West Africa: Foreign Direct Investment and Economic Growth in Liberia – An Assessment of Central Bank Policy Effectiveness (2018-2023)

Published: September 7, 2026

Francis Boakai Passawe*

School of Postgraduate Studies in Economics, University of Liberia, West Africa, Monrovia, Liberia

*Corresponding author: Francis Boakai Passawe, School of Postgraduate Studies in Economics University of Liberia, West Africa, Monrovia, Liberia.

ABSTRACT

Despite Liberia recording one of the highest foreign direct investment (FDI)-to-GDP ratios in Sub-Saharan Africa during 2018-2023, the country remained among the poorest nations globally, raising the question of whether Central Bank of Liberia (CBL) policy effectively channeled FDI into sustained economic growth.

This study assessed the effectiveness of CBL policy in shaping the relationship between FDI and economic growth in Liberia over the 2018-2023 period. A quantitative research method, employing a descriptive and correlational, ex-post facto design, was adopted. Secondary time-series data compiled from the Central Bank of Liberia, the World Bank, the IMF, and UNCTAD were analyzed alongside primary survey data drawn from a purposively selected sample of 20 respondents across five institutional categories directly engaged in Liberia’s monetary, investment, and financial-regulation environment.

The study found that CBL policy, particularly its progressive easing of the Monetary Policy Rate and reserve requirement ratios from 2021 onward, was moderately but not comprehensively effective, its influence bounded by structural constraints – including the dominance of extractive-sector FDI, financial-system dollarization, and limited regulatory transparency – that lay largely beyond the Bank’s control. Practitioners rated the Monetary Policy Rate the most effective instrument (mean 3.80 on a five-point scale), followed by foreign exchange interventions (3.56) and reserve requirement ratios (3.44), with overall CBL policy effectiveness rated at 3.60.

The study recommends that the CBL institutionalize ongoing monitoring of the pass-through of its policy instruments to FDI and growth outcomes, deepen coordination with the National Investment Commission and the Ministry of Finance and Development Planning, and that government pursue FDI diversification toward manufacturing and services while improving regulatory transparency. The study concludes that Liberia’s limited translation of high FDI inflows into broad-based growth reflects primarily the sectoral composition of that investment and complementary institutional weaknesses, rather than any singular failure of Central Bank policy.

Keywords: Foreign Direct Investment, Economic Growth, Central Bank Policy Effectiveness, Liberia, Monetary Policy Rate, Dollarization

Introduction

Foreign direct investment has long been regarded by policymakers and development economists as a principal channel through which capital-scarce, low-income economies such as Liberia can access financing, technology, managerial expertise, and integration into global value chains that domestic savings alone cannot provide. Liberia’s contemporary economic history was shaped decisively by two successive civil wars that ended in 2003, followed by a fragile recovery subsequently disrupted by the 2014-2015 West African Ebola epidemic and, later, the COVID-19 pandemic. FDI inflows into Liberia reached a recorded high of approximately US$129 million in 2018 before declining sharply, recovering only partially thereafter, while the country’s cumulative inward FDI stock stood at approximately 226.5 percent of GDP, an extraordinarily high ratio reflecting both the capital intensity of Liberia’s mining concessions and the small absolute size of the national economy.

The Central Bank of Liberia (CBL) carries a statutory mandate to preserve price stability, safeguard exchange rate stability, maintain financial-system resilience, and support domestic economic growth. This mandate operates within an unusual monetary arrangement: Liberia functions as a de facto dually-currencies economy in which the United States dollar circulates alongside the Liberian dollar, a condition that investment promotion officials describe as giving investors the freedom to repatriate profits, but which simultaneously constrains the Bank’s capacity to use exchange rate policy as an independent stabilization tool. To manage these pressures, the CBL relies on a policy toolkit comprising the Monetary Policy Rate (MPR), reserve requirement ratios differentiated by currency denomination, and periodic foreign exchange auctions.

Despite this high FDI intensity, Liberia remains among the poorest nations in the world, with a Human Development Index of 0.510 and GDP per capita below US$1,000, and with roughly 60 percent of the population living in poverty. This apparent paradox – a very high ratio of foreign investment to national output coexisting with persistently low levels of human development – indicates that the relationship between FDI inflows and broad-based economic growth in Liberia is neither automatic nor straightforward. Existing econometric evidence covering 2008-2023 shows that FDI exerted a statistically significant positive effect on Liberia’s GDP growth in the short run, but a significant negative effect in the long run, raising the possibility that the growth benefits historically attributed to foreign investment in Liberia have been transitory rather than structural.

Within this environment, the specific channels through which CBL policy instruments shape the relationship between FDI inflows and GDP growth had not been systematically assessed for the 2018-2023 period. Existing studies had tended either to model the FDI-growth relationship in isolation, without directly incorporating CBL policy variables, or to describe CBL policy actions in narrative terms without empirically linking those actions to investment or growth outcomes. It was this gap that motivated the present study, whose purpose was to assess the effectiveness of Central Bank of Liberia policy in shaping the relationship between foreign direct investment and economic growth in Liberia between 2018 and 2023. The study pursued five specific objectives: to examine the trends and patterns of FDI inflows into Liberia across sectors and source countries; to assess the trajectory of economic growth and the sectoral contributions underpinning it; to evaluate the specific monetary and exchange rate instruments employed by the CBL; to determine the extent to which CBL policy effectiveness influenced the FDI-growth relationship; and to identify the institutional, structural, and policy-related factors that constrained or enhanced the translation of FDI into sustained growth.

Literature Review

Theoretical Review

The study drew on three complementary theoretical strands. The neoclassical growth model of Solow (1956) held that capital accumulation, including capital supplied through FDI, raises output growth up to the point of diminishing returns, after which sustained growth depends on gains in total factor productivity; this framework anticipated a positive but diminishing short-run FDI-growth relationship, consistent with the positive short-run FDI coefficient of 0.922 percent reported for Liberia in recent research. Endogenous growth theory, associated with Roomer (1986, 1990) and Lucas (1988), extended this framework by arguing that growth need not diminish provided investment generates technology transfer, knowledge spillovers, and human capital formation – a proposition consistent with the limited diversification and spillover effects documented for Liberia’s extractive-sector FDI. Monetary policy transmission theory, associated with Bernanke and Blinder (1988) and the finance-growth literature of Levine (1997, 2005), explained the interest rate, credit, and exchange rate channels through which central bank policy instruments influence investment and output, and suggested that the strength of this transmission depends on the depth of the domestic financial system – a proposition of direct relevance to Liberia’s shallow, partially dollarized financial system.

FDI, Central Bank Policy, and Growth: The Empirical Evidence

The empirical literature linking FDI to growth originated with Bornstein, De Gregorio, and Lee (1998), who found that FDI’s contribution to growth was conditional on a minimum threshold of host-country human capital. Within Sub-Saharan Africa, extractive FDI has been found to exhibit negligible association with export diversification, while manufacturing-oriented FDI produces significant positive diversification effects, a distinction of direct relevance to Liberia, where FDI has remained heavily weighted toward mining. On monetary policy and FDI specifically, cross-country evidence covering 132 economies over 1970-2023 found pronounced asymmetries by income level: tighter monetary policy attracted FDI in high-income economies by signalling credibility, but discouraged it in lower-income economies where policy signals carried less weight – a finding of particular relevance to Liberia’s classification as a low-income, dollarised economy.

Comparable West African experience offers a useful benchmark. Ghana’s disinflationary tightening in 2022-2023 coincided with a recovery to 2.9 percent growth in 2023 and subsequently 5.8 percent growth by 2025 alongside falling inflation, while Sierra Leone’s monetary tightening over 2023-2024 coincided with a deceleration in growth from 5.7 to 3.9 percent even as inflation fell. These contrasting regional experiences indicate that the relationship between central bank policy stance and macroeconomic outcomes in small, post-conflict West African economies is neither uniform nor mechanically predictable, reinforcing the case for a Liberia-specific empirical assessment. Directly on Liberia, the most rigorous prior contribution found that FDI exerted a statistically significant positive short-run effect on growth (0.922 percent per one percent increase in FDI) but a significant negative long-run effect (-0.709), while public debt suppressed growth in both the short and long run. Neither this study nor other Liberia-focused work, however, incorporated CBL policy variables directly into an empirical model of the FDI-growth relationship, a gap the present study was designed to address.

Exchange Rate Management, Dollarization, and Extractive-Sector FDI

The literature on exchange rate stability and FDI attraction is extensive but not unambiguous: while some panel evidence finds a positive long-run association between exchange rate stability and FDI, other cross-country evidence finds that the more prevalent causal pattern runs from FDI to the exchange rate rather than the reverse, and that once inflation is accounted for, exchange rate dynamics contribute comparatively little independent explanatory power to FDI inflows. For Liberia, whose de facto dollarised economy reduces transactional risk for dollar-holding investors while constraining the Bank’s capacity for independent exchange rate management, this literature suggests that CBL’s foreign exchange interventions may matter less in isolation than in combination with the Bank’s broader success in containing inflation. Compounding this, extractive-sector FDI – which dominates Liberia’s investment profile – has been found across Africa to generate limited employment, weak linkages to the domestic economy, and negligible export diversification relative to manufacturing FDI, a pattern reinforced by governance and regulatory transparency weaknesses documented in Liberia’s investment climate.

Methodology

The study adopted a quantitative research method, situated within a descriptive and correlational, ex-post facto research design. The descriptive component established the trends and patterns of FDI inflows, sectoral economic growth, and CBL policy instruments over the 2018-2023 period, while the correlational component examined the association between FDI, CBL policy effectiveness, and economic growth. The design incorporated two complementary data streams: a secondary time-series stream comprising annual observations of FDI inflows, sectoral GDP growth, the Monetary Policy Rate, reserve requirement ratios, and foreign exchange auction volumes for 2018-2023, compiled from the Central Bank of Liberia, the World Bank, the IMF, and UNCTAD; and a primary cross-sectional survey stream comprising structured, closed-ended responses from purposively sampled practitioners.

The target population comprised 500 individuals drawn from institutions directly involved in Liberia’s monetary policy formulation, investment promotion, and financial-sector regulation, including staff of the Central Bank of Liberia, the National Investment Commission, the Ministry of Finance and Development Planning, commercial-bank economists, and independent financial and economic analysts. From this population, a sample of 20 respondents was selected using purposive, non-probability sampling, stratified into five institutional categories of four respondents each, on the basis that relevant technical expertise on CBL policy was concentrated among a limited number of senior and technical staff rather than distributed evenly across the wider population.

Two instruments were used. The first was a structured questionnaire, administered face-to-face to the 20 sampled respondents, comprising closed-ended items using a five-point Likert scale (from “strongly disagree” to “strongly agree”) to rate the extent to which the Monetary Policy Rate, reserve requirement ratios, and foreign exchange interventions had influenced FDI inflows and growth outcomes over 2018-2023. The second was a secondary data-extraction sheet used to compile published time-series data by year and variable, with discrepancies between sources (for example, between UNCTAD’s flow-based and the World Bank’s balance-of-payments-based FDI figures) recorded and noted rather than resolved arbitrarily. Secondary data were analyzed using descriptive statistics (annual growth rates, means, and standard deviations) and correlation analysis; primary survey data were analyzed using descriptive statistics (frequencies, percentages, means, and standard deviations) disaggregated by institutional category. Ethical safeguards, including informed consent, voluntary participation, and respondent confidentiality, were observed throughout.

Discussion of Empirical Results

Trends and Patterns of FDI Inflows into Liberia (2018-2023)

FDI inflows into Liberia were volatile throughout the period. On UNCTAD’s flow-based measure, inflows peaked at US$129.0 million in 2018, fell by 32.2 percent in 2019 and a further 28.8 percent in 2020 to US$62.3 million, before recovering partially to US$73.0 million in 2022 and easing to US$68.4 million in 2023. The World Bank’s balance-of-payments series echoed this pattern in the earlier years but diverged sharply from 2021 onward, recording values in excess of US$740 million annually – a divergence attributable to differences in how the two sources treat equity capital and reinvested earnings tied to major mining concessions. FDI’s weight relative to GDP rose from 3.8 percent in 2018 to 16.96 percent by 2023, placing Liberia among the more FDI-intensive economies in Sub-Saharan Africa relative to the size of its GDP.

Table 1: Foreign Direct Investment Inflows into Liberia, 2018-2023

Source: UNCTAD World Investment Report (2023); World Bank World Development Indicators (2025); CBL Monthly Economic Review (2023).

The extractive sector dominated FDI throughout the period, averaging 74.5 percent of total inflows and peaking at 82.1 percent in 2022, consistent with mining-related FDI rising from roughly US$603.3 million in 2021 to US$948.3 million in 2022. Agriculture – mainly rubber and palm oil – was the second-largest recipient, averaging 14.1 percent, though its share slipped from a high of 20.3 percent in 2020 to a low of 9.4 percent in 2022 as mining investment expanded. Manufacturing never exceeded 3.9 percent of total FDI in any year. By source country, Hong Kong was the largest single contributor, averaging 26.3 percent of inflows (rising from 22.4 percent in 2018 to 29.6 percent in 2022 before easing to 27.4 percent in 2023), followed by China, averaging 17.6 percent, and the United States, whose share slid from 18.6 to 13.8 percent (averaging 15.7 percent). Côte d’Ivoire averaged 10.4 percent, reflecting cross-border investment within the Mano River Union and ECOWAS framework, while Norway and Croatia’s presence reflected continued European interest in Liberia’s natural resource and maritime sectors.

Trajectory of Economic Growth in Liberia (2018-2023)

Liberia’s growth path was distinctly volatile. Real GDP growth stood at 4.2 percent in 2018, eased to 2.4 percent in 2019, then contracted by 3.1 percent in 2020 as COVID-19 struck. Recovery followed quickly, with growth of 4.8 percent in 2021 and 4.6 percent in both 2022 and 2023. The nominal series swung even more sharply – a 4.32 percent contraction in 2020 followed by expansions of 10.61 percent in 2021 and 13.89 percent in 2022, reflecting both the real recovery and rising global commodity prices for iron ore and rubber. GDP per capita rose from US$678 in 2018 to US$871 in 2023, a cumulative gain of only 28.5 percent, not enough to move Liberia out of low-income status; per-capita GDP remained below US$1,000 throughout the period, consistent with a poverty rate of roughly 60 percent.

Table 2: Liberia’s GDP Growth Rates and Sectoral Contribution to GDP, 2018-2023

Source: Macrotrends (2025); World Bank World Development Indicators (2025); IMF Article IV Reports (2020-2024); CBL Annual Reports (2018-2023); African Development Bank Country Focus Reports (2023-2025).

Services remained the largest sector throughout, contributing between 45.7 and 48.5 percent of GDP. Agriculture, which employs the largest share of the workforce, declined steadily from 34.2 to 31.2 percent of GDP. Industry’s share rose most sharply from 2020 onward, driven almost entirely by mining, whose GDP contribution climbed from 8.4 to 13.8 percent – a gain of 5.4 percentage points that tracks closely with the rise in mining-related FDI. Manufacturing, by contrast, never rose above 4.2 percent of GDP, indicating that economic diversification remained largely out of reach. Mining was also the most volatile sector by growth rate, contracting by 8.2 percent in 2020 before expanding by 16.8 percent in 2021 and 14.2 percent in 2022, swings that fed through to, and amplified, total GDP growth and underscored Liberia’s continued exposure to global commodity markets.

CBL Monetary and Exchange Rate Policy Instruments (2018-2023)

The Monetary Policy Rate, the CBL’s main signaling tool, held at 14.5-15.0 percent through 2018-2020, a contractionary stance consistent with the Bank’s price-stability mandate. From 2021 the CBL eased steadily, cutting the rate to 12.5 percent, then 10.0 percent, then 8.5 percent by 2023 – a cumulative reduction of 6.5 percentage points from its 2020 peak. This easing tracked the economy’s recovery from the pandemic and a fall in inflation from 16.4 percent in 2020 to 5.8 percent in 2023.

Table 3: CBL Monetary Policy Instruments, 2018-2023

Source: CBL Annual Reports (2018-2023); CBL Monthly Economic Review (2023); IMF Article IV Reports.

Reserve requirements followed the same downward path. The ratio on Liberian-dollar deposits fell from 15.0 percent in 2018-2019 to 10.0 percent in 2022-2023, while the ratio on US-dollar deposits fell from 10.0 to 7.0 percent over the same period, reflecting the CBL’s recognition of how dollarized Liberia’s financial system is. Foreign exchange auction volumes fell steadily from US$92.4 million in 2019 to US$52.8 million in 2023, a 42.9 percent decline, reflecting both easing pressure on the currency market and a more selective approach to intervention aimed at smoothing volatility rather than defending a particular rate. The Liberian dollar depreciated only modestly against the US dollar, from L$148.2 to L$156.7 per US$1.00 (a cumulative depreciation of 5.7 percent, or roughly 1.0 percent a year), suggesting that, given the economy’s exposure to external shocks, the CBL’s foreign exchange management held up reasonably well.

Practitioner Assessment of CBL Policy Effectiveness

Primary survey data were gathered from twenty purposively sampled respondents across five institutional categories – CBL staff, National Investment Commission staff, Ministry of Finance and Development Planning staff, commercial-bank economists, and independent financial and economic analysts – with an equal 20 percent weighting for each category. Average professional experience ranged from 6.8 years among National Investment Commission staff to 12.4 years among independent analysts, with an overall average of 8.8 years.

Table 4: Respondents’ Assessment of CBL Policy Instrument Effectiveness (Mean Scores, 5-Point Likert Scale)

Source: Primary survey data (n = 20), 2026.

Across all five respondent categories, the Monetary Policy Rate was rated the most effective CBL instrument, followed by foreign exchange interventions and reserve requirement ratios. CBL staff rated every instrument most favorably, while independent analysts were consistently the most conservative in their scoring, a pattern that likely reflects analysts’ greater distance from, and more critical stance toward, the institution whose performance they were assessing. Overall CBL policy effectiveness scored a mean of 3.60, indicating a generally positive but qualified assessment among practitioners and observers of Liberia’s monetary policy landscape.

This practitioner assessment is broadly, though not entirely, consistent with the wider empirical literature. Prior econometric evidence for Liberia found that a one percent increase in FDI was associated with a statistically significant 0.922 percent increase in short-run GDP growth, but a significant negative long-run coefficient of -0.709, a pattern consistent with a capital-deepening effect, predicted by the Solow growth model, that faded rather than compounded. The concurrent decline in the CBL’s policy rate and in inflation between 2020 and 2023, alongside continued real GDP growth of 4.6 percent in both 2022 and 2023, suggests that CBL policy had, at minimum, not obstructed Liberia’s post-pandemic recovery, and is consistent with a Bank that used the room created by falling inflation to ease policy in a manner supportive of growth. However, because extractive FDI generates limited technology transfer and weak linkages into the wider domestic economy, the findings suggest that CBL policy operated as one contributing factor among several, rather than as the dominant determinant, of whether Liberia’s FDI translated into sustained rather than transitory growth.

Several institutional and structural factors were found to constrain the translation of FDI into sustained growth largely independently of CBL policy narrowly defined. Liberia’s de facto dollarised financial system reduces transactional exchange rate risk for dollar-holding investors, but simultaneously constrains the Bank’s capacity to use exchange rate policy as an independent stabilisation tool. The concentration of FDI in extractive industries limits employment generation, forward and backward linkages, and export diversification. Regulatory transparency weaknesses – government agencies remain under no legal obligation to disclose investment regulations for public comment, and public financial data remain only partially transparent – plausibly limit investor confidence independently of monetary policy settings, while Liberia’s rising public debt burden, which reached 58.8 percent of GDP by 2023, represents a fiscal constraint operating alongside, rather than through, CBL policy.

Conclusion

This study assessed the effectiveness of Central Bank of Liberia policy in shaping the relationship between foreign direct investment and economic growth in Liberia over the 2018-2023 period, drawing on secondary macroeconomic time-series data and a primary survey of twenty purposively sampled practitioners. The study concludes that CBL policy over the period was moderately but not comprehensively effective. The Bank’s progressive easing of the Monetary Policy Rate and reserve requirement ratios from 2021 onward, undertaken as inflation fell from its 2020 peak, is consistent with a central bank that successfully created room for monetary accommodation without reigniting price pressures, and this accommodative stance coincided with a sustained recovery in real GDP growth to around 4.6 percent in both 2022 and 2023.

At the same time, the effectiveness of CBL policy was bounded by structural features of the Liberian economy that lie substantially beyond the Bank’s direct control – the dominance of extractive-sector FDI, the persistence of a de facto dollarized financial system, and the shallow depth of Liberia’s domestic financial markets together limit the channels through which CBL policy instruments can be expected to transmit fully to investment and growth outcomes. The study further concludes that the apparent paradox of an FDI-to-GDP ratio exceeding 16 percent coexisting with a poverty rate of approximately 60 percent is attributable primarily to the sectoral composition of Liberia’s FDI rather than to any single failure of CBL policy, since extractive investment is consistently associated with limited technology transfer, weak domestic linkages, and negligible contribution to export diversification. Finally, CBL policy effectiveness, as perceived by practitioners directly engaged in its formulation and observation, was found to be real but qualified: a mean effectiveness rating of 3.60 out of 5.0, together with the gap between the more favourable self-assessment of CBL staff and the more conservative ratings of independent analysts, indicates that the Bank’s policy actions were regarded as competent and directionally appropriate rather than as a fully sufficient response to Liberia’s investment and growth challenges.

Based on these findings, the study recommends that the Central Bank of Liberia institutionalise ongoing statistical monitoring of the pass-through of its policy instruments to FDI and growth outcomes, continue its gradual, data-driven approach to lowering reserve requirement ratios, strengthen its foreign exchange auction framework as a tool for smoothing volatility rather than the primary anchor of exchange rate stability, and deepen collaboration with the National Investment Commission and the Ministry of Finance and Development Planning. The Government of Liberia is encouraged to prioritise FDI diversification toward manufacturing and services, strengthen the screening and monitoring capacity of the National Investment Commission, improve regulatory transparency, and pursue continued fiscal discipline to contain the growth-suppressing effects of public debt. Future research should extend the time series beyond 2023, apply formal regression or vector error-correction modelling that incorporates CBL policy variables directly as explanatory variables, examine the sectoral composition of FDI as a moderating variable in the FDI-growth relationship, and expand the primary survey component to test whether investor perceptions of CBL policy effectiveness align with those of policymakers and analysts.

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