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The oppresive contradictions in Nigeria’s economy

By Henry Boyo

The following is a summary of a presentation by this writer to the House of Representative Committee on Recession, in Lagos recently.

“Readily available evidence, ironically, indicates that the fundamental cause of our presently distressed economy and precariously sliding Naira exchange rate, is actually that of too much money supply, in both Naira and foreign exchange terms. Evidently, CBN’s management of the supply of money is basically defective, such that the albatross of inflation has invariably remained in double digits for several years, with serious consequences for purchasing power of all Naira incomes, consumer demand, productivity, investment and social welfare.

Similarly, with foreign reserves, we have deliberately created a market paradigm, that at best, will ensure that the Naira rate will remain static, even if dollar earnings quadruple, as witnessed in recent years.

Instructively, with an abiding tradition of systemic surplus Naira liquidity, it would be presumptuous to expect any succor from the critical monetary indices, which drive inclusive growth in every economy; indeed, persistent too much Naira supply has ceaselessly continued to fuel inflation. However, since it is not realistic for cost of borrowing to be lower than the inflation rate, it becomes clear that double digit inflation rates will inevitably predicate cost of funds above 10% to make Nigeria’s industrial production less competitive; thus, successful import substitution will remain a mirage; consequently, Nigeria’s economy will remain a dumping ground for imports, if the problem of persistent excess Naira liquidity remains unresolved.

Similarly, an inflation rate that remains closer to 20% will invariably make every static income earner to lose 100% of the value of their income every 5 years. Inflation is an economic ravager, and Nigeria’s economy will never truly flourish, until the Monetary authorities eliminate or drastically reduce the dismal presence of excess money supply, which invariably fuels inflation, which in turn, propels higher cost of funds, and drives weaker exchange rates, which propel higher fuel prices, to make deregulation of the fuel supply business unpopular.

It would be impossible for CBN to deny the horrid challenge caused by excess liquidity when it is decidedly on track to mop up over N7Tn of excess funds from the money market this year; this would translate to an average interest income of over N700bn primarily for banks. Curiously, the ‘celebrated’ 2017 budget expenditure is also about N7Tn!!

Obviously, if CBN and the public sector readily pay upto 17% to borrow and sterilize burdensome excess funds, banks would be unlikely to show enthusiasm for lending to the real sector, particularly, with the attendant challenges of power, multiple taxation and high interest rates which will, inevitably, increasingly induce non performing loans. Nevertheless, Nigeria’s monetary authorities have brazenly carried on for decades with a self assurance that Nigerians will never interrogate the true cause of the disenabling spectre of excess Naira liquidity that spurs the three evils of rising inflation, rising cost of fund and a weak Naira exchange rate, simultaneously with CBN’s consolidation of increasing foreign reserves.

However, it is also undeniable that although substitution of freshly minted Naira values for distributable dollar revenue invariably pumps up CBN’s forex reserves, it has also served as a primary feedstock for the burden of systemic surplus Naira. Evidently, commercial banks, particularly will earn over N700bn as interest charges for lending to the CBN, and other government agencies; sadly, the social impact of such public loans has remained minimal.

It is clearly a contradiction for the monetary authorities to expect a stronger Naira exchange rate, when the constitutional custodian of the Naira, i.e. the CBN, persists in AUCTIONING rations of $ against the Naira, in a money market that is undeniably suffocated with excess Naira supply. CBN’s interventions, in the forex market, is infact a suicidal approach to slowly killing the Naira, as it invariably sells its dollar stock for higher Naira bids. Nonetheless, despite over 15 years of this writer’s advocacy on this clearly deliberate enemy action, it is still business as usual, as the banks flourish, while the rest of the economy wrestle with deepening poverty.

It is evident, however, that if dollar certificates are adopted for paying allocations of dollar denominated revenue, the persistent debilitating burden of systemic excess Naira liquidity will vaporise, and CBN’s Cash Reserve Ratio can then be modulated nearer an equilibrium rate, where CBN has no need to restrain inflation by enticing banks with high interest rates to mop up and sterilize systemic excess Naira liquidity.

Such a payments reform will set in motion a new market paradigm that would reduce the volatile spectre of excess Naira and rising inflation; consequently, the resultant lower inflation rates will induce lower cost of borrowing, and the Naira would have a better fighting chance in the market, if CBN’s dollar auctions cease, while the market becomes free of CBN’s stranglehold monopoly, with all the inherent distortions to efficient resource allocation.

Nigerians may continue to remain in denial of this reality to their eternal peril. Indeed, Naira rate will never significantly improve, even if income from crude oil quadruples. For example, it is a contradiction that Naira steadied around N80=$1 despite a paltry $4bn reserves between 1995-98 but inexplicably fell below N150=$1 even when CBN reserves expanded beyond $60bn between 2006-7!

Presently, with $30bn reserves, the Naira ironically, exchanges for between N305-400=$1, even when crude oil price has risen beyond $38 to $50+/barrel, and our Naira rate clearly remains under siege. The authorities recognize this truth, but it is clear that they certainly hope that Nigerians will look elsewhere for an appropriate solution, while they and their collaborators continue to lap up the benefits from this excess liquidity charade!

Conversely, if dollar allocations are paid with dollar certificates, the dollars will remain domiciled in CBN, even after the banks have purchased the certificates from constitutional beneficiaries, in a free market, outside the present monopolistic framework.

The banks would subsequently sell their dollar purchases to local customers in an open market to pay for only approved and attested import bills. The commercial banks would ultimately instruct the CBN to pay such overseas supplies from the forex balance in the respective bank’s account with CBN to ensure transparency.

This arrangement will minimize round tripping, currency hoarding, and the faux pas of funding bureau de change with official dollars etc. The list of positives to the economy is endless, but the pains to the oppressors who have been making stupendous gains from the current arrangement, will become sweet relief for millions of other Nigerians.

Truth they say is more chrome! It is time to free our economy from the clutches of these financial sharks.”




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