DOLLARIZATION AND DUAL CURRENCY

ISSUES AND RECOMMENDATIONS

August 11, 2016

PRESENTED BY:

HON. MILTON A. WEEKS

EXECUTIVE GOVERNOR

CENTRAL BANK OF LIBERIA

CONTENTS

Liberia Monetary Regime

Dollarization and its Impacts

Dollarization in Liberia

International Comparison of Dollarization

Moving to Single Currency does not guarantee stable

exchange rate

Recommendations

LIBERIA MONETARY REGIME

The dual currency regime is characterized by high level of

dollarization;

Effective monetary policy by the Central Bank of Liberia

(CBL) is difficult;

The US dollar share of broad money remains high: 71.3

percent at end-May, 2016;

DOLLARIZATION AND ITS IMPACTS

Dollarization - the departure from

holding of portfolio in domestic

currency to foreign currency.

Major forms:

Transaction dollarization or

currency substitution, which is the

use of the dollar as a means of

payment in domestic transactions

Financial dollarization, the

substitution of local currency

assets or liabilities for those in

foreign currency;

Reduces exchange rate risk byreducing exchange rate friction betweencurrencies;

Makes the supply of liquidity costlydue to seigniorage loss;

Creates weak control over monetaryand exchange rate policy;

Exposes the economy to externalshocks, etc.;

May encourage Capital flight

DEPOSITS: US & LIBERIAN DOLLARS AND DOLLARIZATION RATIO

78.0

80.0

82.0

84.0

86.0

88.0

90.0

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

40,000.0

45,000.0

50,000.0

Mar-07

Aug-07

Jan-08

Jun-08

Nov-08

Apr-09

Sep

-09

Feb-10

Jul-10

Dec

-10

May

-11

Oct-11

Mar-12

Aug-12

Jan-13

Jun-13

Nov-13

Apr-14

Sep

-14

Feb-15

Jul-15

Dec

-15

SOURCE: CENTRAL BANK OF LIBERIA

USD Deposits LRD Deposits Dollarization Ratio (Right Axis in Percent)

Over 80 percent of deposits are

denominated in US dollars.

Deposits dollarization on

average was 86.3 percent from

March, 2007 to December,

2012.

The high level of dollarization is

partly due to high public

confidence in the US dollar.

USD, LRD Credit to Private Sector (CPS) and Dollarization Ratio (%)

87

88

89

90

91

92

93

94

95

96

97

98

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Ma

r-0

7

Jul-

07

No

v-0

7

Ma

r-0

8

Jul-

08

No

v-0

8

Ma

r-0

9

Jul-

09

No

v-0

9

Ma

r-10

Jul-

10

No

v-10

Ma

r-11

Jul-

11

No

v-11

Ma

r-12

Jul-

12

No

v-12

Ma

r-13

Jul-

13

No

v-13

Ma

r-14

Jul-

14

No

v-14

Ma

r-15

Jul-

15

No

v-15

Ma

r-16

Source: Central Bank of Liberia

USD CPS LRD CPS Dollarization Ratio (Right Axis)

Credit to private sector

denominated in US dollar on

average was 95.0 percent from

March, 2007 to March, 2016;

A maximum of 97 percent and

minimum of 91 percent, signaling

the high level of dollarization in the

country;

Businesses and consumers are

comfortable in taking US dollar

denominated credits due to the

stability in its value.

INTERNATIONAL COMPARISON OF DOLLARIZATION

An economy is dollarized if the ratio of

foreign currency deposits to broad money

exceeds 30 percent (Baliño, Bennett, and

Borenstein, 1999);

Liberia in 2015 was the 2nd most dollarized

economy amongst selected developing

countries;

In selected WAMZ countries Liberia and

Ghana were the two dollarized countries at

end-2015;

Liberia dollarization ratio was 70.2 percent

in 2015, from 61.0 percent in 2007;

Ghana dollarization ratio was 33.3 percent

in 2015, from 20.9 percent in 2007.

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

INTERNATIONAL COMPARISON OF DOLLARIZATIONForeign Currency Deposit to Broad Money

Liberia FCDM(%) El Salvador FCDM(%) Cambodia FCDM(%)

Sao Tome & Principe FCDM(%) Uganda FCDM(%) Sierra Leone FCDM(%)

Nigeria FCDM(%) Ghana FCDM(%) Botswana FCDM(%)

Angola FCDM(%)

Amongst the countries selected, Liberia isthe only country with dual currency regimewhile Cambodia, the most dollarizedcountry, hasmultiple currency regime.

MOVING TO SINGLE CURRENCY DOES NOT GUARANTEE STABLE EXCHANGE RATE

It is important to note that the

use of a single currency does

not guarantee stable

exchange rate as shown in

the graph;

In order for the domestic

currency to appreciate, there

is a need for real sector

diversification (agriculture,

manufacturing etc.) that

adopts a value added growth

model.

L I B D O L L A R D A L A S I C E D I G N F L E O N E N A I R A

8.7213.1 15.67

19.423.9

58.19

196.5--310.5

Major WAMZ Currencies Weaken

End July 2015-End July 2016

RECOMMENDATIONS

The Central Bank of Liberia believes it is only prudent to move to a single

currency through collaboration with fiscal authorities and consultation

with the Economic Management Team Chaired by H.E Madam President.

In order to achieve De-dollarization, a gradual market approach begins

with 1)Transactional De-dollarization followed by 2) Financial De-

dollarization.

There is a need to develop a road-map that will guide the process of De-

dollarization.

THANK YOU!