BY HENRY BOYO
The market price of crude oil steadily increased beyond $50/barrel after OPEC agreed to cut output by about 1.2million barrels/day recently. Nigeria’s export revenue prospects will consequently be boosted if the price trend is sustained, particularly if restiveness is minimized in the Niger Delta.
However, much against popular expectation, the more bountiful the export dollars, the bigger also will be our economic headache!
President Buhari must be unhappy that the naira exchange rate has suffered so poorly under his watch, particularly after he promised parity between Naira and dollar, if he won the election. Unfortunately, the worst is yet to come, because, if crude oil price and output remain favorable, the dollar will paradoxically spike well above N500=$1 and may approach N1000=$1 before December 2017! Any attempt to bridge the widening gap between official and parallel market exchange rates will trigger a steep rise in fuel price to shoot inflation well beyond 20% and deepen poverty nationwide.
Advisedly, patriotic Nigerians should promptly alert Mr. President that a legacy of mass poverty will characterize his tenure if he remains in denial of the above reality.
Hereafter, an interview format will be adopted, to explain the chain of cause and effect that will induce the horrifying realities foretold above.
Question: Why are you so pessimistic and why should increasing dollar revenue make Nigerians poorer? Isn’t this a contradiction?
Ans: Yes, it would indeed seem a contradiction for deepening poverty to be the product of increasing dollar revenue, but interestingly, this has been our economic experience for some time now; for example, Nigeria became listed amongst the world’s poorest peoples despite the stupendous revenue from oil for several decades. Furthermore, when crude oil prices averaged about $10/barrel, N1 exchange for about US$2.
Conversely, when crude oil prices exceeded $140/barrel and output remained at over 2m barrels/day to sustain forex reserves well over $50bn, the Naira exchanged for over N150=$1! Thus, Nigerians may have to work 300 times harder, just to earn $1, particularly when income levels rise more slowly. Thus, it is evident that deepening poverty is unfortunately presently induced by increasing dollar income! So, my perspective is not pessimistic but realistic.
Question: So are you suggesting that the economy will do better with smaller export revenue from oil?
Ans: Unfortunately, as evident from our national experience, it’s a case of heads you lose, and tails, you also lose, as lower oil prices and dwindling revenue have similarly also induced severe hardship everywhere.
Question: So, why does oil revenue instigate such an economic dilemma?
Ans: The oil Revenue is not the problem; the primary cause of the oppressive dilemma is the distortional process CBN adopts for infusing the dollar revenue into the domestic money market to stimulate and support increasing economic activities and improvement in social welfare.
Question: So, how is the dollar revenue infused into the system presently?
Ans: inexplicably, revenue allocations are all denominated in Naira, even though forex revenue from crude generally contributes the lion’s share. The question therefore is what happens to the dollars held back and how is the exchange rate determined for the Naira shared as allocations?
Question: How does Naira substitution and the applied exchange rate distort successful and more inclusive economic management?
Ans: The fear of unrestrained inflationary spiral is the first lesson in economic management everywhere.
The CBN is constitutionally empowered to keep inflation at best practice levels, usually below 2%, to sustain income values and consumer demand. However, the main driver of spiraling inflation is undeniably excess money, (in this case, excess Naira supply). Invariably, money supply is inadvertently expanded every time CBN unilaterally substitutes naira allocations for dollar denominated revenue. Thus, the higher the dollar revenue, the greater will be Naira supply and the greater also will be the serious threat of unbridled inflation.
Furthermore, it is not clear how CBN determines the exchange rate adopted for the Naira it substitutes for dollars, but the popular perception is that CBN adopts the current market rate. This may indeed be so, but the same CBN is guilty of consciously manipulating the exchange rate mechanism to favor dollar rather than Naira, for which it is both custodian and guardian.
Question: How does this happen?
Ans: By directly substituting Naira allocations, CBN immediately assumes ownership of billions of dollars, which have unfortunately been largely abused by the CBN itself and incumbent Presidents.
The obviously perverse argument is that once constitutional beneficiaries accepted Naira allocations for their share of dollar revenue, they cannot turn around to also lay claim to the billions of dollars held back by CBN; that obviously, would be having your cake and eating it! Nonetheless, if the tiers of government subsequently require dollars for any legitimate purpose, they have no option than to buy back such dollars from the same CBN, at a rate that may be higher than the earlier rate CBN adopted for substituting the Naira allocations.
Question: So, how does CBN determine the rate it would sell dollars to both constitutional beneficiaries and in the open market?
Ans: Well, the present price mechanism appears regrettably skewed against the Naira, as CBN proceeds to AUCTION rations of the same dollars in a money market that is undeniably already suffocated by the bloated Naira allocations paid to government every month. Of course, any item auctioned, would invariably sell for higher prices; consequently, CBN’s subsequent auctions of dollar rations, in a market flushed with excess Naira supply, obviously spells doom for the Naira exchange rate and will inadvertently also fire the inflation rate.
Thus, the more bountiful the dollar revenue, the greater also will be the threats from excess Naira supply and spiraling inflation and the more urgent therefore will be the need to introduce policy measures that would hold back inflation.
Question: So, what measure is taken by CBN to restrain spiraling inflation?
Ans: As I said, the presence of excess money supply is the major driver of inflation, so the CBN would invariably try to reduce consumer access to the excess Naira supply, by raising the interest rate commercial banks pay to CBN to cover their temporary cash short falls. Expectedly, banks would in turn, make lending more expensive to their customers by charging higher interest rates for the loans advanced. This reflex posture inevitably constitutes an obstacle to inclusive economic growth, industrial competitiveness and the possibility of successful import substitution.
Question: So what is the way out?
Ans: The CBN should adopt dollar certificates for paying allocations of dollar denominated revenues, rather than unilaterally substituting Naira allocations.
This article was first published on the 12th December, 2016.
SAVE THE NAIRA!! SAVE NIGERIANS!!!