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Is CBN defending the naira or dollar?

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By Henry Boyo

Clearly, the travails currently confronting our economy are as daunting as the challenges we faced as a nation during the IMF inspired Structural Adjustment Programme (SAP) of the late 80s and early 1990s.

It is apparent that the serial Naira devaluations from stronger than one Naira to one dollar to what appeared to be an abysmal low of about N70=$1 at that time, was the most significant cause of the tragic economic somersault caused by SAP.  The once pulsating engines of our expanding industrial base soon became almost silent, with increasing idle capacity, which threw millions of our countrymen into a famished job market. Worse still, those lucky Nigerians who were still employed, regrettably earned wages and salaries which were reduced to ‘peanuts’ by the suffocating Naira devaluation; inevitably, the ‘check out’ syndrome became fashionable, as well heeled professionals, and technocrats sought greener pastures abroad in order to maintain their accustomed lifestyles. Sadly, the impact of the near fatal blows from SAP still impairs our development till this day, and Nigeria has since remained listed as one of the world’s poorest nations.

Curiously, subsequently, even exceptionally high crude prices, at $140/barrel, and the attendant bountiful dollar reserves accumulated in recent years, did not succeed in redeeming our economy and improving our people’s social welfare. Inexplicably, increasing dollar reserves, and extended payments cover for our imports, has continued to foster weaker Naira exchange rates, such that one is forced to wonder if less reserves would actually stimulate a stronger Naira!

Well, we do not have to wonder any longer, as reduced revenue from crude oil prices below $60/barrel has clearly constituted another major onslaught on the Naira exchange rate and economic progress.

Thus, in our quest for a socially and industrially supportive exchange rate, we find ourselves in a bizarre twist of “heads you lose, tails I win”. Indeed, as with SAP, IMF has curiously also been in the forefront of the Vanguard for further Naira devaluation; the embedded role of IMF technocrats in the management of our economy also fostered the unfortunate notion, despite abundant best ever foreign reserves and extended imports payments cover, that the Naira is overvalued! Regrettably, government economic blueprints such as NEEDS were formulated with this obtuse mindset, that despite fortuitously bountiful reserves, a stronger Naira and growth cannot evolve without economic diversification.

1000-naira-notesWell, today, the Naira exchange rate is close to the N180=$1 projected to induce economic diversification and growth in the NEEDS blueprint, but clearly, supportive price and exchange rate stability are sadly still unattainable.

Certainly, no economy can succeed when the real sector is expected to access loanable funds at over 20% while consumer demand remains severely constrained with annual inflation rates of 8-12%, with Naira exchange rate also depreciating, despite increasing revenue and extended payments cover, or indeed where a government readily pays over N600bn interest on loans that are simply kept idle despite the acute shortage of funds to drive real sector growth.

Sadly, CBN and our Economic Management Teams have never been able to construct the appropriate foundation which incorporates low cost of funds (3-6%), low inflation rate (1-3%) and a liberalised foreign exchange market to drive the elusive quest diversification of our economy.

Nonetheless, politicians, critics, and the public are once again singing the chorus of diversification, and as usual, they still labour under the belief that we will get to El Dorado by simply throwing hundreds of billions of Naira at various economic sub-sectors. Indeed, in an economy with a burdensome abiding problem of stupendously surplus Naira, these huge intervention funds regrettably only make things worse as they simply compound the problem of eternally surplus Naira when expended; ultimately, the intervention funds instigate another kind of government intervention, which makes it necessary for government to increase its rate of borrowing to mop up increasingly surplus Naira with excruciating and destabilising rates of interest which crowd out the real sector from loanable funds in the market with adverse consequences for inflation, economic growth and job creation. Clearly, the inexplicable burden of eternally surplus Naira is actually the major obstacle in the path of achieving those supportive indices necessary to grow and diversify the economy; eternally surplus Naira is clearly also responsible for weaker Naira exchange rates, as excess Naira becomes regularly pitched against CBN’s rationed dollar auctions which create a market imbalance in favour of the dollar!

Clearly, Nigerians do not interrogate the process with which CBN consolidates it’s so called “own reserves”! In other words, CBN’s strategy of creating fresh Naira values whenever it substitutes Naira allocations for dollar derived revenue, undeniably induces the spectre of surplus cash in the economy; furthermore, the presence of such eternally surplus Naira ultimately also protects the dollar market value against the Naira; thus CBN has ironically become a greater defender of the dollar than the Naira exchange rate!

Thus, the higher the dollar revenue (from high crude prices and output) the greater also would be the fresh supply of Naira that CBN would create and place in the economy as substitute allocations to the actual dollar income.

Thus, whenever we celebrate CBN’s rising dollar reserves, we must recognise that the accumulation of such reserves, unfortunately, ultimately precipitates an increasing spread of surplus Naira or excess liquidity in the money market; consequently, the greater the liquidity the harsher and more counter-productive also would ultimately be CBN’s monetary measures to reduce Naira supply so as to restrain lending and contain inflation despite the adverse consequences of these measures on the economy.

In view of the foregoing narrative, it seems farcical that the same CBN whose monetary measures actually intimidate and pulverise the Naira in the foreign exchange market can be so wrongly favourably perceived as defending the Naira with its reserves!

Thus, it is ironical that the CBN which instigates a market disequilibrium in favour of the dollar when it substitutes fresh Naira values for dollar denominated revenue, now turns round in apparent defence of the Naira exchange rate to increasingly auction some of the dollars earlier captured when it unilaterally set the Naira exchange rate and subsequently suffocated the money market with surplus Naira values as allocations; unfortunately such Naira liquidity  invariably precipitate weaker Naira exchange rates when pitched against the rationed auctions from the cache of dollars the Apex Bank earlier substituted with Naira allocations.

Surely, the adoption of dollar certificates for allocations of dollar denominated revenue will eliminate or critically reduce the burden of excess Naira liquidity and therefore give the Naira a fighting chance against the dollar in the foreign exchange market.

Save the Naira, Save Nigerians!!


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