To Stabilize Economy: ‘Engage in Currency Swap’

first_imgRep. Koon: “This theory is better to satisfy the public desire.”…Suggests Rep. KoonWith the ongoing debate on the controversies to print about L$35 billion new Liberian banknotes to help restore the ‘bad and broken economy,’ Montserrado County District #11 Representative, Richard Koon, has proposed that the government should downplay the printing of new money, and that the Central Bank of Liberia (CBL) should negotiate with other banks on ‘Currency Swap.’This theory, according to research, is an agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal, and interest in another currency. At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.Koon, an Accounting instructor at the University of Liberia, said the theory of ‘Currency Swap’ will have greater impact, and helps stabilizes prices on domestic commodities, as well as balances economy.He said Liberia is heavily dependent on imported goods and uses US Dollars for transaction. Therefore, he said, the CBL should do the ‘Currency Swap’ with countries that are considered ‘Single Domestic Currency Nations’ or ‘Fully De-dollarized,’ such as Nigeria, Guinea, Ghana and the Ivory Coast.“Let us look at Nigeria as a case. The Central Bank of Nigeria will deposit huge amount of Naira (₦) in CBL, and then the CBL will do likewise with the L$, that method is the ‘Currency Swap.’“The two currencies will create an implied exchange rate (the established rate between Naira and Liberian Dollar). This approach will weaken the US$ to a greater extent, and strengthen the L$ also to a greater extent,’ Rep. Koon said.Rep. Koon, who is a member of the House Public Account and Expenditure Committee (PAC), argued that most businessmen buy the US$ before going to import, and with currency swap, they will now take their huge L$ to the CBL in exchange for Naira ₦ before going to import goods from Nigeria, which will be vice versa.“It will relieve pressure on the US dollar, and the CBL, working along with the Ministry of Commerce and industry will be able to take control of price regulation on these commodities. Not only do the prices have to reflect the changing tastes of its various suppliers’ segments of goods and services, but the prices must also be competitive with the prices of other goods and services manufactured and marketed globally. The price elasticity of demand (PED or Ed), or price sensitivity for products in Liberia varies between its suppliers and segments,” Rep. Koon said.He said in recent years, in a bid for the People’s Republic of China (PRC) to internationalize their currency (Renminbi or RMB), China arranged bilateral currency swaps with central banks around the globe.Three of Africa’s largest economies– Egypt, Nigeria and South Africa–are among the more than 30 central banks that have entered into these swap agreements.Rep. Koon recalled how South Africa signed a US$4.75 billion swap agreement with China in 2015; Egypt, a US$2.62 billion swap in 2016; and Nigeria, a US$2.5 billion swap in 2018.“These swaps make sense given the amount of trade between China, and these nations,” he said.In 2017, trade between China and South Africa, Egypt and Nigeria amounted to US$23.5 billion, US$10.8 billion and US$13.8 billion respectively.Thus, the swaps allow some trade to be invoiced in the counter parties’ currencies, helping ease dollar financing pressures. They also provide renminbi liquidity to the African countries and African currency liquidity to China. This should help boost trade and encourage closer ties.“Nigeria’s central bank says it will help stabilize exchange rates,” he said.Meanwhile, Rep. Koon has said doubt has been created in the mind of the public and partners as a result of the L$16 billion and the US$25 million investigations in the competencies of the Central Bank, and the Ministry of Finance and Development Planning officials negatively impacting public trust.“Hence, printing of new currency in the midst of current financial crisis, and lack of trust could erode the intended policy impact,” Rep. Koon said.Share this:Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new window)last_img read more