By Les Leba
It is clear that CBN’s current monetary framework has expectedly failed to induce price stability, which is its core mandate, as per the 2007 CBN Act.  It is clear that an MPR of 12% is relatively very high, and would predictably instigate high double-digit lending rates; that cannot stimulate economic growth.

Thus, the prospect of industrial growth or achievement of Vision 202020 is wishful thinking.  Incidentally, a high MPR is a double edge sword; while it increases the cost of borrowing to the real sector, it also increases cost of borrowing to government.

For example, irrespective of whether the object of the borrowing is for excess liquidity mop up or for deepening the bond market, government now pays in excess of 14% for its own borrowings from the money deposit banks.  Meanwhile, such public sector borrowings will not improve our infrastructural deficiency nor will it add value to our welfare. Only a fool will borrow money with such high costs and then proceed to keep the money idle!!

Meanwhile, the international media recently reported the consternation of the Spanish people when as a result of their debt crisis, the cost of government borrowings approached 7%!!  In the light of such concern in a country with a much heavier debt burden, it is disturbing that our government is glibly borrowing at 14% to mop up excess liquidity (a process  that adds no value to economic growth and development).

The real malady in the system is the reality that the endless scourge of excess liquidity is caused by a ‘cash tsunami’, consciously offloaded in the market by the same CBN, who subsequently leads the excess liquidity mopping up brigade for the same cash!!  Such useless borrowings will attract debt service charges of over N500bn in 2011 (over 10% of revenue projections).

Extremely high cost of borrowing (over 20%) will undoubtedly instigate and sustain inflation rate into double digit, a rate level that can barely support buying and selling not to talk of industrial regeneration and growth!

What is clear from the shenanigans of the recent past is the overt admission by the CBN that the foreign exchange market is in the vice grip of the apex bank.  The CBN Governor patently made this very clear,  when he informed an international news agency in November, that naira rate of exchange would shortly hover between N155 – 6=$1 from the erstwhile 150=$1.  The latest MPC committee decision has confirmed  Sanusi’s advance notice to the world!

It is instructive that speculative dollar demand consequent upon Sanusi’s ‘forewarning’ remains unabated even after the confirmation of the MPC’s decision to devalue naira, as CBN’s forex supply could only accommodate about 30% of the total demand of over $400m at the very next forex auction!

We have consistently maintained that with 80 – 90% of market dollar supply originating from CBN, it is correct to label CBN’s forex market dominance as a virulent monopoly that is anti-people and destructive to the economy!

It is odd that while we decry adverse fallouts of NNPC’s monopoly of about 50 – 60% of fuel supplies, we are ready to condone the poisonous effect of CBN’s monopoly, and worse still, we fail to recognize that the perceived high price of fuel in a deregulated market, is in fact, the product  of an obtuse forex market that inexplicably pushes naira value down when we earn increasing foreign revenue!!

Nigerians have not recognised that the forex market is a monopoly!  CBN continues to unilaterally determine exchange rate by manipulation of quantum naira consistently juxtaposed against CBN controlled dollar supply in the market!

A simple example will illustrate this; if oranges and mangoes exchanged in the market at, say, 1 orange=1 mango, if the supply of mangoes becomes reduced for one reason or the other, you will clearly require more oranges for one mango; so it is with naira and dollar rate.

Naira and dollars exchanged for N1=$1 at one time, but as CBN continued to liberally pump more naira into the market, whenever it creates and unilaterally substitutes hundreds of billions of naira  for increasing dollar revenue every month, the naira rate began to fall against the dollar, just as in the earlier example of oranges and mangoes!!

Indeed, CBN may be regarded as a great defender of the dollar under such obtuse market arrangements, as naira rate has been on a continuous downward slide in spite of increasing dollar revenue, because of CBN’s monopoly of both dollar and naira supply!

(Our Igbo brothers have a saying, that whoever has the knife and yam can choose to cut the yam as he pleases, and this is exactly what CBN does every month)!  It cuts the yam in favour of the dollar, that is why the dollar has steadily firmed in value against the naira, even when our dollar revenue provided over 30 months’ cover for our imports payments in contrast to the $4bn and four months’ imports cover in 1996, when the naira exchanged for a modest N80=$1.

The products of CBN’s poisonous strategy are double-digit inflation and over 20% lending rate, weaker naira and rising unemployment.

If there is any doubt about the veracity of this observation, the statement of Monetary Policy Thrust in government’s Vision 202020 blueprint is sufficient testimony, and reads as follows:  “Dealing with the EXCESS LIQUIDITY CHALLENGE requires innovative approaches, in view of the source of the problem.

One potentially ENDURING SOLUTION, which would avoid the CREATION OF NEW MONEY and boost the NAIRA VALUE in the foreign exchange market, RELATES TO THE ALLOCATION OF FOREIGN EXCHANGE EARNED FROM OIL TO THE THREE TIERS OF GOVERNMENT RATHER THAN MONETISING IT.

But this may be a recipe for capital flight.  Therefore, the Central Bank would need to develop capacity for LIQUIDITY FORECASTING AND PROGRAMMING.

Thus, CBN, MPC and presumably the Economic Management Team (EMT) fully  recognize the implication of what appears to be the source of the debilitating scourge of excess liquidity in the system!

The Vision 202020 blueprint also confirms government has failed to find an enduring solution to the problems caused by paying the dollar component of monthly allocations with dollars rather than the current practice of CBN’s capture of the monthly distributable dollar revenue and substitution of the dollars with additional naira creation in spite of the adverse consequences of high interest rates, weaker naira, rising fuel prices, increasing inflation, contracting industrial base, increasing unemployment and insecurity.

However, the Vision 202020 document mischievously relates the problem of capital flight with what it readily admits to be a possible enduring solution to the dilemma.  But let us be frank, which system promotes and sustains increasing capital flight?

The current system where, in spite of the recognition  that  much of the official dollars sold to BDCs actually provide funding for smugglers and importation of contrabands as well for those treasury looters, who wish to ferry their naira holdings abroad; over $2bn is directly placed at the disposal of bureau de change BDC monthly!  Our industrial landscape and economy are severely challenged by the dollar funding opportunity ‘benevolently’ provided via CBN to BDCs!

Of course, if distributable dollar revenue is distributed as raw cash, it would exacerbate capital flight in the same manner that dollars sold to BDC also have a negative economic impact; however, the adoption of registered dollar certificates for the purpose of allocation of dollar revenue will in fact, minimize capital flight, as the dollar certificates cannot be transferred, but would require to be exchanged to naira by the beneficiaries at money deposit banks at a market-determined rate before they can obtain value for their allocations!

Furthermore, transactions of public organs will become more transparent as movement of certificates and the related naira transactions can be clearly monitored; besides, the realisation of an appreciating naira would make naira holdings more attractive and reduce artificial/speculative demand for dollars!!

In fact, holders of dollars may be in a hurry to offload their dollar cache before it loses value against the naira, and this can only reduce the prospect of capital flight and further strengthen the naira and lower the rate of inflation!!

Thus, it is clear that CBN will never succeed in bringing about price stability in Nigeria so long as the forex market remains regulated and manipulated by CBN; the increasing poverty of our people in the last three decades is sufficient testimony that CBN’s monetary policy framework, since the mid 1980s, has failed to deliver on improved social welfare and industrial and economic growth, and so long as CBN continues to capture monthly dollar allocations and substitute naira, there is no trick in the bag to change this outcome!

This is the poison in the economy, and the Vision 202020 recommendation for liquidity/inflation targeting as a preferred panacea has obviously failed with prevailing very high cost of borrowing and a naira under severe downward pressure with no imminent hope of respite for our comatose economy!

If the current payment system continues, Nigerians must brace up for very difficult years ahead,; the situation will be made increasingly tragic, if fuel subsidies are removed, without first deregulating the foreign exchange market.

Petrol prices in excess of N140/litre, interest rates at over 20% and inflation rate sustained over 10% will bring much hardship, pain and sorrow to most Nigerians.  If the CBN’s cashless policy takes off in January 2012 as directed, the demand for dollars may skyrocket, as more local bulk traders/businesses adopt dollar denominated transactions in order to beat the inordinate penalty of 10% for cash transactions above N150,000 from January 2012.

This dollar preference for transactions will further depreciate the naira rate, instigate further increase in fuel prices and in turn, fuel inflation with serious consequences for purchasing power, demand, employment and insecurity!!

The cashless project may just become the icing on CBN’s poisoned monetary policy cake!  Incidentally, with CBN’s rudderless travails in search of the haven of price stability, it is not surprising that the apex bank also chose to test market this enforced cashless policy in the industrial and commercial hub of Lagos with a population estimated at over 17m.

The distilled professional marketing wisdom of product test marketing in relatively modest market sectors is profoundly lost on the ‘revered experts’ in the CBN and the EMT.

Indeed, with the prevalent annual cost of borrowing at over 20%, the  10% penalty on transactions above the N150,000 cash limit for each customer is akin to killing a fly on a glass table with a sledgehammer, but, again, this is in consonance with the deep level of ignorance and levity that has characterized monetary policy in the last thirty years!  No wonder our people continue to suffer severe deprivations even when we earn increasing export revenue!

SAVE THE NAIRA, SAVE NIGERIANS!!