By Henry Boyo
Our parlous economic state has been attributed by some observers to our heavy dependence on increasing oil revenue and our inability to stimulate the performance of our industrial and agricultural subsectors, particularly the small and medium enterprises and thereby, also diversify the productive sectors of our economy.
This column has however consistently explained that the unyielding presence of surplus Naira deliberately instigated by our Central Bank is, ironically, actually the major obstacle to inclusive economic growth and diversification. In other words, economic Eldorado will eternally remain a mirage, unless we can successfully combat the decades old burden of a systemic Naira flood and buoyant dollar reserves inspite of widespread poverty nationwide.
Nonetheless, CBN’s unilateral substitution of Naira allocations for dollar derived revenue has been clearly identified in this column as the real cause of the disenabling excess liquidity; regrettably, however, the oligarchs who derive immense wealth from government’s impulsive borrowings of trillions of Naira with Treasury bills, fuel subsidy payments of over $12bn annually, and the ready access to humongous slush funds which facilitate corruption, understandably, do not want CBN to stop inducing the unyielding socially oppressive spectre of excess liquidity.
However, some readers of this column wonder how distributable dollar denominated revenue can be infused into the system without inducing the destabilising poison of excess Naira in the economy. Hereafter, the following explanation will juxtapose the related consequences of CBN’s substitution of Naira allocations for dollar revenue under the Current Payments Model (CPM) against the Advocated Payments Model (APM) of adopting dollar certificates for the distribution, for example, of $1bn export revenue, to the three tiers of government in eight sequential scenes!
Thus, Scene-1, CPM: CBN unilaterally determines naira exchange rate and unconstitutionally captures the distributable $1bn revenue and prints/creates (read as monetizes) N160bn as statutory allocations, which are domiciled in commercial bank accounts of beneficiaries!
Scene-1, APM: The $1bn is not substituted with N160bn; instead, beneficiaries receive dollar certificates for their respective portions of allocation, while the $1bn remains domiciled with the CBN, while naira exchange rate is ultimately determined by open market demand and supply.
Scene-2, CPM: The banks enjoy almost ten-fold leverage on the fresh naira inflow, with an enhanced credit capacity, which suffocates the money market with excess spending power , and fuels inflation!
Scene-2, APM: With strictly dollar allocations, no fresh Naira is created; the naira supply in the system remains unchanged, and cannot therefore instigate the usual disenabling systemic spectre of surplus naira.
Scene-3, CPM: In response to the threat of rising inflation, the CBN ‘altruistically’ steps in with treasury bills to borrow money it does not need at over 10 percent from the banks, so as to reduce money supply and curb inflation. Despite the oppressive cost, the borrowed funds are simply kept idle!
Scene-3, APM: In the absence of the usual naira surplus, CBN does not have to borrow money it does not need at over 10%; consequently, our increasingly oppressive debt burden would cease! Banks would have no choice but to chase the real sector for business!
Scene-4, CPM: In order to further prevent liberal access to cheap excess funds in the market, CBN raises its Monetary Policy Control Rate (MPR) and this propels banks to increase their own lending rates; the resulting crushing cost of funds would therefore restrain customers’ motivation to borrow; interest rates, may rise above 20 percent, and reduce the prospects of industrial growth and the creation of increasing job opportunities with irrepressible inflation and contracting consumer demand prevailing nationwide.
Scene-4, APM: In the absence of the usual excess naira supply, the threat of inflation and government’s costly impulsive borrowing with Treasury bills will be minimised; CBN would therefore readily reduce its Monetary Policy (control) Rate (MPR) drastically; commercial banks will similarly drop their interest rates across the board to single digit, so that businesses can access cheaper funds to finance new businesses as well as grow existing industries with increasing employment opportunities.
Scene-5, CPM: Ministries and State Governments, who require imports, are constrained to buy back dollars from banks who have become the prime beneficiaries of CBN dollar auctions. Ultimately, naira exchange rate comes under pressure as increasingly surplus naira in the market chase the rationed dollars auctioned weekly by CBN! The market dynamics of demand and supply consequently become unfavourably skewed against the naira, particularly more so, whenever CBN’s total monthly forex auction falls below the $1bn earlier unconstitutionally captured in Scene-1 above!
Scene-5, APM: The three tiers of government remain the owners of dollar values domiciled with CBN; however, these government agencies can exchange for naira, all or portions of their dollar certificates from time to time, directly through commercial banks. Thus, the usual naira surge when CBN prints/creates fresh naira balances for allocations of dollar revenue will cease; inevitably, the naira will become stronger against the dollar in the forex market!
Scene-6, CPM: The less dollars sold by CBN, the larger are CBN’s reserves, but the weaker also will be the naira, as less dollars will invariably become pitched against excess naira supply in the market. The gap between official and black market naira rates consequently widens.
Scene-6, APM: The usual CBN bi-weekly dollar auctions will also cease as constitutional beneficiaries directly trade their dollar certificates for existing naira balances with banks; (since dollar certificates are not legal tender in Nigeria). The dollar values will, however, remain domiciled with the CBN, irrespective of ultimate buyer!
Scene-7, CPM: In order to reduce the gap between the black market and the official rates of exchange, CBN commits the unforced error of freely allocating dollars to Bureau de Change, who in turn fund the requirements of treasury looters and smugglers of contrabands, not minding the adverse impacts of such misguided dollar supply on the economy. Indeed, such monetary policy management must be far from international best practice!
Scene-7, APM: In the absence of the usual liberal spectre of surplus naira, banks become wary of over committing their naira balances to just foreign exchange purchases. The black market for the dollar will rapidly contract, while the motivation for smuggling and money laundering will similarly be curtailed.
Scene-8, CPM: Despite a gasping manufacturing sector and deepening poverty nationwide, the banks and other speculative foreign investors celebrate another bumper year!!
Scene-8, APM: The absence of systemic excess naira will promote single digit and lower inflation rates with positive knock-on impact for increasing consumer demand, industrial consolidation, increasing job opportunities and economic diversification. A stronger naira will drive down fuel prices and ultimately eliminate subsidies!
SAVE THE NAIRA, SAVE NIGERIANS!!