Could you give us a brief overview of Liberia's economic situation?
As you know, Liberia is still in a post-conflict situation, and as such, with tremendous damage to the infrastructure and to some degree to the social fiber, the country has yet to get back on the proper economic track. To date, due to difficulty in obtaining traditional support from the donor community, the pace of reconstruction, particularly as it pertains to traditional infrastructure, has been very, very slow. We have been unable to get citizens fully repatriated and resettled; therefore you still have quite a bit of a densely populated city. That notwithstanding, the government recognizes the need and is trying to do the best with limited resources. Unfortunately, to attract foreign direct investment…let me back track a little. I have always maintained a position that official flows should not be the principal source of development. Liberia has a legacy from the past of a very strong private sector and Open Door Policy. I believe, today, tomorrow and in the future, the private sector will be the engine to drive the Liberian economy. To get that, infrastructure is fundamental, but even equally so, if not more so, the legal and regulatory framework must be conducive… because, as you know today, even the physical infrastructure, in many places, is able to attract foreign private investment.
Therefore, if the conditions are right, I have no doubt that Liberia, being a dollarized economy and unique in that respect will succeed. Liberia is the only country in sub-Saharan Africa, which has a totally liberalized capital account and a totally liberalized current account. And this, along with the U.S. dollar, the Open Door Policy, the free enterprise system and the private sector-driven economy, I think put together a package that can hardly be matched by any other country in the sub-region.
What would be the priority?
I think, in the first instance, we have to project a proper image outside. Secondly, what happens on the ground has to be consistent with the message we send out. It is not enough to send out the message and what's on the ground is different. And I think to the extent that we can make this investor-friendly again… cut out the bureaucracy, cut out the red tapes, get a transparent and good government… and as I said let the economy be very investor-friendly. Predictability is very important. When an investor comes in, he must be able to know before he comes in what the requirements are, what the expectations are. He must have the assurances that when he fulfils those he would get what he expects to get. And I think these are some very fundamental points. Fortunately, I would say Liberia has a President unique, in this respect, who perhaps appreciates this or understands this more than any other African head of state that I have dealt with over the many years. Now, there's the static and the dynamic … there's one thing to be aware and another to put into practice..
Eight banks were apparently closed in the past 10 years due to insolvency and liquidity problems. What would you say is your assessment of the financial sector, and what measures are being implemented to reinforce the structure of commercial banking?
First of all, let me say that Liberia's financial sector has traditionally been largely a banking system. We have never really gone non-banking financial institutions… we have never really been developed… we had a few insurance companies here, but that was it. And therefore the capacity to mobilize turn resources has always been limited. The contractual saving industries - social security, providence funds and insurance - have never really been developed. The banking system is very, very small. As you rightly pointed out, a number of the banks were closed and we had the difficult task a few months ago of seizing another bank, LUBI, which was difficult. LUBI was the only bank that served the small Liberian depositors, and it has almost 20,000 small depositors. But there was the issue of how long do we exercise regulatory forbearance and when do we step in to protect not only the interest of the depositors, but the integrity of the system itself. It is still fragile after the war days. As you know deposits are not only from commercial enterprises, but from individuals as savings. The extent to which they can do it depends on their own disposable personal income from which you save. There are a lot of people not even employed today and to the extent that they had savings in there, we had to make sure those were not lost. I would say however that despite the fact that one bank was recently seized and you have four fully functioning banks today, I would say the banking system today is stronger than that banking system was anywhere in the last ten years. You know, what we've done, as we came in, is to introduce the necessary prudential guidelines which are consistent with international norms and … these cover things like capital adequacy ratios, liquidity ratios, loan classification and provisioning requirements, accounting treatment for various transactions, risk concentration, exposure limits, connected and inside parties lending and we believe we are now at a level where we are compatible with Ghana; it's bigger there, as you may know I spent four years there as a World Bank advisor working on their banking system restructuring. I would dare say we are today nowhere where Ghana is, but we are today probably as strong as you could find within an economy, which has four functioning banks. What we've sought to build, I don't believe we should rely on regulation.
What do you mean?
In most cases, regulations are what drive system. I believe confidence is important and it must be continuously earned and not just once. I believe competition leads to efficiency and as long as it is competitive, it's efficient, and the savings generated can be passed on even to the depositors and the public. So, we are driving for reasonably free entry and exit. A competitive and efficient banking system, be it small, but one in which we know that inter-mediation will be developed and will be continued. The size for us is not an important factor, and we are starting in the first instance by creating a consultative forum with the banks to institutionalize it once a month. And I prefer to treat this as a partnership rather than purely an oversight relationship.
You have said the size of the banking sector is not important?
It's not the most important. If a bank operates with only few depositors then per yearly cost transactions would be higher. I am saying the size is not the single most important element. I have seen, for example I worked in the Nigerian banking system for a long time, probably the last World Bank report in 1997 on the cost of inter-mediation was done by me for Nigeria and I know that you could cut out more than 50 percent of the banks and the system would be remissive.
Yes, but Nigeria has about 120 million people with some sort of saving potential, sustainable income, when Liberia has slightly more than two million people with four commercial banks…
Let me come back to something. Nigeria had the second highest number of banks per capita next to Belgium, and that is something that struck me, because the intermediation cost was high, the efficiency among the banks was low and if they brought the efficiency level to where it should be… that's Nigeria, but here you know the system had virtually broken. I don't know whether you're aware, but there was conflict between the then National Bank and the commercial banks, and I came in as Central Bank and inherited it, which said we've given you our deposits and you've taken it… we've given you our reserves and suddenly one day this is what the report says that they suddenly declared it was one-to-one parity - and therefore if you give me five million US dollars, I give you five million Liberian dollars. As a result of which, apart from litigation, there was no confidence. I think we've passed that stage now and I rely on regulations and the power of the Central Bank as a last resort. We are now in a position where if the banks run a little short we can help them get over it. We have a consultative forum, which gives us the chance to find out what their concerns are and let them know what it is we are trying to do. The clearing and settlement system had broken down in Liberia, so the banks were clearing among themselves. We have now revitalized it; we are now doing clearing and settlement in three days when before it took 10, 12 to 15 days, and it was a matter of letting the customers beware that if they could not get settlement in two weeks, then it had to be three weeks and not in three days. So, we are trying gradually to make some progress. We like to attract some banks … we are talking to banks in Lebanon and other places, but no matter who you talk to, no matter what you put in the papers, the potential investor will come here and he will talk to other banks on the ground to find out their experience and whether we are serious. So our actions must be consistent with what we put out (in the media).
Since the end of November, the Central Bank is the sole custodian of government funds, formerly carried by commercial banks. To what extent do you think this will impact on the performance of the commercial banks?
This is something the banks have been saying a lot - that we took away some money from them. But basically they have not exercised resourcefulness and imagination in trying to mobilize resources. The banks in Liberia have not been lending, they have been content to rely on field-based income, purely credit substitutes and they have got to go out, mobilize resources and actually lend. One of the things I hope will come out of this is to awaken them that they must go outside and mobilize resources and if we have it here we may very well be a source for them. We also need to develop a short-term inter-bank money market. And that is one of my problems, people talk about stock exchange … that's to me so far away, but a money market is going to help to ensure that those with excess liquidity and those with insufficient liquidity can match so that we optimize the use of the resources within the system.
The existing banks are said to be refusing checks drawn on each and other, could you elaborate on that issue?
It had happened in the past and it happened even when we began to administer clearing, as we were not having settlement. But actually new guidelines came out and banks are now receiving other bank's checks so that can't happen anymore. We will not hesitate to suspend a bank from clearing or fine them if we thought they were doing anything that would undermine our capacity to rebuild the payment system. I think to a large extend the banks are cooperating now, and it's basically like a partnership. | One of the important elements is for the banking system to get access to international funding and particularly to long-term funding. Where do you stand in that respect?
Quite frankly right now, we will continue to limp until we do get access to this. No matter how much our vision is, or what our plans may be, we will continue to experience some difficulties until we can access such funds and this has nothing to do with just Liberia - these are just economic realities in any dynamic environment. You can't miss-match maturities, you can't take short-term resources and use it for long-term needs. There are long-term requirements we will need financing for. Luckily for Liberia, perhaps unlike other countries, because we are a dollarized economy, because we are an open economy, we still have flows coming in, so we don't have a problem. You probably know Liberia has maintained, since we introduced the new Liberian bank notes, the most stable exchange rate and one of the lowest rates of inflation in the sub-region and these are two things that I guide very jealously.
Would you say these are some of the achievements in the very short period of your governorship?
That, plus I think we have introduced some sanitization and sanity to the banking system. I believe there is now discipline and there is a greater sense of public accountability on the part of the banks.
What makes the Central Bank of Liberia unique as compared to other West African Central Banks?
The Central Bank is the most autonomous in the sub-region by law. I must also say, we are also fortunate in that the President was directly involved at all stages when the laws were been put together with the assistance of the IMF advisor and FINREF (Financial Reform Commission). So, when I was asked to come in as Governor, we discussed details of the law I didn't think the President would have time to know about, but he said: "Elie, I went through this myself". As you know, unlike our Nigerian counterpart, who can be removed at the will and pleasure of the President, here I have to be impeached. Let's not kid ourselves, this is in Africa, if he really wants to impeach me, he'll find a way. But, at least, I'll have my day before the Legislature (parliament). This is unlike being a Finance minister when I was chairing a meeting on incentives to revitalize the logging industry in the private sector when I heard the announcement that there was a new Finance minister. These are the realities of life. We have not only the greatest autonomy by law, but we've been allowed to function in that respect … and with the currency arrangement which in the beginning many persons thought was a dual legal tender currency arrangement, as you know the U.S. dollar is legal tender, so is the Liberian dollar. The market determines the rates. People were afraid that it makes monetary policy difficult. It really has not made it difficult. The policy mix is a little different … a slightly different arrangement. It doesn't take away your capacity to conduct monetary policy. In a sense I feel different and our dealings as a Central Bank with the fiscal side of the government is minimum. During the dedication of this facility (the Bank), I spoke strongly in my speech about the increase in the petroleum prices and the consequences on what I consider a weary private sector, which may not continue to survive its impact on cost of living and the consequences for inflation. I heard later that they thought it was a sensitive area that people were surprise that one would publicly speak when the President was sitting there, but I did. He never said a word, he never asked me. We are different because we are much more autonomous by law and the capacity to operate that way. We have the latitude because there are no exchange controls… nobody needs to come in here. In fact, we were contemplating very seriously asking people coming in to declare the amount of foreign exchange they are bringing with them and when they are going out, because it has an implication for balance of payment data. But because of the situation on the ground right now, and people need to be more and more re-assured, if you do it they may start thinking this is the first stage to controls. So I decided the timing was just not right. This whole thing is about timing. Secondly is the security situation. If you come in and declare so much money and pass it to somebody, who knows who may come to Mamba Point Hotel to look for you. These are issues that we have decided will have to wait until the right time.
What are the lessons that you have learnt from your work at the World Bank and restructuring the Ghanaian economy which could be applied to Liberia?
Let me just make a slight correction. In Liberia there is the impression that I almost worked miracles for the Ghanaian economy. I was largely responsible for the financial sector,which had to interact with the rest … development of the stock exchange and capital market, and they had implications, but it was not as far-reaching as Liberians would tend to mention. One of the aspects that I've learnt is financial sector reform must be carefully planned, action must be well sequenced, and pace of intensity must be realistic and well determined. The process is a slow one. It is not going to be overnight. The tendency to think that once you've had banks restructured and put in place is the solution, or now is the end of it, is wrong. If you do that, you would have relapses. The linkage between a sound financial system and the larger economy should not be missed. If the private sector is the engine of growth and development, the banking system is the principal piston in that engine. Unless that linkage is right and the synchronization is right, you are not going to get the benefits or the results you want.
Governor, you have a five-year mandate. What would you like to achieve in five years time?
I want to continue to have a stable Liberian dollar. I want to continue to maintain inflation … as you probably know, Liberia's year-on-year inflation rate through September has been 6.2%; October inflation rate was 3%; at year-on-year through October was about 5.8% … that is well, well below anything that a developing country in this part of the world can claim. I would like to also continue to achieve the control and contained inflationary environment. On the other hand, I want to also be remembered as somebody who's prepared to take actions to stimulate the economy even if it sounds like if I say I would be willing to see inflation go up by one or two percent if the growth in the economy will over compensate for it. So, we would like to build a strong, viable, competitive and efficient banking system. I would like to have achieved a stable Liberian currency. To have developed and put in place the basis, if not a fully functioning, inter-bank money market because I think that is going to be essential to make sure the economy gets moving… And rebuild confidence in the system.
You asked me earlier on about ECOWAS. There are on-going discussions about an economic union… it is a very delicate one. In the economic context, it makes a lot of sense. And as a long-term objective, it is laudable… we should not lose sight of it. But again, like financial sector reforms I was just talking about, it is important that we define realistically where we are and where we want to go. Realistically determine the pace to go there and not let political consideration drive an economic decision. I think that it is realistic that we can get one common market and we should seek for it in the near future. I mean it is realistic that we should try to drop the immigration barriers, and work toward free movement and work permits and seek to harmonize our customs tariffs; we should seek to rationalize our investment codes and seek to harmonize our commercial codes, and when we put these together, then, we have laid the platform to start thinking about a common currency. The Maastricht agreement and the current experience of the EU should tell us that we should not jump before we start to walk. An economy such as Liberia's, which is very fragile, but has some good legacies in the corner, such as the liberalized economy and the dollarized environment… we should not lose it. Realistically, we are anchored by the dollar, CFA countries are anchored by the French Franc which in turn is anchored by the Euro, so indirectly they are the Euro. Do we give up our dollarized economy to be anchored by what? The Naira? Ghana is probably pushing because you know the Cedi hasn't done too well. We have insisted that we are not here to finance fiscal deficits, so we have managed to keep things under control. But if you look at the monetary arrangements of Nigeria, it is so large that if you have a one percent movement, the rest of the countries in that currency zone are in trouble. So we have to be very careful. My advice to the President is to support it, go along with all the other things, but tell them when it comes to the currency, we are still fragile, we are still a post-conflict country. Our hearts are there, they should start the process, we will watch it. We'll come in later, but we can't afford a crack in what we are doing. And that's basically my own advice.
What message would you address to the 550.000 business readers of Far Eastern Economic Review?
Liberia has a lot of potential. In order to take advantage of it, one must be willing to take some risks. Opportunities will not find themselves lying on the table, you have to come in and look for it. I think on a per capita basis, Liberia is strategically located. We have deep seaports, we are well endowed with natural resources and I think the economic foundations on which this country was built are still there, and anybody who's interested in a free enterprise system should be willing at least to venture. So rather than stay out and wait until everyone says it's good, there'll be others who will be done to it. |
CENTRAL BANK OF LIBERIA