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.