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Is CBN defending the Naira or Dollar?

‘By Henry Boyo

AS I speak to you, our    external reserves stand above $31bn and that provides us with enough fire power to be able to defend the Naira” Godwin Emefiele (CBN Governor, April 25, 2017).  However, the question is: Is the CBN actually defending the Naira? This question is examined in the above title, which was first published in Punch and Vanguard Newspapers on January 12, 2015. Please read on:

“Evidently, the serial devaluation of the Naira from stronger than N1=$1 to an abysmal low of about N70=$1 at that time, was probably, the most significant instigator of the oppressive economic challenges induced by the IMF imposed Structural Adjustment Programme(SAP).   Nigeria’s once pulsating industrial base soon became almost silent, with increasing idle capacity, which threw many Nigerians into a famished job market. Worse still, those lucky Nigerians who were still employed, regrettably earned wages which were reduced to ‘peanuts’ value by the suffocating Naira devaluation; inevitably, the ‘check out’ syndrome became fashionable, as well heeled professionals, and technocrats sought greener pastures abroad in order to maintain their accustomed lifestyles. Sadly, the impact of the near fatal blows from SAP has truncated our development till this day, and we have since become listed as one of the world’s poorest nations.

Curiously, exceptionally high crude prices, at $140/barrel, and the attendant bountiful dollar reserves accumulated thereafter, did not redeem our economy or improve our social welfare. Inexplicably, increasing dollar reserves, and extended payments cover for our imports, continued to foster weaker Naira exchange rates, such that one is forced to wonder if less reserves would actually stimulate a stronger Naira!

Well, reduced revenue from crude oil prices falling below $60/barrel, since then has undeniably clearly constituted another major onslaught on the Naira exchange rate and our economic progress.

Thus, in our quest for a socially and industrially supportive exchange rate, we find ourselves in a bizarre twist of “heads you lose, tails I win”. Indeed, as with SAP, IMF has curiously also been in the forefront of the Vanguard for further Naira devaluation; the embedded role of IMF technocrats in the management of our economy also fostered the unfortunate notion, despite our best ever foreign reserves and extended imports payments cover, that the Naira is overvalued! Regrettably, government economic blueprints such as NEEDS were predicated on the obtuse mindset, that inspite of the fortuitously bountiful reserves, a stronger Naira and growth cannot evolve without first diversifying the economy.

Well, today, the Naira exchange rate is close to the N180=$1 projected to induce economic diversification and growth in the NEEDS blueprint, but clearly, supportive inflation, cost of borrowing and exchange rate stability are sadly still unattainable. Certainly, no economy can succeed when the real sector is expected to access loanable funds at over 20% while consumer demand remains severely constrained with annual inflation rates of 8-12%, with Naira exchange rate also depreciating, despite increasing revenue and extended payments cover, or indeed where a government readily pays over N600bn interest on loans that are simply sterilized from use despite the acute shortage of cheap funds to drive real sector growth.

Sadly, CBN and our Economic Management Teams have never been able to construct the appropriate foundation which supports low cost of funds (3-6%), low inflation rate (1-3%) and a liberalised forex market to drive the elusive quest for economic diversification.

Nonetheless, politicians, critics, and the public are once again singing the chorus of diversification, and as usual, still labour under the illusion that we will get to El Dorado by simply throwing billions of Naira at various economic sub-sectors. Indeed, in an economy with a burdensome abiding problem of stupendously surplus Naira, these huge intervention funds regrettably only make things worse as they simply compound the problem of eternally surplus Naira when expended; ultimately, the intervention funds instigate another kind of government intervention, which makes it necessary for government to increase its rate of borrowing to mop up increasingly surplus Naira with excruciating and destabilising interest rate which crowd out the real sector from loanable funds with adverse consequences for inflation, economic growth and job creation.

Clearly, the inexplicable burden of eternally surplus Naira is actually the major obstacle in the path of achieving those supportive indices which are required to grow and diversify the economy; eternally surplus Naira is clearly also responsible for weaker Naira exchange rates, as excess Naira becomes regularly pitched against CBN’s rationed dollar auctions which invariably create a market imbalance in favour of the dollar!

Clearly, Nigerians do not interrogate the process with which CBN consolidates it’s so called “own reserves”! Furthermore, CBN’s strategy of creating fresh Naira values whenever it substitutes Naira allocations for dollar derived revenue, undeniably induces the spectre of surplus cash in the economy; furthermore, the presence of such eternally surplus Naira ultimately also protects the dollar market value against the Naira; consequently, CBN ironically becomes a greater defender of dollar rather than the Naira exchange rate!

Thus, the higher the dollar revenue (from high crude prices and output) the greater also would be the fresh supply of Naira that CBN would create and place in the economy as substitute allocations to the actual dollar income.

Thus, whenever we celebrate CBN’s rising dollar reserves, we must recognise that the accumulation of such reserves, unfortunately, ultimately precipitates an increasing spread of surplus Naira or excess liquidity in the money market; sadly, the greater the Naira liquidity the harsher and more counter-productive also, would ultimately be CBN’s monetary control measures to reduce Naira supply, to restrain lending and contain inflation despite the adverse economic consequences of these measures.

It seems farcical from the preceding narrative that the same CBN whose monetary measures actually intimidate and pulverise the Naira in the forex market can also be so wrongly, favourably perceived as defending the Naira with its reserves!

Thus, it is ironical that the CBN which instigates a market disequilibrium in favour of the dollar when it substitutes fresh Naira values for dollar denominated revenue, now turns round in apparent defence of the Naira exchange rate to increasingly auction some of the dollars earlier captured when it unilaterally set the Naira exchange rate and subsequently suffocated the money market with surplus Naira values as allocations; unfortunately such Naira liquidity   invariably precipitate weaker Naira exchange rates when pitched against the rationed auctions from the cache of dollars the Apex Bank earlier substituted with Naira allocations.

Surely, the adoption of dollar certificates for allocations of dollar denominated revenue will eliminate or critically reduce the burden of excess Naira liquidity and therefore give the Naira a fighting chance against the dollar in the forex market.”

Save the Naira, Save Nigerians!!


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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.