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.

 

Author: JAMES F. KOLLIE

I am a Liberian professional with passion for pro poor economic development and grassroot political organizing. I have read public policy, corporate finance and accounting at various levels. I have worked in government, private sector and non-profit sector.

5 thoughts on “Liberian dollars out of banking system: an anecdotal explanation from my friend, a non-economist”

  1. The assumptions made by your friend (the non- economists ) are valid enough. However, the motive for various economic agents holding these cash balances could have been triggered by systemic inefficiencies in the banking system ( or at commercial banks) as well as the dampened public confidence in the entire financial system, induced by the plethora of bad news that emanated from the Central Bank over the recent past. So, it behooves the Central Bank repair the reputational damage and work closely with the banking system to resolve the looming liquidity issues as soon as possible before they get out of hands, as panic is the driver of crisis.

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  2. Your friend is 100% right. As a non-economist myself, I find iui t difficult to understand why the economist aren’t seeing this or chose to ignore this simple fact?
    Now, talking about the solution, it’s as easy as ABC…let’s go digital! This is an economic consequence of a cash based economy. Countries who envisioned this sabotage were able to abort it by going cashless. So let’s say we introduced a cashless payment system, at least 60% of the 1 million people will migrate to a digital transaction. That’s bringing back over half of the money into the banking system. The remaining 40% might continue to use cash based transactions , especially in rural areas.
    It doesn’t address the problem on the overall, but it’s a great way to start. Plus the value addition that comes with it in terms of financial security and fluctuations created by local exchangers that are difficult to control…well, there might be no need for those anymore, except for the rural areas. We can expand on this, but a great place to start.

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  3. Your friend is 100% right. As a non-economist myself, I find it difficult to understand why the economist aren’t seeing this or chose to ignore this simple fact?
    Now, talking about the solution, it’s as easy as ABC…let’s go digital! This is an economic consequence of a cash based economy. Countries who envisioned this sabotage were able to abort it by going cashless. So let’s say we introduced a cashless payment system, at least 60% of the 1 million people will migrate to a digital transaction. That’s bringing back over half of the money into the banking system. The remaining 40% might continue to use cash based transactions , especially in rural areas.
    It doesn’t address the problem on the overall, but it’s a great way to start. Plus the value addition that comes with it in terms of financial security and fluctuations created by local exchangers that are difficult to control…well, there might be no need for those anymore, except for the rural areas. We can expand on this, but a great place to start.

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  4. I could not disagree with your friend on the subject under discussion. His argument is very much in place and makes a lot of sense. Frankly, there might even be more money being held then actually estimated . For instance, due to lack of trust in the banking system and the current shortage of money which makes it difficult to access savings which has reduced the people’s purchasing power, many people have turned to keeping their cash home in order to have easy access when there is a need to spend.

    Some organizations have begun or are considering paying their staff (for December) in cash instead of through their respective bank accounts as has been the normal routine of salary payment. Business people who make huge cash daily are also hesitant to take their money to the bank for fairs of not having access to it when needed most.

    ATM, Mobile Money, Western Union/Money Gram and other cash transfer systems cannot pay out cash to people when they need it most to settle children’s school fees, pay medical bills and take care of other monthly expenses.

    The economists need to find the way around this to first restore confidence in the financial and banking system and ensure that the alternative systems put in place for accessing money or carrying out financial transaction is adequately working and customers are getting the maximum utility of services paid for.

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