Nigerians generally believe that large foreign reserves are useful for defending the exchange rate of the naira.  However, our total foreign reserves actually comprise of two primary income streams; the first is the Excess Crude Account (ECA), which consists of all crude oil revenue in excess of budget estimates.

In the recent past, over $10bn accrued annually into the ECA.  Surprisingly, however, government always managed to consume the proceeds in this account in addition to the hundreds of billions of naira, borrowed by government, at costs usually above 12%, to fund earlier projected ghost deficits, which were induced by the misguided conservative price and output benchmarks adopted in annual budgets.

The inherent contradiction of federal budgets that inexplicably accommodate deficits as well as actual revenue surplus is regrettably generally lost on our people, and our illustrious Economic Management Team.
The second major component of our foreign exchange reserves is what the Central Bank of Nigeria (CBN) describes as its “own reserves”; the value of this reserve is currently about $40bn.

CBN’s claim to sole ownership of the $40bn reserves is founded on the principle that the federation cannot lay claim to this fund since government was already the beneficiary of the naira ‘equivalent’, which the apex bank unilaterally created and substituted as allocations for constitutionally distributable dollar revenue.”  For this reason, CBN’s $40bn reserves cannot be appropriated for defraying deficits in our budgets, nor to redress some of our serious infrastructural deprivations.

A good example of this bizarre outcome may drive the point home; some Nigerians will recall that Mr. President was in China last year, partly to raise funds for infrastructural enhancement, and indeed, apparently raised about $1.5bn with an interest rate that may not be far short of the 7% rate on our existing Eurobonds.

Interestingly, however, the CBN Governor was also in China to assess investment opportunities for some part of CBN’s dollar reserves!  However, it is unlikely that Sanusi found any investment opportunity that would ultimately produce a yield of more than 4%; in such an event, there is nothing that stops Chinese investors from borrowing directly from CBN at a cheaper cost for onward lending to the Nigerian government at a higher rate of interest!

Sadly, the above illustration is indeed also mirrored by the process of domestic debt accumulation.  To substantiate this observation, we quote Lamido Sanusi’s revelation as reported in Thisday Newspaper’s issue of 24/07/2013.

“…First of all, you have got liquidity (naira) surplus in the banking industry; … there is over N1.3tr or so sitting in banks and belonging to government agencies.  Now basically, they (these funds) are at zero percent interest and the banks are lending about N2tn to the government and charging 13 to 14%!  Now, that is a very good business model, isn’t it?  Give me your money for free and I lend it to you at 14%; so why would I go and lend to anyone?”  Worse still, the funds mopped up (borrowed) by the CBN are simply sterilised or kept idle, despite prevailing significant budget deficits!

Thus, as CBN’s reserves grow, so also does the extent of naira surplus in the system expand to inadvertently promote a conducive platform for a general price rise, and lower exchange rate as CBN’s obtuse and patently unconstitutional payments strategy constantly induces a market mix of systemic surplus naira chasing relatively few ‘goods’ and rationed dollar supply from the CBN every month.

Thus, the flipside of CBN’s increasing  dollar reserves is actually the constant threat of inflation  as well as increased domestic borrowing, as the CBN ‘posthumously’ embarks on a borrowing spree at double-digit interest rate, in order to reduce the burden of surplus naira that become increasingly worrisome with CBN’s unceasing monthly substitution of naira allocations for distributable dollar revenue.  A significant part of Nigeria’s estimated N8tn domestic debt was actually accumulated with this suicidal monetary strategy while service charges on such “useless” debts probably exceeded $3tn in the last six years.

Furthermore, CBN’s forced appetite to borrow hundreds of billions of naira at such high cost, inevitably also crowds out the real sector from accessing cheap funds.  The scarcity of cheap funds to SMEs ultimately contracts the domestic economy, thus, inducing an increasing level of unemployment as collateral.

Consequently, it seems our people have to become poorer for CBN’s reserve to grow.
In a failed attempt to stem naira depreciation in the recent past, Sanusi wrongly identified abnormal dollar demand as the prime villain for increasing market pressure.  The CBN, therefore, reduced its weekly forex allocations to Bureau De Change (BDC) from $1m to $250,000.

Not surprisingly, however, rather than douse demand, the vibrant forex market experienced dollar supply shortage, which expectedly intensified the pressure on the naira exchange rate.  Consequently, less than 60 days later, the suspended CBN Governor, in another characteristic policy somersault, summarily lifted the limit on sales of dollars to BDC, despite the recognition of the BDC’s role in facilitating money laundering, capital flight and the ignoble smuggling enterprise, which kills our industries.

Invariably, even Sanusi’s incongruous policy flip-flop could not reduce the pressure on the naira, because he probably failed to appreciate that the problem was not only dollar supply, but significantly also the unceasing deliberate creation of excess naira supply by the same CBN.  For example, the apex bank’s ill-advised provision of over N1tn to settle AMCON’s non-CBN debts in the last quarter of 2013 inadvertently also added almost N10tn worth more of naira liquidity into an already naira-suffocated money market to further worsen the plight of the naira against the dollar.

Thus, it becomes a farcical expression of concern, when the same agency that consciously created the disenabling naira surfeit turns round to sell rations of dollar revenue it earlier captured, in its futile bid to “defend” the naira rate of exchange.  Nevertheless, these unforced contradictions in the product of monetary strategy will become successfully resolved with the adoption of dollar certificates for the disbursement of the dollar component of distributable revenue.


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