The Contours of Money, the Financial System and Ancillary Matters
12 Pages Posted: 8 Feb 2021
Date Written: January 12, 2021
Recent developments in the monetary sphere of Liberia including the “dearth of local currency banknotes” have triggered escalating public conversations about the financial system of Liberia and perceived risks and opportunities. Many pundits from within and outside Liberia have yielded to the innate summons of the moment to express their views on the nature of the problems and what solutions they believe exist. I have observed with keen interest the trend of the debate and deemed it super important to advance some thoughts that would at least refresh the experts and provide orientation for others.
I have explained why the concept of money, its creation process and management framework need to be properly understood as the discussions in the public about the financial sector and the dearth of local currency banknotes heighten. I have posited that under the fractional reserve system, part of what we term as money and queue up to banks to collect physical currency against, is created out of “thin air” and is not matched by any available physical currency/banknotes. Coupled with the fact that banks use currency/banknotes deposited to extend loans which is expected to be repaid overtime, no financial system in the world can survive if an extremely high number of depositors show up for their deposits.
The highly dollarized nature of the financial system makes the implementation of monetary policy a serious challenge as a greater share of the country’s money supply is in foreign currency (United State dollars) for which the local authorities have no control. The total money supply is incomplete as the quantum of United States dollars circulating outside the banking system is not calculated and reported. Calculating and reporting the total USD in circulation is practically difficult. At any point, it is difficult to know the total amount of US dollars circulating in the economy and impacting monetary conditions as anyone could fly in and out of Liberia with the US dollars. Therefore, expediting the de-dollarization roadmap would prove useful. And this would require the right monetary autonomy to have adequate amount of local currency to substitute the foreign currency. Actions directed at increasing the use of the Liberian dollar in daily transactions such as the Remittance Split Policy introduced few years ago but now suspended, while good for de-dollarization, led to significant surge in the Liberian dollar in circulation. In other words, significant de-dollarization would mean having more Liberian dollar for the conduct of daily transactions. Except digitization efforts gain traction, this would require more printing!
Keywords: Financial Institution, Bank, Bank Lending, Credit, Reserve Requirement, Mobile Banking, Money, Currency Substitution
JEL Classification: A1, G0, G2, E40, E42
Suggested Citation: Suggested Citation