By HENRY BOYO

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 monetizing it.  But this may be a recipe for capital flight. 

Therefore, the Central Bank would need to develop capacity for liquidity forecasting and programming.”Vision 20:2020 ‘Monetary Policy Thrust’

In reality, the success or failure of any economy is generally predicated on its monetary strategy; thus, abundant endowment of mineral and agricultural resources will not necessarily deliver inclusive economic growth, if the system is underpinned by monetary strategies that are out of step with best practice management. Consequently, the success of vision 20:2020 may well rest on the strength of its monetary policy thrust.

The following is a simple English translation which should facilitate understanding of Vision 20:2020 monetary policy thrust.

“We have failed over the years to combat the unusual problem of systemic surplus Naira which fuels inflation and instigates a weak Naira and very high cost of funds; furthermore, systemic Naira surplus, also sustains the anti-social and reckless strategy of placing government deposits at zero percent while government simultaneously, borrows with double digit interest rates and crowd out the real sector from access to cheap loanable funds.

“Thus, the failure of our economy is rooted in our reluctance to tackle the source of unyielding Naira surplus which results when CBN creates/prints fresh supply of Naira as substitute for distributable dollar revenue. Nonetheless, we recognise that if we muster courage to stop such monthly creation of New Naira supply, the Naira value would be boosted in the foreign exchange market”.

“However, we recognise that if dollar revenue is allocated in its pristine form without substituting Naira, such an arrangement will stop the creation of disenabling surplus Naira, but may inadvertently facilitate stealing and speculative repatriation of Nigeria’s dollar reserves. Consequently, in order to avert such “illegal” forex outflow, we will continue to substitute fresh Naira supply, for dollar derived revenue!”

However, “if substitution of New Naira supply is sustained, the CBN will need to develop the capacity to forecast and programme the extent of Naira surplus that is desirable in order to minimise an inflationary spiral!”

The preceding is a simple translation of the Vision 20:2020 monetary policy thrust statement. Well, to the extent however, that six years after commencement of the Vision, inflation still remains untamed, and cost of funds to the real sector remains over 20 percent, while government continues to borrow money it intends to keep idle at over 10 percent, and the Naira exchange rate continues to depreciate inspite of increasingly buoyant reserves, we may confidently conclude that CBN’s strategy for liquidity forecasting and programming has failed.

Clearly, the Vision 20:2020 economic blueprint rejected the obvious solution of allocating dollar revenue in its original form because of the fear of unproductive unsubstantiated huge leakages from our reserves. In reality, in view of the abysmal level of greed, lack of patriotism, and ineffective sanctions for treasury looters, it is indeed likely, that raw dollar allocations may truly worsen the outflow of our export dollar revenue.

Nonetheless, it is equally true that if dollar certificates rather than actual dollar cash served as instruments for allocations of dollar revenue, the threat of capital flight will definitely be minimised.

In the rest of this article, we shall examine whether the process of Naira substitution for dollar revenue as currently practised serves as better protection of the federations dollar reserves than an allocation process that adopts dollar certificates which can only be available as legal tender (for domestic spending) after the beneficiaries have exchanged their certificates for Naira sums at prevailing market exchange rates from commercial banks.

Thus, under the current system, the CBN captures the dollars and creates new Naira supply as allocations, while, the dollar values remain temporarily domiciled with CBN.

*  The constitutional beneficiaries lodge their huge Naira allocations in banks and thereby provide the banks with the leverage to instigate surplus Naira and expand their capacity to create credit and instigate inflation.

*The CBN, with its monopolistic ‘good fortune’ as suppliers of over 80% of the dollar market, auctions only part of its dollar cache to banks and Bureau De Change; thus, with surplus Naira chasing relatively limited dollars, the Naira exchange rate weakens as banks and BDCs speculatively purchase dollars from CBN auctions. Ultimately, despite the anxiety on capital flight, CBN immediately transfers the dollars purchased directly into the custody of beneficiary banks and BDCs; consequently, the CBN’s dollar balances are reduced accordingly.

*  The banks and BDCs in turn add their margins, which may exceed the current N7/dollars before selling to their customers, who may be importers or indeed government parastatals and ministries, who were the original owners from whom the auctioned dollars were initially captured.

*The BDC allocations become the primary source of funding the nefarious activities of treasury looters, currency traffickers and smugglers despite the threat to  Nigeria’s economic and industrial growth and security; similarly, the banks can also roundtrip or speculatively hoard their dollar purchases and create disenabling market distortions.

— Conversely, with dollar certificate for allocations, the CBN does not create new Naira supply, with the attendant destabilising economic consequences; furthermore, the dollar cash remain domiciled in the CBN instead of dispersal to banks and BDCs.

— Government beneficiaries of dollar certificates approach banks to convert their dollars to Naira in a market where more dollars chase relatively static Naira balances, as no new supply is created by CBN; consequently, the Naira exchange rate becomes stronger while CBN’s dollar reserves still remain stable.

—— The banks would domicile their dollar purchases in domiciliary accounts with CBN, thus preventing round tripping and such anti-social transfers.

——In case governments or its agencies require imports, they simply surrender their dollar certificates through banks to CBN so that their domiciliary accounts with CBN can be debited with the dollar value of their imports immediately at sight of documentary confirmation of satisfactory shipment of their orders.

——Private sector importers would buy dollars at open market exchange rates from banks to cover their invoice values. The banks would simply instruct CBN to pay the overseas suppliers of their (banks) customers from their domiciliary accounts with the CBN once the CBN receives documentary confirmation that shipment of imports has been satisfactorily effected.

Save the Naira, Save Nigerians.