John S. Morlu II, Deflated by Citizens Coalition: Article On the Head of the Central Bank of Liberia Shown to be Baseless and Uniformed. The Concept of Inflation and Reserves Beyond Morlu’s Understanding

The diminutive John S. Morlu, II is at it again. Liberia’s would be Napoleon who sees himself as the messiah of the Liberian people, having insulted and condemned everyone he considers a threat to his dream of greatness, including the President of Liberia, has now considered it necessary to turn his diatribe on one of Liberia’s finest sons and public servant, the Executive Governor of the Central Bank of Liberia, Dr. J. Mills Jones. Morlu, with his dream of being Liberia’s Napoleon, should know quite well that there is a place called Waterloo. Morlu tries to sell himself to the Liberian people as a well-educated man who cares for his country Liberia (never mind that he ran to another country after his term as Auditor general expired). However, the fact is that he engages in shoddy analysis, bounded by hallucinatory thoughts and occurrences and name dropping. So, he uses the name of the President, someone whom he has taken pleasure in castigating on numerous occasions and knowing that the president is not likely to stoop to get involved in such a debate to portray Dr. Jones as a violent individual. This is laughable, as all those who know Dr. Jones, even from childhood, know he is the opposite of Mr. Morlu’s characterization. Notice that he did not mention anybody to substantiate his claim regarding the altercation that he cites over the matter of auditing the Central Bank. You will see why after reading the record of the Governor regarding auditing at the CBL. The record shows that the Executive governor has been a champion of transparency and accountability at the CBL.

Interestingly, while Morlu and his minions (ironically, some are supposed to be so-called “big shots”) were busy trying to get his article to various publishing  houses, the CBL was being honored in France by the Global Trade Leaders’ Club with the International Europe Award for Quality. It should also be noted that the Executive Governor has recently been honored in the United States, and by the Cuttington University, one of Liberia’s preeminent institutions of higher learning, in June for his outstanding services to the Liberian people and his astute policies that have not only brought back the banking system from the point of disaster but also expanded the system, while empowering the Liberian private sector. The traditional council of chiefs and elders also recently honored the Governor for his work. Morlu, it is time to wake up and smell the roses! If you want to be someone people look up to in Liberia, do so through your accomplishments, not by pulling everybody down. But you have had your chance, and you failed. You spent your time holding the lantern looking around for one honest man and didn’t find any, failing to realize that you too were a man! Our message to you and people like you is simple: it is time for Liberia to move on. We know those whose heart is in Liberia; who wants to lift us out of poverty; who offer us hope; who bring a can-do spirit to the national dialogue. We know you love Liberia, Morlu; but from afar, the United States (this should win you cheers from the market women and the members of the credit unions, the petty traders and the women in the villages, who are being revitalized by the CBL. We bet you don’t know who these people are). For us, the common people, sons and daughters, husbands and wives, brothers and sisters, of the market women, small traders, women in the villages who see some hope  from the policies of the Central Bank in working to help them help themselves— people you cleverly make fun of because you have forgotten where you came from— we say again to you something simple: our eyes are open, and as each day passes, we get to know better, and we will act in our best interest to move Liberia forward. Efforts by you and others to smear the Executive Governor are seen by us, the common people, as a war against us. We hope this message is clearly understood.

Let us now address the substance of Morlu’s rambling article.  The issue of the high dollarization of the Liberian economy is nothing new, even non-economists know that.  The reason is largely historical and also due to the fact that the US dollar has legal status as a currency of transaction in Liberia.  The Central Bank Act of 1999 clearly states that the US dollar is legal tender in Liberia. By this Morlu, be informed that the reserve currency is also a regular transaction currency and that the CBL succeeded in maintaining 2.7 months of imports cover compared with the 3.0 months target, even after the Bank has had to step up its intervention. Would that extra 0.3 months of imports cover propel Liberia’s economy over the poverty threshold or satisfy the condition for sustainable development and increase the potential for Liberians to play a more meaningful role in the Liberian economy? Of course, not. What would it have meant for the exchange rate had the CBL not stepped up its intervention?  Wouldn’t it have led to a more rapid depreciation of the Liberian dollar, which could help to feed inflation?

Morlu tries to give a reason for capital flight in Liberia, attempting to show that he has been reading some papers from the International Monetary Fund (IMF).  He writes derisively of the IMF to suit his purpose: “except IMF forgot that U.S. dollars are used to facilitate capital flight in Liberia”, suggesting that the movement of the US dollar or any other major currency from one country to another is capital flight.  That is not the case, as anyone with a limited understanding of economics would know.  There are many factors that lead to capital flight or to “dollarization,” which in the traditional sense stems from such circumstances as political uncertainty and persistent macroeconomic instability, not the use or easy availability of the US dollar. The traditional case of “dollarization” generally occurs where there is the substitution of the local currency in a given country for the US dollar in order to protect the value of individual wealth due to political turmoil or an unstable macroeconomic environment in that country, represented by circumstances such as persistently high inflation— and we mean high inflation.  In the circumstances of Liberia, the prevalence of the US dollar is at once a legal and historical issue.  This is not to ignore the limitations that this places on the exercise of monetary policy, but that is another question which is being looked at by the Government, and one can refer to the Policy Statements of the Central Bank of Liberia for 2012 and 2013.  Regarding Morlu’s Moscow experience where he tried to use the US dollar to make a purchase, Morlu who sells himself as the intellectual who knows everything should have at least known that in Russia the only currency that is used for regular transaction is the Ruble. And this is not peculiar to Russia.  The majority of countries in the world have their own legal tender. Morlu has shot himself in the foot, demonstrating his lack of understanding of such elementary underpinnings of international economics.  But we acknowledge his right to be an economic commentator; that is one of the good things about freedom of expression.  By the same token, we exercise our right to treat his expose with a grain of salt and consign it to where it belongs, the dust bin.

We now consider the matter of inflation.  Morlu goes on what seemingly is an intellectual tour, mentioning Friedman, Adam Smith, Keynes, and Andrew Jackson, and what Jackson did as President of the United States in the 1800s. We hesitate to think that Morlu is looking to apply Jackson’s actions in today’s world. Morlu also gives a lecture on the Phillips Curve. Bravo! However, those who by now have forgotten about the Phillips curve considering all the empirical research in scholarly journals which Morlu will not be able to understand (put aside the higher mathematics underlying such research) know that Morlu’s rambling amounts to only grandstanding. He asserts that the Governor has not being able to explain to Liberians why we have “high inflation and high unemployment”. He calls this an “economic paradox” whose solution “could lead to winning a Nobel Prize in Economics”. This is ignorance par excellence. Morlu, please go back and read up on the Phillips curve!! But that is not the point we want to stress here. Morlu talks of “high inflation”, but given the erudite scholar that he is, does not mention a number for the inflation rate that he calls “high”. In fact, he does not present any relevant statistics in his rambling note. The data for the last three years show that the CBL, under the leadership of Governor Jones, has worked to maintain single digit inflation; and for the last 10-month period to October, 2013, inflation still remains in single digit averaging 7.2 percent.  The IMF has commended the Liberian authorities in several reports for maintaining macroeconomic stability.  Does the economic gospel according to John, The Morlu, say that a single digit rate of inflation of 7.7 percent at end-December, 2012 is an inordinately high rate of inflation?  Is this not distortion and falsehood?  As a matter of fact, it should be pointed out that Liberia has consistently met the West African Monetary Zone (WAMZ) criteria of single digit rate of inflation.  For your information Morlu, research has shown that inflation in Liberia is not driven by monetary variables (i.e., exchange rate and broad money supply) given that they were found empirically not to be significant in explaining movements in inflation. So, if the Governor cannot explain “high inflation” in Liberia, there is a good reason; it doesn’t exist.  Inflation rates for some countries within the West African sub-region show 11.9 percent for Ghana; Sierra Leone, 9.9 percent; Nigeria, 8.0 percent; and the Gambia, 5.9 percent. That aside, there is a body of literature on the extent to which some inflation may be considered to spur economic growth.  Also, deflation may be bad for an economy.  The recent situation of Japan is a case in point.  The bottom line is that those are not simple issues that lend themselves to simple conclusions.

Now let us now take up the question of depreciation that Morlu raises in his article.  Morlu writes, “The Governor is printing more Liberian dollars to support his loan schemes, increasing the amount of Liberian dollar in circulation without a corresponding output to obtain more US dollars.”  Here we go again, with Morlu trying to impress that he is schooled in the crude Quantity theory of Money. However, what he presents as the fact about “printing more money for loan schemes” is total nonsense.  But this is nonsense that has come out of the mouths of some who should know better, according to sources familiar with the subject.  The access to credit initiatives for Liberian small and medium sized businesses and farmers and for jumpstarting the mortgage industry were done largely in US dollars. The facts are clear because these initiatives were announced publically by the CBL for everyone to hear. But it is not uncommon that hate for someone trying to serve his nation to make a difference can lead to some putting their ears under their feet.  Is this what Morlu and his leakers who are providing distorted information call “printing more and more money”?  In fact, shouldn’t the increased availability of US dollars to Liberian businesses lessen the demand for the US dollars, thereby helping to stability the exchange rate?  According to our research, Liberian dollars have been used for the initiative to promote financial inclusion through microfinance institutions, credit unions and Village Savings and Loan Associations, and the amount approved by the Board of Governor for the microfinance program plus the Liberian dollar component of the other program when used in its totality will be equivalent to US$7.9 million.  Are Mr. Morlu and those encouraging him to write such an article telling the Liberian people that a loan program in Liberian dollars that when used fully is equivalent to this amount will lead to macroeconomic instability in a n economy that is estimated at US$1.7 billion (the nominal GDP)? It should also be pointed out that the “learned Morlu does not seem to grasp the notion of “non-bank financial institution,” stating that the CBL is working with “non-financial institution.”As an accountant, Morlu should at least be able to figure this out and come to the conclusion of how is it that this “small tail” is wagging the “big dog”, the Liberian economy. In fact, it is improbable that all of the Liberian dollars that are loaned to people in the villages and small towns will be transformed into demand for United States dollars, and even if we assume that it is, the transmission mechanism would operate with a lag, thereby dampening the direct effect. Our research shows that the pressure on the Liberian dollar stems largely from a 17 percent decline in Liberia’s terms of trade (Morlu should know much about terms of trade) and, get this, a 38 percent increase in Government spending of Liberian dollars. Who is putting out the Liberian dollars, Morlu? We can only surmise that there is a conspiracy to make the Central Bank Governor look bad by shifting blame, and only because the common people are applauding him for the work the CBL is doing. The Central Bank is not on a binge creating money. This would show up in the monetary statistics of the country, which is published monthly by the Central Bank. The monetary data record show that currency outside the banking system in the hands of the public grew by 11.8 percent in the 9-month period to September 2013, less than the estimated nominal GDP growth that is put around 14 percent. That is, Liberian-dollar money supply growth is less than nominal GDP growth. It would seem that Morlu and his helpers know very little about monetary statistics. The question is, what else don’t they know? Under Governor Jones, the Central Bank puts out more information to the public on the economy than any other institution, including to the Executive and each member of the Legislature. The story line to all of this is to try convincing the Liberian people that while they may think that the Governor is helping them, the policies of the CBL is in fact hurting them. This is a hard story to tell, and there are enough of us who follow these acts of deception to make sure that the Liberian people will not buy it. We will give tit for tat and if necessary more.

Furthermore, we are led to believe that Morlu doesn’t know what escalating depreciation of a currency means. Using words loosely might excite passions, but is not helpful in describing economic phenomena. We went to the literature and found that broadly speaking, the threshold for considering a currency as in a state of escalating depreciation or volatility is when the rate of depreciation goes above 15 percent. In the case of Liberia, the rate of depreciation in the 10-month period to October 2013 stood around 7.4 percent, compared with the Gambian dalasi, 14.5 percent; Ghanaian Cedi, 13 percent; South Africa Rand, 12.2 percent; Indian Rupee, 17.8 percent; and Chinese Yuan, 7.3 percent. Morlu and others of similar perspectives should not confuse exchange rate fluctuation with escalating depreciation.

This brings us to the assertion of Morlu that the CBL is “using taxpayers money to make loans”. It is surprising that the supposedly well-informed former Auditor General of Liberia does not know that the CBL only maintains the accounts of the Government of Liberia and has no authority to, and does not in fact, touch the account of the Government. These accounts are under the direct supervision and control of the Ministry of Finance who authorizes expenditure. So, this notion about the Central Bank “dishing out” the people’s taxes is far from the truth. We are led to believe that they who say so do not understand how central banks work; but for the “learned” former Auditor General to be so ignorant?  Also, it is unfortunate that Morlu does not know that the foreign exchange auction of the Central Bank is a monetary policy tool used to manage liquidity and not what Morlu calls “A US dollar window where the Governor provides loans”. Again, this from the former Auditor General of the Republic? Morlu further demonstrates his ignorance and limited understanding by stating that there is a special window at the CBL where US dollar is provided to “market women” and requested that “Anyone can disprove me by going to the Central Bank to see the special discount window created by the Governor to service these importers, calling themselves “market women.” It is sad to say that it was a waste of our precious time going to the CBL to find a special window where “market women” were standing in line to receive US dollars; this is what Morlu made us to believe, which we found to be a complete lie. The nomenclature “Special Window” was used by the CBL to enable smaller businesses to participate in the auction just like larger businesses. There was no “discount window” for what Morlu called “market women”. Morlu’s informer was uninformed, and we know who they are. In fact, the sale of US dollars through the auction at the CBL has helped to stabilize the exchange rate, contributing to containing inflation.  Because of depreciation pressure, the CBL has had to step up its intervention in the market to help the Liberian dollar from falling even more sharply.  The CBL builds up reserves to help protect the economy from shocks that would weaken the domestic currency, in this case, the Liberian dollar.  Between January and September 2013, the CBL intervened in the market in the amount of US$66.3 million.  Even now the Liberian dollar remains under pressure.  We have already talked about the reasons, that this is due largely to adverse terms of trade and a significant rise in Government expenditure in Liberian dollars of about 38 percent over the previous year.  That said, what is important to stress is that the CBL like many central banks in developing countries, has to balance two competing policy objectives; on the one hand, build reserves and on the other use those reserves to help smooth fluctuations in the exchange rate.  In its 2013 Policy Statement, which is made public, the CBL writes that among the macroeconomic challenges, especially for monetary policy “are the high dependence on imports and the low level of value-added exports with attendant pressure on the exchange rate and the need for additional tools for managing liquidity.”  The CBL Policy Statement also stated that “the narrow productive base with the potential for the enclave sector to once again be the source of growth makes it difficult to deal with the high level of unemployment and poverty.”  The same message was sent out in the CBL Policy Statement for 2012.  “The lack of economic diversification remains a major issue, and the high dependence on foreign investment mainly in the enclave sector, which is the major source of financing for the current account is not sustainable.  A more rapid decline in unemployment and poverty will require a more broad base economic growth.  Against this background it is important that policies remain focused on increasing productivity in the real sector of the economy aiming at both the domestic and export markets.”  The CBL’s Statement went on to say, “cheaper power and better roads and ports facilities will be critical.”  We believe that this shows an institution that is aware of the unemployment problem in the country and is attempting to provide a direction in which we should be going to deal with the problem.  The words of the CBL also suggest that the unemployment issue is not a monetary phenomenon but is structural.  So, it is difficult to see where Morlu gets his paradox of inflation and unemployment that would require a Noble Prize for its solution.  It is becoming clear that Morlu should be advised that economics and economic management, which require not just elementary knowledge of economic theory but experience and sound judgment are not his area.

As a rambling article we cannot deal with everything that Morlu has said, so we will look at two more issues.  Morlu tries to make much of the issue of the level of reserves being below what was the target for the period under the Program with the IMF.  There are a couple of points that should provide the context to this issue.  First, the IMF considers the resources/assets of the Central Bank (which are not “tax payers money” to use Morlu’s words) as reserves only as long as those resources are being held abroad.  The idea is that these resources have a high degree of liquidity to enable the Bank to respond readily to an external shock. Any portion deposited at home is not counted, even though these are US dollar deposits in local banks.  From our understanding, the CBL has deposited some of these resources at home to help improve access to credit and by so doing empower Liberian entrepreneurs.  This is not as if the CBL has lost the reserves of the country.  But it is a fundamental question as to whether it helps to strengthen the economy and the Liberian private sector in the longer term if some of the resources of the CBL are brought back home for domestic use to help empower Liberians to take a more prominent role in their own economy, something which is now lacking.  The US dollar deposits of the CBL in commercial banks at home are akin to certificates of deposits.  When they mature the CBL will collect its funds in the same US dollars.

Now, from our research, it is no secret that the IMF places emphasis on reserves accumulation, and that is because of the nature of the institution. The IMF is a monetary institution concerned with the smooth functioning of the international payments system, for the most part. It is not a development institution; that is the charge of the International Bank for Reconstruction and Development, commonly known as the World Bank. In the latter years of its existence, the IMF has begun to pay more attention to poverty reduction and economic growth in developing countries, reflected in the transitions from Stand-by Arrangements to the Structural Adjustment Facility (SAF); the Enhanced Structural Adjustment Facility (ESAF); the Poverty Reduction and Growth Facility (PRGF); and now, the Extended Credit Facility (ECF). Programs that countries agree with the IMF can also be seen as support for a country’s balance of payments. Thus, again, is related to the notion of the smooth functioning of the international payments, enabling a country to pay its bills externally, including for imports. Liberia has benefited from its working relationship with the IMF, including obtaining debt relief from the international community and technical assistance from the institution, as we have been told by officers of the Central Bank. The Executive Governor has been party to all the engagements with the IMF, and all of the Letters of Intent bear his signature along with the Minister of finance, and this has been since the Executive Governor took office. It should also be pointed out that the Executive Governor is among few Liberians who know much about the operations of both the IMF and the World Bank. He served on the Executive Board of the IMF for many years. He was also Alternate Executive Director of the World Bank, serving also on the Executive Board of that institution. The Boards are the policy making bodies of the two institutions. Is Morlu suggesting that this individual is someone not competent to hold negotiation with the IMF and articulate the interest of Liberia? Morlu has never engaged in any policy discussions with the IMF; he has no knowledge of the give and take that goes on. Morlu and some who are trying to hide behind him want to give the impression that there is a rift between the IMF and the Central Bank. That is not so. A discussion of policy regarding one’s country should be engaged in seriously. And at no time did the Central Bank not see the usefulness of having adequate reserves. Go back to statements by the Executive Governor and publications of the CBL. But access to credit, as the Central Bank has maintained, is also cardinal to economic development and the empowerment of Liberian entrepreneurs is key to broad-based sustainable growth and development. And this is also given prominence in the government’s Agenda for Transformation, “Priority interventions: The CBL will continue to maintain adequate foreign reserves and to keep the exchange rate stable….The CBL will continue a credit line for commercial banks’ on-lending to SMEs and will implement the proposals for modest credit lines to non-governmental microfinance institutions and to the Afri-Land Bank for smallholder tree crops with them bearing the credit risk.” Access to credit is key to the development of the Liberian middle class. This, we understand is also the view of the Central Bank of Liberia. This is not incompatible with the objectives of the IMF and the IMF as far as we have been able to determine, has never said that it was. Morlu tried to refer to recent meetings between the IMF staff and the Liberian authorities represented by the Ministry of Finance and the Central Bank in Washington D.C. The meetings involved only personnel from these two agencies. How did Morlu become an expert on what was discussed, and drawing conclusions there from? Morlu should be advised to desist from spreading gossips and falsehood, except there are some who have their reasons to see him do that. They should be careful that what goes around comes around, and we know that some institutions keep good records.

Let me finally end on Morlu’s fabrication about CBL avoiding been audited. It is important to note that Part X Count 46 (2) of the CBL’s Act of 1999 requires that the accounts of the Central Bank be audited at least once every year by reputable and professional external auditors appointed by the Board of Governor. Our research also found that the CBL, under Governor Jones, has consistently been audited by internationally acclaimed auditing firms with headquarters outside Liberia. The IMF has conducted regular safeguards assessments of the CBL. When Governor Jones took office he established a Board Audit Committee, which excludes the Executive Governor (himself) which then agreed, on among others, a set of criteria for selecting the external auditors. Such criteria did not exist before then. Executive Governor Jones also spearheaded the CBL’s transition to transition to International Financial Reporting Standards (IFRS) in record time.  All of this was geared towards enhancing transparency and accountability in the CBL. The reports of the external auditors are presented to the government through President, as required by law and made public. The management letter of the external auditors is shared with the IMF by instruction from the CBL. So, it is a little puzzling that with all of this, Governor Jones would threaten to beat up Morlu for asking to audit the CBL (and who were his witnesses?). We leave this for reasonable people to decide. And by the way, the Reserves with which Morlu seems to have a fixation, giving the impression that the Bank is hiding something in that area, are also part of the things looked at by the external auditors. In fact, Morlu should tell the people how many public institutions in Liberia are following International Financial Reporting Standards in addition to the CBL.