Key Policy Challenges for the Monetary Authority (Central Bank of Liberia)

1. Preserving the Operational Independence of the CBL

The Government of Liberia (GOL) has sole ownership of the CBL. A review of the Acts that established the Central Bank of Liberia (1999) and its predecessor, the National Bank of Liberia (1974), clearly indicates that both were granted functional independence to conduct monetary policy.

However, during periods of poor fiscal performance, past administrations often failed to exercise this independence effectively. Instead, the Central Bank/NBL prioritized credit allocation to the government, leading to persistent deficit financing and a crowding-out effect. Printing banknotes and using commercial banks’ reserves to cover fiscal deficits became frequent practices. These measures did not serve any constructive monetary policy objective.

While quantitative easing and credit expansion are typically used to support growth, in Liberia such practices became harmful to economic stability. For the CBL to be effective, the government’s overbearing influence on monetary operations must be curtailed or minimized.

2. De-dollarization vs. Dollarization

Liberia currently operates a dual currency system, where both the Liberian dollar (LD) and the United States dollar (USD) are legal tender. By law, prices for all transactions should be denominated in Liberian dollars. However, in practice, payments are widely accepted in U.S. dollars.

A thriving parallel market exists, creating exchange rate disparities between the two currencies. For example, as reported on the CBL website, the average exchange rate on January 27, 2024, was L$189.80 = US$1.00. Movements in the exchange rate reflect imbalances between the demand for and supply of foreign currency, with serious implications for the balance of payments.

The effectiveness of conducting monetary policy under this dual arrangement must be carefully assessed. Determining whether to maintain dollarization or pursue de-dollarization is critical, as each path carries risks of policy distortion. In this regard, COLED could use its expertise to recommend the most appropriate currency regime, along with the necessary monetary and fiscal adjustments to implement it successfully.

3. Taming Inflationary Pressures

High inflation erodes consumers’ purchasing power. In Liberia, inflationary pressures stem primarily from exchange rate fluctuations and external shocks such as supply chain disruptions and global market developments. Exchange rate volatility typically arises from an imbalance between the demand for and supply of foreign currency for trade and services, pointing to a balance of payments (BOP) challenge.

To minimize inflationary pressures, two strategies stand out:

• Boost foreign currency earnings (e.g., through exports and remittances)
• Reduce imports while increasing domestic production

Where sufficient foreign exchange is available, sterilization policies—reducing excess domestic currency in circulation—can also help stabilize prices. Another option is to adjust the composition of financial assets in the economy to absorb excess liquidity.

4. Promoting and Incentivizing Financial Inclusion and Deepening

Liberia’s financial markets remain shallow, with limited products and no secondary markets for trading financial derivatives. To strengthen the sector, the CBL must lead efforts to:

• Innovate and diversify financial products
• Develop secondary markets for financial instruments
• Broaden financial access in underserved areas

In many developing countries, microfinance institutions—especially in rural regions—play a key role in expanding services to unbanked populations. This strategy enhances financial inclusion, mobilizes domestic resources, and supports economic growth.

COLED can contribute by conducting research on how Liberia’s financial markets can be deepened and diversified, thereby increasing the range of services available to households, businesses, and investors.

1. Lessons from Past Bank Failures

A series of bank failures between the 1980s and 2000 shook the foundation of Liberia’s banking system. The sector’s resilience was severely weakened after the military takeover in 1980. Contributing factors included capital inadequacy, poor management structures, and weak supervision. Specialized banks created to provide credit for housing and agriculture also collapsed due to ineffective oversight.

The responsibility for ensuring financial stability and risk mitigation rests with the Central Bank of Liberia (CBL). To fulfill this role, the CBL must strengthen its regulatory and supervisory capacity. A robust risk-mitigation framework should be developed alongside clear legal and regulatory regimes to guard against insolvency, such as establishing a deposit insurance institution. Guidance from the Basel Committee on Banking Supervision (Basel I, II & III) will be valuable in this process.

Consideration should also be given to recapitalizing the defunct National Housing and Savings Bank (NHSB) and the Agricultural and Cooperative Development Bank (ACDB)—though this would require significant resources. COLED can explore options for safeguarding financial sector assets in the event of a crisis, as well as the feasibility of recapitalizing these institutions.

2. Encouraging Banks to Modernize Practices

Financial technology (FinTech) has become a key driver of banking innovation in the 21st century, and its importance cannot be overstated. Many banks are transitioning away from traditional practices—such as long in-person lines for deposits and withdrawals—toward online and digital banking.

In emerging and low-income countries, mobile banking is bridging the gap between formal and informal economies. Payments and credit services are increasingly facilitated through mobile money platforms. In addition, central banks worldwide are exploring Central Bank Digital Currency (CBDC) for domestic and international transactions.

These platforms must be carefully assessed for both their potential benefits and the risks associated with their use.

3. Addressing Bank Non-Profitability

Both banks and non-bank financial institutions in Liberia face significant constraints that limit profitability. Challenges include:

• High levels of non-performing loans (NPLs)
• Inconsistent electricity supply, forcing reliance on costly private generators
• Other structural and operational inefficiencies

To reduce financial losses, robust debt resolution mechanisms must be established. Developing a credit reference system to prevent chronic defaulters from repeatedly accessing credit would be a strong first step. COLED could further investigate how such a system could be created and managed with proper safeguards.

1. Insurance Companies

The Act authorizing the creation of insurance companies in Liberia was first passed in 1973. At that time, it was unclear whether these companies operated under a regulatory or supervisory framework. With the creation of the Central Bank of Liberia (CBL) through an amended Act in 1999, oversight responsibilities for insurance companies were formally transferred to the CBL.

However, it was not until 2013 that an Act was passed establishing a comprehensive regulatory and supervisory framework to guide the operations of insurance companies in Liberia. Since then, several amendments to the insurance laws have been enacted to address governance, premium payment compliance, and management structure issues.

The operations of the National Insurance Company of Liberia (NICOL) and the National Social Security and Welfare Corporation (NASSCORP) have continued to undergo review. Notably, the Act that created NICOL granted it the sole and exclusive right to insure all government businesses. Meanwhile, the solvency of NASSCORP has remained questionable, as highlighted by a 2015 World Bank study. A thorough review of these institutions’ operations is necessary to determine their viability.

2. Establishing an Institute for Banking Studies and Economic Analysis

If not already in existence, such an institute could serve as a dedicated training ground to promote best practices in banking, finance, and economic analysis. This would enhance the capacity and resilience of Liberia’s financial sector.

COLED has the expertise to develop a standardized curriculum and deliver the requisite instruction to strengthen the skills base of banking and financial professionals.