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Naira exchange rate, CBN “don” miss road

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By Henry Boyo

The Central Bank of Nigeria is obviously, currently losing the battle to arrest inflation and the unyielding slide in the Naira’s exchange rate. Regrettably, with inflation persistently closer to 10%, all static incomes have lost over 40% of purchasing values since 2010; thus, the laborer’s N18,000 minimum wage may just be worth less than N10,800 today. Instructively, however, spiraling inflation is, usually, primarily triggered by uncontrolled and liberal money supply. Consequently, monetary authorities in successful economies everywhere, endeavor to keep inflation below 2% by managing money supply!

Emefiele CBN Governor
Emefiele CBN Governor

Unfortunately, prevailing near double digit inflation rates were compounded by over 25% Naira devaluation this year. Alarmingly, the Naira has plummeted from N197 to below N270=$1 in the parallel market, while the huge margin between both rates has encouraged financial malfeasance and resulted in significant market distortions, which invariably promote rent seeking while discouraging any serious commitment to grow the real sector, and create more jobs.

Historically, Nigeria’s rising rate of unemployment and deepening poverty correlates loyally with Naira’s steady depreciation from 50kobo to N197=$1; consequently, in order to earn the same purchasing value that 50kobo commanded before 1980, Nigerians must now perform the impossible task of working almost 400 times harder today.

Inevitably, therefore, the consequences of high inflation rates and a sliding Naira exchange rate have ultimately propelled us amongst the World’s poorest nations.

Incidentally, dollar scarcity cannot be the primary cause of weaker Naira exchange rates as often alleged; for example, Nigeria earned bounteous dollar revenue when crude oil prices rose steadily from $53.41/barrel in 1979 to well over $140/barrel in 2008, while average output also remained consistently above 2million barrels per day since return to civil rule; part of the fortuitously, consolidated revenue surplus of over $12bn was sunk into the power sector without any observable positive impact, while another $18bn also became available for the controversial London/Paris Club debt exit.

Furthermore, in compliance with IMF recommendations to liberalise our ‘embarrassingly’ increasing dollar supply, the CBN licensed about 3,000 Bureau De Change and provided them with weekly dollar allocations that often exceeded total forex provision to the real sector; ironically, every Nigerian citizen could also access up to $150K with Naira debit cards at official exchange rates annually from ATMs abroad. Inexplicably, however, despite the healthy reserve base, the Naira rate still depreciated from N80 to N160=$1!

However, in the wake of the present collapse in crude prices, CBN has reduced international ATM withdrawals to $300/day (about $110,000 annually) in order to conserve forex. Nonetheless, every account holder is still entitled to additional $7,000 weekly ($336,000 annually), for international POS Transactions.

It is undeniable that these payment platforms provide ample opportunity to fund smuggling, currency round tripping and money laundering, and it is therefore not surprising that Nigeria, ultimately became one of the largest markets for bulk currency trade. Curiously, these liberal forex windows are still kept wide open by CBN, while genuine real sector operators who can add value and create jobs are constrained to patiently await official allocations or alternatively patronise, oppressive black market dollar rates to fund their businesses.

Instructively, if the PRIMARY cause of Naira’s depreciation is not identified and minimized, the forex market would steadily become unraveled and the parallel market rate may alarmingly exceed N400=$1 with disastrous economic consequences in 2016. Historically, CBN’s attempt to manage Naira exchange rate has always been targeted at curbing dollar demand. It is instructive however, that high dollar demand is actually a function of public perception of the dollar as a stronger and safer store of value than Naira.

Thus, unless actual market dynamics alter this perception, any attempt to control dollar demand or restrict access to supply, will invariably only instigate further rejection of the Naira as a safe store of value. If, however, the CBN recognises persistently surplus Naira as the prime determinant of the dollar/Naira exchange rate, then, our decades long sojourn in the wilderness of monetary strategy will end. Evidently, the unceasing suffocation of systemic Naira liquidity invariably weakens Naira exchange rate in a market where CBN conversely auctions ‘small’ rations of dollars weekly.

It is critically pertinent therefore to seriously interrogate the primary cause of systemic Naira surplus. Incidentally, former CBN Governor, Chukwuma Soludo noted after an MPC meeting in June, 2005 that: “The major source (cause) of huge liquidity injection has been the monetisation (read as the substitution of naira allocation for dollar denominated revenue) …” Soludo therefore warned that…”the (adverse) consequences of excess liquidity (inflation and weaker Naira) stare us in the face.”

If, indeed, according to Soludo, Naira substitution for just $1b distributable revenue wreaks such havoc on liquidity, one can only imagine what damage Naira substitution for an estimated $30bn annual distributable revenue would cause. Instructively however, last week (December 2016), in deference to problematic liquidity surfeit, the CBN again indicated its intention to borrow and store another N135bn as idle funds, to manage the debilitating challenge of Excess Naira supply before the year ends.

The CBN has also projected to additionally remove N1,220bn ($6.13bn) of perceived systemic Naira liquidity with sales of government Treasury bills before March ending 2016. Notably, Treasury Bill sales is CBN’s instrument of choice to control money supply, and establish price stability in the market place.

Furthermore, the Apex Bank and the Debt Management Office also additionally borrowed over N50bn long term loans in December, despite the attendant double digit interest rates which are clearly inconsistent with sovereign, risk free, loans of resource endowed countries such as Nigeria. Revealingly, these government loans were all oversubscribed by well over a 100%, i.e. a loud attestation to the prevailing high systemic liquidity, which also underscores the stranglehold of banks on sovereign debts in preference to real sector lending.

Nevertheless, despite our reduced export revenue, unless, there is an urgent intervention by either President Buhari or the Legislature, Naira liquidity surfeit would clearly remain a challenge to alleviating poverty and successful promotion of economic growth in 2016. However, the adoption of dollar certificates/warrant for allocating dollar denominated revenue will surely minimise Naira liquidity and shore up Naira value and also positively restrain inflation.

A steady hardening of the Naira exchange rate will also gradually promote public preference of the Naira as a stronger store of value than the dollar. Evidently, so long as CBN continues to tackle the problem of an ever sliding Naira rate from the prism of demand for dollars, rather than frontally addressing the bogey of eternally surplus Naira, the end of our economic dislocation will never be in sight.





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