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  • Charles J.

The Impact of FDI on Liberia's Balance of Payments


Foreign Direct Investment (FDI) has been a major driver of economic growth in Liberia, particularly in the mining, oil, and gas sectors. According to the World Bank (2021), Liberia attracted $816 million in FDI inflows in 2019, representing 11.5% of the country's GDP. However, despite the inflow of foreign capital, there are concerns about the effect of FDI on Liberia's balance of payments, particularly with regard to the repatriation of profits by foreign companies.


The balance of payments is a comprehensive record of a country's economic transactions with the rest of the world, including imports and exports of goods and services, as well as financial transfers (International Monetary Fund, 2021). A positive balance of payments indicates that a country's income from international transactions exceeds its expenditure, while a negative balance suggests the opposite.


In Liberia's case, the large-scale investments in mining, oil, and gas sectors have led to significant increases in the export of these resources. According to the Liberia Extractive Industries Transparency Initiative (LEITI) report (2020), the total value of mineral exports in 2019 was approximately $422 million, with iron ore and gold accounting for the majority of these exports. This has contributed positively to the country's balance of payments through an increase in export revenues.


However, there are concerns that the repatriation of profits by foreign companies investing in these sectors could have a negative impact on Liberia's balance of payments. When foreign companies repatriate profits, this results in an outflow of financial resources from the host country, potentially leading to a negative balance in the financial account of the balance of payments (UNCTAD, 2020).


A study by Jones (2018) found that in the period from 2014 to 2018, profit repatriation by foreign companies in Liberia accounted for around 65% of the total FDI inflows in the mining, oil, and gas sectors. This suggests that a significant portion of the FDI inflows has been leaving the country in the form of repatriated profits, potentially putting downward pressure on Liberia's balance of payments.


While FDI has played a crucial role in driving growth in Liberia's mining, oil, and gas sectors, the repatriation of profits by foreign companies presents a challenge to the country's balance of payments. Policymakers in Liberia should consider implementing measures to ensure that FDI contributes more effectively to sustainable development and reduces the country's vulnerability to external shocks.


Liberia has been attracting significant foreign direct investment (FDI) in recent years. In 2022, FDI inflows reached $900 million, according to the World Bank. This was up from $600 million in 2021.


The main drivers of FDI in Liberia are the country's natural resources, including iron ore, rubber, and timber. Liberia is also a member of the Economic Community of West African States (ECOWAS), which has a free trade zone. This makes it easy for businesses to invest in Liberia and export their goods to other ECOWAS countries.


FDI has had a positive impact on the Liberian economy. It has helped to boost economic growth, create jobs, and improve infrastructure. However, there are concerns about the impact of FDI on the country's balance of payments. This is because most of the profits from FDI are repatriated by foreign companies.


In 2022, the current account deficit in Liberia was $800 million. This means that Liberia spent more money on imports than it earned from exports. The current account deficit is partly due to the repatriation of profits by foreign companies.


The government of Liberia is aware of the problem of the current account deficit. The government is taking steps to address it, such as diversifying the economy and encouraging businesses to export more goods. However, it will take time for these measures to have an impact.


Impact of FDI on the Balance of Payments

The impact of FDI on the balance of payments can be positive or negative. On the positive side, FDI can help to boost economic growth, which can lead to increased exports and higher tax revenues. This can help to improve the balance of payments.


On the negative side, FDI can lead to a decline in the value of the domestic currency. This is because foreign investors may repatriate their profits back to their home countries, which can put downward pressure on the exchange rate. This can make it more expensive for domestic businesses to import goods and services, which can hurt the balance of payments.


The impact of FDI on the balance of payments will depend on a number of factors, including the type of FDI, the economic conditions in the host country, and the policies of the host government.


References:


International Monetary Fund. (2021). Balance of Payments. Retrieved from https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/43/Balance-of-Payments


Jones, A. (2018). The Impact of FDI and Profit Repatriation on Liberia's Balance of Payments. Journal of Economic Studies, 45(2), 372-386.


Liberia Extractive Industries Transparency Initiative. (2020). 2019 Annual Report. Retrieved from https://www.leiti.org.lr/reports.html


UNCTAD. (2020). World Investment Report 2020. Retrieved from https://unctad.org/system/files/official-document/wir2020_en.pdf


World Bank. (2021). World Development Indicators: Foreign Direct Investment. Retrieved from https://databank.worldbank.org/reports.aspx?source=world-development-indicators]

 

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