Improving Liquidity Forecasting at the Central Bank of Liberia (IMF)
Project Development Objective (PDO)
The project aimed to support the Central Bank of Liberia (CBL) in their efforts to build more efficient financial markets by developing a liquidity monitoring and forecasting framework, and by instituting operational actions and capacity to manage it effectively.
With Liberia at an early stage of financial development, the CBL operated a simple, passive system of monetary management. At the CBL, the primary objective of monetary policy is the achievement of low inflation and maintaining a stable exchange rate between the Liberian dollar (L$) and the U.S. dollar. Both currencies are legal tender in Liberia and the financial system is highly dollarized. More than 80 percent of commercial bank deposits are in U.S. dollars and this limits the scope for an independent monetary policy. The banking system is characterized by large amounts of excess L$s due to the limited lending undertaken in L$s and the absence of financial instruments. As a result of this excess liquidity, the effectiveness of future monetary operations is severely undermined and inhibits development of financial markets in L$s. As a short-term management tool for the Ministry of Finance, the Government of Liberia (GOL) commenced the issuance of monthly 91-day T-bills on May 2, 2013. The first issue was for L$149 million. As the first L$ marketable instrument, the issuance represented a major step toward developing a short-term money market.
The Government of Liberia embarked on T-bill issuance on a monthly basis coupled with the sharp rise in the value and number of participants at the forex auctions. The CBL felt that it needed to have a more robust liquidity forecasting framework to gain a better view of liquidity changes and its potential policy consequences. With no instruments at its disposal to manage the changes in liquidity, the CBL was also concerned that the conduct of limited monetary operations, even at a future date, could be difficult. Against this backdrop, the CBL requested for MCM TA to develop a more formal liquidity forecasting framework with a view to integrating it with the work of the Research, Policy and Planning Department (RPPD) to ensure effective capacity-building.
The CBL monitors banks’ L$ liquidity on a monthly basis, through its (RPPD). Most of the work on liquidity monitoring is done by two staff members who also have other tasks assigned to them. It is envisioned that the task of liquidity forecasting will also be subsumed into the work of these two RPPD staff since many of the variables monitored feed into the forecasting exercise. The then liquidity monitoring consisted of a detailed Excel spreadsheet which contains all the factors that determine liquidity including net foreign exchange sale by the CBL to the banks as well as the government sector. However, the spreadsheet has its limitations.
Activities / Output
The TA was to be delivered through a combination of staff and peripatetic expert missions. The key TA activities under this project focused on:
1. Developing a liquidity forecasting framework and automating the underlying operational
elements, with a view to the outputs from the use of the framework serving as an input
into the monthly T-bill Auction Committee deliberations and decision structures.
2. Developing a formal structure to better integrate qualitative and quantitative data on government
cash flows with the CBL’s liquidity forecasting framework.
3. Staff training to enhance the technical capacity of RPPD staff to monitor and manage liquidity
changes (including excess liquidity).
4. Advising on integrating the liquidity forecasting exercise with the T-bill issuance process.
The project aimed for the following results:
1. An enhanced data management framework put in place to support liquidity forecasting;
2. Liquidity forecasting framework is developed and operationalized;
3. Staff are trained to effectively monitor and analyze systemic liquidity changes and implement
appropriate monetary operations; and,
4. A consistent and effective framework for managing banking sector excess liquidity is