precious kerme gayan_central_bank_of_liberia

THE CENTRAL BANK OF LIBERIA

PRECIOUS KERME GAYAN 0

August 18, 2015

Precious Kerme Gayan



CONTENTS

I. INTRODUCTION ............................................................................................................................................................................. 2

II. ORGANIZATIONAL CHART OF THE CBL ............................................................................................................................... 4

II. ELEMENTS OF THE CBL ORGANIZATIONAL CHART AND THEIR FUNCTIONS ................................................ 5

III. CENTRAL BANK OF LIBERIA AS A FISCAL AGENT OF THE GOVERNMENT .................................................... 13

IV. CENTRAL BANK OF LIBERIA MONETARY POLICY FUNCTIONS ......................................................................... 14

V. THE INSTRUMENTS OF MONETARY POLICY ............................................................................................................. 16

VI. FUNCTIONS OF THE CENTRAL BANK OF LIBERIA ................................................................................................... 19

VII. THE CONCEPT OF INDEPENDENCE OF THE CBL ..................................................................................................... 22

VIII. AREAS IN WHICH THE CBL MUST BE ALLOWED TO ENJOY ITS INDEPENDENT ......................................... 22

IX. WHY CBL INDEPENDENCE IS NECESSARY ................................................................................................................ 23



I. INTRODUCTION

The Central bank of Liberia is the institution responsible for the management of the state’s currency, its money supply and interest rates.

It also possesses a monopoly on increasing the money base as well as printing the country’s currency.

The Central bank of Liberia was established on October 18, 1999 by an Act of the national legislature of the Republic of Liberia. It became

functional in 2000 and succeeded the national bank of Liberia with Mr. Elie E. Saleeby serving as its first Executive Governor.

This paper presents the most recent organizational chat of the Bank with detailed discussion on the functions and mandate of the individual

departments and sections.

The paper also comprehensively deliberated the fiscal agency and monetary policy functions of the Central Bank that is, those roles and

functions the CBL performed on behalf of the government of Liberia along with the details on the monetary policy tools used by the CBL.

In further discussions, the paper highlighted the Central Bank of Liberia’s delegated authorities. That is, those authorities that the National

legislature has delegated to the CBL.

In its climaxing stage, the paper further elaborated on the concept of Independence as it relates to the Central Bank. The paper clearly

expounded what exactly a Central Bank independence means, with detailed explanation of areas in which the Central bank must be allowed

to enjoy its independent and why the independent of the Central Bank is deem necessary.



II. ORGANIZATIONAL

CHART OF THE CBL

CENTRAL BANK OF LIBERIA

Deputy Governor

(Economic Policy)

External Relations Executive

Governor Internal Auditor

Board of

Governors

Deputy Governor

(Operations)

Research

Policy &

Planning

Deptmt

Banking

relation

&

Supervisi

on

Deptmt

Mainten

ance &

Financial

Inclusion

unit

Treasury

Operatio

n unit

Legal

Departm

ent

Administr

ation

Deptmt

Banking

Deptmt

Finance

Deptmt

Mgmt

Informatio

n System

unit

Payment

s System

unit



II. ELEMENTS OF THE CBL ORGANIZATIONAL CHART AND THEIR

FUNCTIONS

1. The Board of Governor

The power of the Central Bank is vested in the board of governors who are responsible for

formulation and implementation of policy. The board consist of five (5) governors. The Board of

Governor of the Central Bank of Liberia are responsible for:

Determining the policy of the Bank, other than the formulation of monetary policy;

Determining the objectives of the Bank, including oversight for its financial management

and strategy;

Keeping under constant review the performance of the Bank in carrying out its functions;

Keeping under constant review the performance of the Governor in discharging the

responsibility of that office;

Keeping under constant review the performance of the Governor in ensuring that the Bank

achieves its Objectives;

Determining whether the policy statements made are consistent with the Bank’s primary

function and policy objectives of the Bank

Keeping under constant review the use of Bank’s resources.

2. Executive Governor

The management of the Central Bank is conducted by the Executive Governor who is also the

Chairman of the Board of Governors of the Central Bank. The executive governor serves as the

Chief Executive Officer of the Central Bank, and is responsible to the Board of Governors for the



implementation of its policy and is in charge of the day-to-day management of the Central bank.

The executive governor also have the powers to act, contact and sign instruments and documents,

for and on behalf of the Central bank.

3. Internal Audit

The Internal Audit Department remained focus to the provision of independent, purposeful

assurance and advisory services designed to enhance the Bank’s operations. It is responsible to

perform pre-audit procedures on all transactions involving telex or Swift transfers or instructions

to debit the accounts of the bank with commercial banks, continuously ensure the proper

functioning of computer security system, particularly with regard to code numbers and security

levels, which control access to documents and execution of financial transfers through the

computer. They are also responsible to perform post-audit procedures on expenditures of the Head

office and branches and report to the board and the Governor any violations to provisions of the

Law or the Bank's rules and regulations, in such respect. Audit the Bank's holdings and stock of

currency notes; coins and gold, as well as operations relating to the receipt of currency notes from

printing and houses, in accordance with the instructions issued in such respect and participate in

the annual stock-taking of the Bank's assets.

4. External Relations

This department is responsible to maintain a cordial working relationship with its traditional

multilateral partners including the International Monetary Fund (IMF), World Bank and the

African Development Bank. Which includes holding regular meetings, consultations on policy

matters relative to financial and macroeconomic developments in the economy, benefiting from

trainings and technical assistance as well as exchanging data. This department is also responsible



to provide good and close working relationship with sub-regional and regional institutions such as

the West African Monetary Institute (WAMI), West African Monetary Agency (WAMA), West

African Institute for Financial and Economic Management (WAIFEM) and the Association of

African Central Banks (AACB).

i. International Monetary Fund

The CBL continued its engagement with the IMF at the level of policy consultation, technical

assistance, memorandum of understanding and the request for waiver and modification of non-

observance of performance criterion under the Extended Credit Facility Arrangement (ECF). The

IMF also continued its technical assistance to the CBL in areas of capacity development, helping

with the improvement of the quality of research, compilation of monetary and liquidity forecasting,

price, and balance of payments statistics as well as financial soundness indicators, capital market

development and the insurance sector.

ii. The World Bank

The CBL also continued its engagement with the World Bank Group’s institutions, the

International Finance Company (IFC) and the FIRST Initiative in areas of financial system reform

including support to the establishment of a collateral registry and development of the capital

market. The Bank also remains a key development partner of the Government in the provision of

financial support to ongoing infrastructure projects, especially electricity and road.

5. Legal Services

The Legal Department is responsible for providing legal advice and support to the CBL

management towards the implementation of their functions relative to the CBL achievement of the

monetary policy objective of Liberia, including strengthening the legal and regulatory framework

in the country.



6. Administrative Department

The Administration Department provides the tools necessary for a productive working

environment, facilitating the functions of each department and the duties of each individual.

The Administration Department performs these core functions:

Procures supplies and conducts stock-taking exercises

Maintains the Bank’s records management system

Disseminates information produced by the Bank

Manages the Bank’s collectible coin operations

Maintains the Bank’s facilities, plant and equipment

Provides reprographic services to the Bank

Coordinates meetings and conferences

7. Deputy Governor (Economic Policy)

The Deputy Governor serve as the principal assistant to the Executive Governor and exercise the

powers and duties of that office. This governor is responsible for analyzing and reporting on

current and prospective economic developments in the Liberia and world economies and assisting

in the determination of appropriate economic policies. This governor superintends over the

Economic Policy Directorate, comprising the Research policy and planning department, banking

regulation and supervision department, Microfinance and financial inclusion unit and Treasury

operations.



8. Research Policy and Planning Department

The Research, Policy and Planning Department (RPPD) of the CBL is responsible to provide

technical and analytical reports aimed at informing policy decision-making for monetary policy

management during the year. This department is also responsible to collaborate the CBL with

institutions and partners at the national, regional and global levels relative to policy harmonization

and coordination. The Department provides regular updates to senior management on

macroeconomic developments including exchange rate movements, inflation dynamics, GDP

growth, and the balance of payments situation.

9. Banking Relation and Supervision Department

This department is responsible for setup secured transaction regimes and collateral registries across

the world and how to facilitate access to credit by micro, small and medium enterprises, promote

good business practices and market conduct in the financial system, and enhance consumer

confidence in the system. The department is also responsible to ensure commercial banks to

adequately educate and inform consumers about their new products and services, as a means of

empowering the public and consumers to make informed decisions.

10. Maintenance and Financial Inclusion Department

Financial inclusion and development role of the Central Bank includes formulating policies to

make credit available to productive sectors of the economy including rural and Micro, Small and

Medium Enterprises (MSME) sectors. Promoting financial education and financial literacy are the



current focus of the function and encapsulates the renewed national focus on Financial Inclusion.

The functions of the Department in brief are:

To formulate macro policy to strengthen credit flow to the priority sectors

To ensure that priority sector lending becomes a tool for banks to capture untapped

business opportunities among financially excluded sections of the society

To step up credit flow to MSME sector.

To strengthen institutional arrangement, such as, state level bankers committee and Lead

Bank Scheme to facilitate these objectives

11. Treasury Operation Unit

This department is responsible for the day-to-day management of the Central Bank's reserves.

These reserves are the counterpart of commercial banks' reserve requirements, currency in

circulation, the issuance of Liberian dollar denominated Certificates of Deposit, and capital

reserves and permanent deposits from the government. It ensures that the liquidity position of the

bank is sound, facilitates the investment decisions for surplus cash in the bank and determine the

exchange rate for foreign currencies against the local currency

12. Deputy Governor (Operations)

Also serve as the principal assistant to the Executive Governor and exercise the powers and duties

of that office. This governor superintends over the banking department, finance department,

management information system unit and the payments system unit. This governor is responsible

for driving the industry-wide shared services initiative towards achieving efficient banking

services with cost savings for the Liberian banking industry and greater penetration of banking



services. This governor is also responsible to equally provides strategic direction and supervises

the four departments of the Central Bank of Liberia that he/she supervises.

13. Banking Department

This department is responsible to collaborate closely with the Liberia Revenue Authority (LRA)

to increase the number of revenue collection windows in Monrovia and its environs. This

department is also responsible to collect on behalf of the Government of Liberia, taxes, fees and

fines on a real time basis for immediate posting to the consolidated Revenue Account, thereby

maximizing the general revenue collection Payment Systems Modernization Project Report

Underway, standardized all CBL checks issued by the bank to its customers (Government

Ministries, Sectorial Agencies and Commercial Banks), which entailed the printing of MICR

coded images readable during scanning process by a specialized scanner. The Clearing House

process was also automated during the year, which will help facilitate reduction of the clearing

cycle when it goes live.

14. Finance Department

This department is responsible to prepare the CBL’s financial statements in accordance with

International Financial Reporting Standards (IFRS). The financial statements are usually audited

by PricewaterhouseCoopers-Ghana, the Bank’s external auditor. The statutory audit is conducted

in schedule consistent with the provisions of Section 50 of the CBL Act.

15. Management Information System Unit

MIS was the focal point for the infrastructure upgrade and implementation of the Payment



System project. The Management Information System (MIS) studies manual systems in the Central

Bank and the feasibility of their automation. The IT Division carries out Software evaluation and

it develops programs required for automation, in addition to the identification of the equipment

needed, in this respect. Other tasks include:

Develop and update structural designs for data-files or database systems, and explain the

manner in which database files may be utilized.

Provide training and relevant technical assistance to users of computer systems in the

Central Bank.

Provide council and technical advice to the Central Bank's management on automation and

systems.

Perform procedures relating to hardware installation, determine specifications, maintain

and monitor functioning thereof.

Operate systems and application software.

Effectively manage telecommunication network operations within the security, and protect

measures prescribed for such operations.

16. Payment system Unit

This department is responsible for implementing series of reform initiatives aimed at modernizing

the payments system in the country in line with international standards. The key solution

components of the modernization include Real-time Gross Settlement System (RTGS), Scriples

Securities Settlement System (SSSS), Automated Check Processing (ACP) and Automated

Clearing House (ACH) system. The unit is also responsible to upgrade the country's financial

infrastructure to a level of other countries in the sub-region like Ghana and Nigeria in preparation



for the launch of a single currency in the region. This helps to enhance the countries' participation

in intra-regional trade and commerce.

III. CENTRAL BANK OF LIBERIA AS A FISCAL AGENT OF THE

GOVERNMENT

The Central Bank acts as a fiscal agent for the government by holding the Treasury Deposit

Account (TDA) and central governmental agency deposit accounts, and undertaking the issuance,

registration, redemption, and interest payment of central government bonds and treasury bills.

Managing the Treasury Deposit Account

The Bank manages the TDA on behalf of the Ministry of Finance (MFDP), processing receipts

and disbursements of the central government. The Bank delegates the handling of treasury

transactions to the nine financial institutions and their various branches.

Handling Central Government Agency Deposits

Central government agencies are required to make their deposits with the Bank or other delegated

banks subject to the approval of the MFDP. However, the delegated banks are required by law to

redeposit a certain percentage of the deposits with the Bank, except thosein interest-bearing

accounts.

Managing Central Government Bonds

As a fiscal agent, the Bank, on behalf of the MFDP, performs services related to the issuance,

registration, transfer, redemption, and interest payment of central government bonds. The Bank

also conducts the auctions of central government bonds.



Managing Treasury Bills

Treasury bills are sold at discounts through auctions. Participants include banks, investment trusts,

insurance companies and bills finance companies.

IV. CENTRAL BANK OF LIBERIA MONETARY POLICY FUNCTIONS

Issuance of Legal Tender Currency Notes and coins

The Central Bank of Liberia engages in currency issuance and distribution within the economy.

The Bank have the sole right to issue banknotes and coins in Liberia. In Liberia, no person other

than the Central Bank have the right to issue coins, banknotes, or any documents or tokens payable

to bearer on demand having the appearance of or purporting to be Liberian currency without the

prior approval of the Central Bank, neither do any person other than the Central Bank have the

right to issue commemorative coins of Liberia without the approval of the Central Bank.

Maintenance of Liberia’s External Reserves

In order to safeguard the international value of the legal tender currency, the CBL is actively

involved in the management of the country’s debt and foreign exchange.

Debt Management

In addition to its function of mobilizing funds for the government, the CBL in the past managed

its domestic debt and services external debt on the advice of the Ministry of Finance for

Development Planning. On the domestic front, the Bank advises the government as to the timing

and size of new debt instruments, advertises for public subscription to new issues, collects

http://www.cenbank.org/MonetaryPolicy/Function.asp#top



proceeds of issues for and on behalf of the government, and sensitizes the Government on the

implications of the size of debt and budget deficit, among others. On external debt service, the

CBL also cooperates with other agencies to manage the country’s debt.

Foreign Exchange Management

Foreign Exchange management involves the acquisition and deployment of foreign exchange

resources in order to reduce the destabilizing effects of short-term capital flows in the economy.

The CBL monitors the use of scarce foreign exchange resources to ensure that foreign exchange

disbursements and utilization are in line with economic priorities and within the annual foreign

exchange budget in order to ensure available balance of payments position as well as the stability

of the Liberian Dollar.

Promotion and Maintenance of Monetary Stability and a Sound and Efficient

Financial System

The effectiveness of any central bank in executing its functions hinges crucially on its ability to

promote monetary stability. Price stability is indispensable for money to perform its role of

medium exchange, store of value, standard of deferred payments and unit of account. Attainment

of monetary stability rests on a central bank’s ability to evolve effective monetary policy and to

implement it effectively.

Banker and Financial Adviser to the Government.

The CBL as banker to the Federal government undertakes most of government banking

businesses within and outside the country. The Bank also provides banking services to the state

http://www.cenbank.org/MonetaryPolicy/Function.asp#top



and local governments and may act as banker to institutions, funds or corporation set up by the

governments. The CBL also finances government in period of temporary budget shortfalls

through Ways and Means Advances subject to limits imposed by law. As financial adviser to the

government, the Bank advises on the nature and size of government debt instruments to be

issued, while it acts as the issuing house on behalf of government for the short, medium and

long-term debt instruments.

Banker and Lender of Last Resort to Banks

The CBL maintains current account for deposit money banks. It also provides clearing house

facilities through which instruments from the banks are processed and settled. Similarly, it

undertakes trade finance functions on behalf of banks’ customers. It also provides temporary

accommodation to banks in the performance of its functions as lender of last resort.

V. THE INSTRUMENTS OF MONETARY POLICY

Fiduciary or paper money is issued by the Central Bank on the basis of computation of estimated

demand for cash. Monetary policy guides the Central Bank’s supply of money in order to achieve

the objectives of price stability (or low inflation rate), full employment, and growth in aggregate

income. This is necessary because money is a medium of exchange and changes in its demand

relative to supply, necessitate spending adjustments. The commonly used instruments are

discussed below.

Reserve Requirement

The Central Bank may require Deposit Money Banks to hold a fraction (or a combination) of their

deposit liabilities (reserves) as vault cash and or deposits with it. Fractional reserve limits the



amount of loans banks can make to the domestic economy and thus limit the supply of money. The

assumption is that Deposit Money Banks generally maintain a stable relationship between their

reserve holdings and the amount of credit they extend to the public.

Open Market Operations

The Central Bank buys or sells (on behalf of the Fiscal Authorities) securities to the banking and

non-banking public (that is in the open market). One such security is Treasury Bills. When the

Central Bank sells securities, it reduces the supply of reserves and when it buys securities-by

redeeming them-it increases the supply of reserves to the Deposit Money Banks, thus affecting the

supply of money.

Lending by the Central Bank

The Central Bank sometimes provide credit to Deposit Money Banks, thus affecting the level of

reserves and hence the monetary base.

Interest Rate

The Central Bank lends to financially sound Deposit Money Banks at a most favorable rate of

interest, called the minimum rediscount rate (MRR). The MRR sets the floor for the interest rate

regime in the money market and thereby affects the supply of credit, the supply of savings and the

supply of investment.

Direct Credit Control

The Central Bank can direct Deposit Money Banks on the maximum percentage or amount of

loans (credit ceilings) to different economic sectors or activities, interest rate caps, liquid asset



ratio and issue credit guarantee to preferred loans. In this way the available savings is allocated

and investment directed in particular directions.

Moral Suasion

The Central Bank issues licenses or operating permit to Deposit Money Banks and also regulates

the operation of the banking system. It can, from this advantage, persuade banks to follow certain

paths such as credit restraint or expansion, increased savings mobilization and promotion of

exports through financial support, which otherwise they may not do, on the basis of their risk/return

assessment.

Prudential Guidelines

The Central Bank may in writing require the Deposit Money Banks to exercise particular care in

their operations in order that specified outcomes are realized. Key elements of prudential

guidelines remove some discretion from bank management and replace it with rules in decision

making.

Exchange Rate

The balance of payments can be in deficit or in surplus and each of these affect the monetary base,

and hence the money supply in one direction or the other. By selling or buying foreign exchange,

the Central Bank ensures that the exchange rate is at levels that do not affect domestic money

supply in undesired direction, through the balance of payments and the real exchange rate. The

real exchange rate when misaligned affects the current account balance because of its impact on

external competitiveness.



VI. FUNCTIONS OF THE CENTRAL BANK OF LIBERIA

According to the CBL act of 1999, the CBL is have the functional independence, power and authority

to:

Issue legal tender banknotes and coins

Legal tender signifies the currency designated by law that a debtor may offer and a creditor is

obligated to accept in the settlement of financial obligations. The CBL has the power to issue

banknotes and coins that are used for the settlement of all debts; public and private, public charges,

taxes, duties, and dues.

Administer the currency laws and regulate the supply of money

Money Supply is the amount of money freely circulating in an economy. The CBL money supply is

made up of currency (paper bills and coins) and bank deposits. Money supply is an important aspect

of government monetary policy. Governments use monetary policy, along with fiscal policy (which

is concerned with taxation and spending), to maintain economic growth, high employment, and low

inflation.

By far the most important function of the CBL is controlling the nation’s money supply and the

overall availability of credit in the economy. It can increase the supply of money and the availability

of credit by lowering the percentage of deposits that banks must hold as reserves at the Federal



Reserve System, by lowering the discount rate, or by purchasing government bonds through open

market operations. The Federal Reserve System can decrease the supply of money and the

availability of credit by raising reserve ratios, raising the discount rate, or by selling government

bonds.

Provide credit to bank- financial institutions on a discretionary basis

The CBL provides credits to commercial banks to meet their short-term liquidity needs as lender of

last resort. The interest is set at a punitive rate to encourage banks to manage their liquidity

efficiently.

Act as fiscal agent for the Government

The CBL act a banker, fiscal agent and adviser to the government. As banker to the government, the

central bank keeps the deposits of the government and makes payments on behalf of the government.

But it does not pay interest on government deposits. It buys and sells foreign currencies on behalf of

the government.

Administer the New Financial Institutions Act of 1999 and regulate banking

activities;

The CBL direct the new financial act which provides that in order to establish a financial institution

in Liberia, a license must be issued by the Central Bank of Liberia; it also covers the capital

requirement and disclosure (due diligence) reports that must be submitted.



Hold and manage the foreign exchange reserves of Liberia, including gold;

The CBL keeps and manages the foreign exchange reserves of the country. It is an official reservoir

of gold and foreign currencies. It sells gold at fixed prices to the monetary authorities of other

countries. It also buys and sells foreign currencies at international prices.

Advise the Government on financial and economic matters

The central bank also advises the government on such economic and money matters as controlling

inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of

payments, etc.

Conduct foreign exchange operations

The CBL fixes the exchange rates of the domestic currency in terms of foreign currencies. It holds

these rates within narrow limits in keeping with its obligations as a member of the International

Monetary Fund and tries to bring stability in foreign exchange rates. Further, it manages exchange

control operations by supplying foreign currencies to importers and persons visiting foreign

countries on business, studies, etc.



Play an active role in collaboration with bank-financial institutions in the creation

and maintenance of efficient and safe mechanisms for payments, clearing and

settlements to meet the needs of the financial markets, commerce, government

agencies and the general public.

As bankers’ bank, the central bank acts as a clearing house for transfer and settlement of mutual

claims of commercial banks. Since the central bank holds reserves of commercial banks, it transfers

funds from one bank to other banks to facilitate clearing of checks. This is done by making transfer

entries in their accounts on the principle of book-keeping.

VII. THE CONCEPT OF INDEPENDENCE OF THE CBL

Independence in the context of a Central bank is usually defined as the central bank's operational

and management independence from the government. Central Bank independence argues that a

Central Bank which is too susceptible to political direction or pressure may encourage economic

cycle as politicians may be tempted to boost economic activity in advance of an election, to the

detriment of the long-term health of the economy and the country.

VIII. AREAS IN WHICH THE CBL MUST BE ALLOWED TO ENJOY ITS

INDEPENDENT

Legal independence

The independence of the Central Bank is enshrined in law. In almost all cases the central bank is

accountable at some level to government officials, either through a government minister or directly

to a legislature. Even defining degrees of legal independence has proven to be a challenge since



legislation typically provides only a framework within which the government and the Central Bank

work out their relationship.

Goal independence

The central bank has the right to set its own policy goals, whether inflation targeting, control of

the money supply, or maintaining a fixed exchange rate. The setting of common goals by the

Central Bank and the government helps to avoid situations where monetary and fiscal policy are

in conflict; a policy combination that is clearly sub-optimal.

Operational independence

The Central Bank has the independence to determine the best way of achieving its policy goals,

including the types of instruments used and the timing of their use. This is the most common form

of central bank independence.

Management independence

The central bank has the authority to run its own operations (appointing staff, setting budgets, and

so on.) without excessive involvement of the government. The other forms of independence are

not possible unless the central bank has a significant degree of management independence. If a

government is in the habit of appointing and replacing the governor frequently, it clearly has the

capacity to micro-manage the central bank through its choice of governors.

IX. WHY CBL INDEPENDENCE IS NECESSARY

It is easy to understand why Central Bank independence is essential in modern monetary systems.

In a paper-money regime like Liberia, where government liabilities represent means of payment

https://en.wikipedia.org/wiki/Fixed_exchange_rate



and have purchasing power, there is always the temptation for any government to use such money

in an opportunistic manner. The temptation comes from the fact that money creation has positive

effects in the short term, on growth and employment, while the costs, in terms of higher inflation,

are paid over the medium to longer term. Central Bank independence is a way to protect policy

makers against the temptation of using monetary policy in a distortionary way. The Central Bank

independence also bring about lower inflation, which ensures a more stable environment for

economic and employment growth.

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