Communique No. 1 - Monetary Policy Decisions of the Board of Governors

Global Macroeconomic Developments

The global economy remains largely characterized by lingering uncertainties and expected to weaken in 2019, reflecting slow manufacturing activity, reduced business confidence and a fall in demand in China. Global inflation is expected to decline to 3.6 percent in 2019, slightly lower than the 3.6 percent recorded in 2018 due to weak global activity. The subdued global demand is expected to adversely affect the price dynamics of Liberia’s major commodities, while projected rise in fuel price will trigger upward movement domestic prices. Although several advanced countries are loosening their monetary policy rates to stimulate their domestic economies, which should support capital flows to countries tightening their monetary policy rates, this will depend largely on other macroeconomic factors in those countries and how strong the economies are linked.


Domestic Macroeconomic Developments

The third quarter of 2019 witnessed suppressed economic activity reflected by a negative output gap. Inflation was 30.7 percent in the third quarter, compared to 27.3 percent in the second quarter. Non-food and food inflation contributed to the overall rise in inflation in September, indicating higher demand pressures in the economy. Inflation is expected to remain in double digits in the near term, largely due to external trade non-competitiveness, expectations of higher prices and slowdown in the real sector. Month-on-month inflation fell in the third quarter compared to second quarter. The rise in the prices during the third quarter was mainly driven by the deprecation of the Liberian dollar.


External trade worsened to a deficit of US$156.6 million from US$132.8 million in the second quarter of 2019.  The worsening of the trade balance was due to 2.4 percent rise in import payments and 12 percent reduction in exports earning. Coupled with the worsening of the trade balance, net inward remittances fell by 20 percent, translating to a higher exchange rate pressure during the quarter under review.


During the quarter, credits in Liberian dollar to the private sector were low at 1.1 percent of GDP, but grew by 4.3 percent, resulting from growths in loans to personal (71.4 percent), oil and gas (25.3 percent) and services (12.2 percent) sectors. Similarly, credits in US dollar grew by 2.5 percent (12.1% of GDP) on account of growths in loans to manufacturing (70.1 percent), trade (7.6 percent), personal (6.5 percent) and agriculture (4.0 percent) sectors, respectively. 


Broad money supply (M2) grew by 3.7 percent to L$119.4 billion at end September 2019 on account of growths in both Narrow Money (M1) and Quasi Money. M1 grew by 3.8 percent on account of 1.9 percent and 4.5 percent growth in currency outside banks and demand deposits. Currency in circulation (CIC) at end of the third quarter recorded slight growth of 2.3 percent triggered by 8.0 percent and 1.9 percent growths in currency in banks and currency outside banks, respectively.


The banking system remained resilient in the quarter, accounting for over 85 percent of firms in the financial sector. Capital Adequacy Ratio (CAR) reported was 27.5, indicating 17.5 percentage points above the benchmark of 10 percent. However, non-performance loans remained a challenge, representing 12.7 percent of the total loan, reducing by 0.5 percentage points relative to the previous quarter.


The interbank and money markets operations remained relatively weak. The monetary policy instruments did not have the expected impact on deposit and lending rates at commercial banks due to negative rate of return relative to inflation.


Real GDP is projected to further slow down to 0.4 percent in 2019 mainly on account of structural constraints affecting expansion in the service and secondary sectors, despite the 13.2 percent and 2.8 percent growths in mining & panning; and agriculture & fisheries, respectively. Growth in mining & panning is underpinned by increase in mechanized gold production. Projections for 2020 shows an increase in growth by 1.6 percent due to projected growths in mining & panning, agriculture & fishery and manufacturing.



The Board considered developments in the third quarter and given the anticipated pressure in liquidity conditions in the coming months, the Board finds it prudent to maintain the existing tightening stance with continuous monitoring of macroeconomic and market condition.


Having considered the above, the Board of Governors approved the tightening of monetary policy as follows: 

(a)       Increase the Standing Deposit Facility (SDF) rate to 30% and set the Standing Credit Facility at 500 basis points above the SDF; 

(b)       Issue shorter tenor instruments (2 weeks, 1, 3, 6 and 12 months) at 30% per annum;

(c)       Reduce the Liberian dollar Reserve Requirement (RR) to 15% from 25%, and increase the US dollar RR to 15%, from 10%; and     

(d)       Suspend the 25% Remittance Split Policy for the month of December 2019.