The African Development Bank (AfDB) says Liberia’s reserves are exposed to reputational risks resulting from microfinance loan schemes embarked upon by the Central Bank of Liberia (CBL).
According to Investopedia, bank reserves are the currency deposits which are not lent out to the bank's clients. A small fraction of the total deposits is held internally by the bank or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request. In addition to the legacies of Ebola outbreak that thumbed the Liberian economy so hard, the development banking institution, in its 2015 economic outlook, said “foreign exchange reserves have fallen from 2.8 months of imports at end 2013 to 2.5 at end 2014. In the face of the economic crisis, and with potential decreases in foreign exchange earnings, increased exchange rate flexibility will be necessary to maintain reserves. AfDB indicated in the outlook report that reserve levels are constrained by their use for lending schemes amounting to more than US$35 million, which are perceived to be intended for increasing access to finance to underserved borrowers at longer terms and lower rates. Financial experts have indicated that the approach to the microfinance loan scheme is flawed. In effect, the continental bank stated that these schemes create reputational risk, place the reserves at risk and potentially create market distortions.” According to the African Development Bank 2015 economic outlook report on Liberia, in July, the CBL also introduced a direct mopping scheme that sells foreign exchange to businesses while bypassing the auction mechanism. Despite an intention to improve access to foreign exchange, the measure could introduce market distortions. Limiting foreign exchange sales to a transparent and consistent auction mechanism would improve market efficiency and help build confidence in the LRD. This will be necessary to reduce currently high levels of dollarization, at around 72% of broad money. The AfDB report said lower foreign exchange intervention by the Central Bank of Liberia (CBL), combined with weaker growth and reduced supply of United States (US) dollars, contributed to an 18% depreciation of the Liberian dollar through June 2014. To further support LRD liquidity management and offset exchange rate pressures, the AfDB said the CBL continued in its second year of Central Bank Bill (CBB) issuance, introducing 180-day CBBs in addition to 90-day bills. Outstanding CBBs increased to L$2.7 billion through the first quarter of 2014 before declining to LRD 1.4 billion in the last half. Rates on 180-day CBBs increased from 2.4% in November 2013 to 7.1% in October 2014, while 90-day rates increased from 2.0% in August 2013 to 4.5% in July 2014. The earlier depreciation of the LRD contributed to consumer price inflation, which, for the first time since 2011, reached double digits in June 2014, peaking at 13.5% (year-on-year) in September, before falling to 7.7% in December, and averaging 9.9% for the year. The Ebola crisis added further price pressures, with travel restrictions and border closures slowing trade, and the cost of imported goods also now incurring additional freight and insurance charges. Lower international fuel prices should support a moderation in inflation in 2015 to around 7.4%. ] Additionally, President Ellen Johnson-Sirleaf in her State of the Nation Address (SONA) revealed that the Central Bank of Liberia “experienced operational losses” and that corrective measures would be taken to “ensure that well-intentioned microfinance loans amounting to L$644.1 million (equivalent to US$7.2 million) granted to savings and loans clubs are repaid fully remedy the situation”.