Macroeconomic Implications Of Ebola: Peripheral View On Liberia
By Musa Dukuly (PhD)
Ellen Johnson Sirleaf
The nation’s economy is in serious trouble (Liberia’s Minister of Finance, Amara Konneh). So, what are the problems with Liberia’s macroeconomic stability? After recording remarkable economic outturns in the last six years, the momentum to cruise the economy to sustainable path began to dissipate disguisedly in 2013. Many stakeholders acknowledged that the downside has largely been attributed to structural constraints (lack of electricity, water supply, poor production road network, weak human capital). Adding to the misery, the health crisis (Ebola disease) is having devastating toll on the economy; thus undermining efforts of tackling earmarked projects to get on the path of sustainable socioeconomic transformation. Most of the government’s priority projects seem to be suspended indefinitely with focus now keen on addressing the health crisis. Indeed, the impact is reflective of multiple macroeconomic implications that are necessary for discussion to ascertain the efficient outlet.
The focus of this commentary is to elicit few of the macroeconomic implications on planned output, vis a vis fiscal, monetary and trade. Given that the impact is instant, a rigorous empirical exploration is not pursued; instead the discussion is grounded on non-parametric analysis in the context of requisite economic policy. This commentary also endeavors to add to existing efforts geared at reversing the heightening economic woes.
Liberia’s macroeconomic imbalances build up continuously. As a result of the health crisis, economic activities slowed in the real sector with several key indicators revised downward. Growth averaging around 8.0 percent over the last three years is anticipated to drop by more than two thirds in 2014, adding to the misery of the country’s ‘low quality economic growth’. I describe the growth as low quality in quotation here’ because it has not ensured broad base inclusivity for robust absorption of the labor force, as evident by the 78 percent incidence of vulnerable unemployment (Labor Force, 2010) as well as prevailing weak social services. Of course, infrastructural bottlenecks have always remained mere underlying reasons, but the argument goes beyond that. The country has never shown adequate commitment to support macroeconomic stability, evident by low quality human capital and huge emphasis of policy on consumption, instead of increasing quality production (i.e precondition to take off) to drive high per capita output for mass consumption.
Combination of the health crisis and other weak policies is reflective of a mysterious passage for economic agents to cope and contain with critical macroeconomic pressures such as expenditure demand, current account imbalance and inflation. Though the exchange rate is showing relative stability, the weakening fiscal and external sectors seem to put the economy on a more challenging front to contain the pressure. Domestic food production, which often checks on food inflation, is stagnating due to effect of the epidemic on most of the food basket region of the country. It therefore means being confronted with two target problems: fighting commodity inflation and bridging the deteriorating fiscal deficits. Dwindling exports receipt to support the foreign reserve capacity is also compounding the current account problem.
In small open economy like Liberia, a shock is anticipated to transmit huge exchange rate pressures. Interestingly, the monetary authority has been just on the spot with its effective use of monetary tool in the context of exchange rate targeting to keep the exchange rate relatively stable. Notwithstanding, the inflationary trend, in particular food is on the rising horizon due to supply side constraints. In addition to the transmission effect of the epidemic on physical and human capital, keen attentions are turned to rising prices; and the necessary mechanic of reversing the upward trend in prices. As the main absorber of liquidity by economic agents, the looming food and commodity inflation is critical macroeconomic policy concern, because economic agents are perennially enduring the pinch to maintain payments of diverse service fees (rent, medical, transportation, etc). Another heavy burden on the economy is the diminishing human assets, which were already inadequate to support the country’s big push development initiatives. At the moment, the real money balances disposable to households is reducing on the back of inflationary pressure while revenue targets diverge from projections.
The external sector pressure is also heightening as global commodity demand weakens. The widening trade deficit exposes our economy to further macroeconomic risks to contain the exchange rate pressure. In reference to the recent CBL’s bulletin, Liberia’s exports have dwindled sharply. Declining exports in the face of high imports and reduced foreign investments is an indicative of increasing pressure to fund the current account and mitigate the pressure on the Liberian dollars. Combination of persistent CBL’s intervention and net capital inflow to offset by public hoarding of foreign currency is likely undermining exchange rate stability. Interestingly, observed stability of the exchange rate indicates that the demand for foreign currency (USD) is not as badly out of balance as the supply.
From the fiscal front, the country is risked to another debt trap. Liberia has often increased the budget without regard to the complication of external budget support and non-automation of tax system to justify the increase. Dwindling economic activity emanating from the Ebola outbreak has drastically eroded effort to mobilize projected revenue against increasing expenditure demand. The country’s fiscal budget for 2013/2014 is risked to ballooning deficit, with predictable divergence between planned and actual revenues. Fiscal efforts have shifted from other priority investment projects to combating the health crisis. Government planned investment spending is almost negligible, increasing the country’s economic burden. Reduction in government revenue due to unanticipated constraints evokes pressure for monetizing the fiscal risk. But domestically financing the fiscal deficits could further hurt the economy by accelerating inflation and potentially deteriorating the current account deficits if production do not respond favorably to money growth..
Where is the economy dragging?
Is Liberia likely to drag into recession? Alluding to Minister Konneh, the economy is expected to overheat in coming years. In 2015 and beyond, the economy is set to be very tough for sales, profits and jobs, even as country exhibits commitment to re-embark on its development programs. Economic agents should anticipate broad base slowdown as focus could likely be shifted from development initiatives to elections related activities spanning from 2016 up to 2018 before taking off again. The smoothness of the take-off may however be preconditioned on the future political stability of the country following the elections.
Many more could go jobless. Downward adjustment of the high rates of unemployment will not be automatic as the requisite infrastructural to boost investments is expected to still remain weak in 2015, 2016 and perhaps, 2018. Thus, the informal sector is anticipated to surge with further high incidence of ‘vulnerable unemployment’ as a result of the widening unemployment gap that may emanate from the formal sector.
With the scarcity of basic necessity, the volume of imports is anticipated to rapidly increase against potentially gradual rise in exports, reinforcing intense exchange rate pressure. It is worrisome as to whether the CBL’s intervention would be able to cope with the impending exchange rate overshoot in the coming years. In short, consumer should anticipate severe price hike of basic necessities in the immediate post Ebola period before it starts to ease. Inflation is forecast to transition to double digit of 14 percent before the close of the year (IMF, 2014).
The prospects of narrowing the fiscal and trade deficits in 2015 are possible, but narrowed. Fiscal pressure could still loom as most of the suspended projects may be expected to take off simultaneously, amidst inadequate resources to finance those projects. It therefore means that infrastructural bottlenecks would continue to impede the production of high quality economic growth, on the back of weakening institutions, limited support for SMEs and inadequate pro-poor initiatives such as health, education, gender empowerment and youth development.
Walking the Economics
Time is scarce for Liberia to ‘talk and walk the economics’. ‘Ellenomics’ supported by ‘Amaranomics’ and ‘Millsnomics’ needs quick rethinking to contain the increasing macroeconomic pressure. This rethinking should be anchored on scenario base approach. To push any meaningful development agenda in the next three years, the inception of the ‘walk the economics’ to boost Ellenomics is to kick out officials of government with strong political preference for 2018 in order to cut on the imminent losses of implementing viable development programs..
In the context of addressing diverse macroeconomic imbalances ensuing from the health crisis, effective monetary and fiscal coordination should be strengthened to tackle inflation and the deficits. In support of the continual monetary intervention to contain the inflationary pressure, strict expenditure control should be accompanied by prudent revenue measures and robust tax regime to avert unanticipated erosion in tax revenues. Persistent financing of the deficit through monetary expansion should be minimized as it could risk fueling undesirable inflation and threaten the monetary authority’s gains of containing exchange rate pressure.
As exports lessen and reserves decline, the monetary authority should continue to pursue effort of attracting more program support from the IMF to accelerate macroeconomic stability. However, the current monetary strategy enables experts to predict that the exchange rate may not still hover around existing rate in most parts of 2015, albeit it is extremely unlikely for the rate to hit the three level digits against the USD in 2015. To ease private sector pressure and inflation, the monetary authority should endeavor to maintain low interest rates and strengthen its financial inclusion program in order to capture more firms that are engaged in domestic production.
Another swift macroeconomic policy response is for monetary authority to consider discounting debt owe by government, while the latter should also ensure fiscal adjustment via rationalization of spending (especially recurrent). The fiscal authority should design a more effective revenue raising measures away from the traditional mineral enclave sector via economic diversification, because non-tax income, especially the ones emanating from mineral resources are non-deterministic in many perspectives (price fluctuation, low demand, resource depletion, etc.), and therefore not a good instrument to consider for increasing the budget. Stabilization fund should be created so that fixed proportion from mineral income is saved periodically for intervention as direct inclusion of all natural resource income into the budget is a high risk to contain with shocks as it is with the case of Ebola.
Any proposal or plan to raise recurrent budget, especially salary over the next three to five years should be halted because the economy may not be incapable to sustain the rise in wages. It means exerting more efforts in exploring concessional finance to provide low cost energy as well as strengthen the health, education and agricultural sectors for the production of high quality output. The existing situation supports my previous argument that high salary is only a transitory mechanism which does not guarantee sustained economics of happiness in the absence of permanent mechanism that is strongly complemented by effective social services: housings, education, health and transportation (See Liberia’s Economic Nationalism, Dukuly, 2011). Let’s understand that realization of middle income cannot thrive on waste of resources and high consumption economy without sustained emphasis on quality production of output.
About the author: Musa Dukuly lectures economics at the University of Liberia, but currently on sabbatical. He is Senior Economist of the West African Monetary Agency (WAMA) based in Sierra Leone. His views do not represent WAMA