencies or medium of exchange.

Once we have these in place then we have to move quickly for big revenue measures ;not those small ideas that add nothing.

There are also other things which we must do but I will talk about those later: national address system and national biometric identofication system. I have my thoughts…

More on printing banknotes: from the non-economist (my friend)

After reviewing the various comments on the reasons that my friend (the non-economist) provided for why he thinks it is not implausible for vast amount of Liberian dollar banknotes to be out of the banking system thereby creating what appears to be a shortage of Liberian Dollars on the market, I went back to him to understand a little more and to get his thought on whether be believes that more currencies (banknotes) needed to be printed.

In our conversation, he opined that it might just be the case that the country needs to print more banknotes. However, he cautions that inflation might be a by-product of this printing exercise and so care will need to be taken. On the other hand, he argues that if the economy doesn’t have sufficient banknotes (money supply) to support economic activities then that is a problem and this just might be what the country is experiencing.

He says that no matter what country we are talking about, there MUST be a certain amount of currency in circulation to support economic activities. He argues that if Liberia’s GDP is approximately US$3.4 billion, it will need at least about 5% of that amount in currency to support economic activities. This means that there should be approximately L$34 billion to support an economy that size (5% of US$3.4 billion x L$200). Doesn’t seem to me like we have that much banknotes printed.

Still further, my friend said given that National Accounts Statistics is not well developed and the informal sector may not have been properly accounted for in the GDP figures, it is possible that your GDP is understated. And if that is the case, then it means that even L$34 billion (or US$170 million) is small to support your economy.

Now if we assume that he is right and that the GDP is close to US$5 billion then it means that at prevailing exchange rate (1 USD to 200 LD) the country needs about L$50 billion (or US$250 million) to support current level of economic activities.

He argued that if the country doesn’t have the required amount of currency to support economic activities then there is bound to be serious problems in the economy and this might just be what the country is experiencing.

He goes further to state that printing money will not necessarily solve the country’s currency problems but at least it will address the fundamental issue of the required amount of money supply needed to support the economy.

Once this proper level of money supply is achieved, he says that we have to find a way to digitize the economy and move into a more cashless economy so that we are able to perform business transactions without necessarily moving papers around.

I thought he made sense! Now, I will go back to him so we can talk about the digitalization of currencies to help support economic activities.

I didn’t say my friend was uneducated; I said he is not an economist.

Liberian dollars out of banking system: an anecdotal explanation from my friend, a non-economist

Every time I have a conversation with my friend (the non-economist) about the shortage of Liberian dollars on the market, he tries to explain something to me but I am always dismissing him. He is not an economist; just an ordinary businessman. However, he tries every time to make this point and so I decided to pay some attention this time around.

I am not an economist by any definition. I consider myself a student of public policy. I am still learning and so I never turn down the opportunity to learn from anyone. In fact, I consider every moment as either a teachable or learning moment. I will either learn from or might teach someone. That is why I never shy away from debates no matter how sophisticated the other person is.

I know the economist love to talk about empirical evidence but as a student of policy (politics and economics), I believe that anecdotes have value in policy formulation.

My friend tells me that we have a population of approximately 5 million people. He says, let’s assume that about 1 million people (either petty traders, money changers, market women, large businesses, and some ordinary people) decide to keep at least the equivalent of US$100 on them as working capital so that they are able to buy food, pay children transportation to school, buy goods, change money, or just hold for emergency because they don’t want to run to the bank every time they need small money. He says if these assumptions are true and he fervently believes they are, then we have about L$20 billion (1 million people, each holding about L$20,000) in hands of people: outside the banking system.

Now, if the total money we have printed is approximately L$23 billon (old money plus new ones) then it is easy to understand to why there are no Liberian dollars in the banks. For him, this is how he sees the problem and he believes it is not unreasonable for people to hold some cash outside the banking system, for various reasons.

He goes further on the back of the envelop again to argue that if the economy has only about L$23 billion to support economic activities then we need to rethink becasue when the rate was L$80 or L$100 to 1 US$, that L$23 billion was approximately US$230 million. Today, that amount is approximately US$115 million. And because we run a highly dollarized economy, he is arguing that US$115 million cannot do what US$230 million used to do.

Well again, like I said, he is not an economist and neither am I but I thought he made some common sense and so I decided to reflect on it deeply.