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.