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CBN’S complicity in naira crash

By Henry Boyo

LCCI blames CBN over depreciating Naira” was a title on pg 17 of the Guardian of 19/1/2009, in which, Otunba Onafowokan, the chairman, Lagos Chamber of Commerce and Industry, blamed the Central Bank (CBN) for “the drastic drop in the naira value”.

The Chamber’s Chairman noted that “through acts of omission or commission, CBN created an environment which spurred speculative activities, leading naturally to bloated demand for foreign exchange and an inevitable drastic depreciation in the exchange rate”. The Chamber also noted that CBN’s “various pronouncements and actions did not give a clear policy direction and were sometimes inconsistent; a disposition which significantly fueled speculative activities leading to unbearable demand pressure on the forex”. Furthermore, the LCCI noted that it would seem that CBN top officials do not appreciate the gravity and severities of the damage, its actions have caused the economy”.

Truth, they say, has no hiding place! However, probably unknown to LCCI, the path to the naira’s fall and our dislocated economy had infact  been plotted and the process steadily implemented by CBN since February 2005; thus, the recent Naira crash was actually a dastardly blow delivered under cover of the global economic meltdown.

“THE N.E.E.D.S. PROGRAMME AND MONETARY POLICY CIRCULAR NO. 37 (1&2), are two articles published on the 14th and 21st February 2005, in which this writer warned Nigerians on CBN’s plot to attack the naira, and emasculate the economy with odious policies!  Evidently, our increasing economic challenges despite over four years of embarrassingly abundant foreign income, may have validated our prognostication.

Indeed, Mrs. Omolara Akanji, CBN Director “Trade & Exchange” boasted at the 8th Annual CBN Seminar for Business Editors in August 2006 that “the apparent convergence (of Naira exchange rates) signaled an effective foreign exchange management and efficient foreign exchange market”.  The CBN Director suggested that the convergence was brought about by its recent liberalization of the foreign exchange market,

Consequently, in its quest for market liberalization, CBN removed the traditional documentary controls that inhibited patrons of black market from accessing relatively cheaper, officially sourced dollars from commercial banks. CBN subsequently met the expected upsurge in forex demand, by allocating $400,000 to every registered bureau de change, despite the threat of capital flight and the reality that the major patrons of BDCs could be smugglers and Treasury looters. The CBN’s jiggery-pokery on the forex market, was decried in an earlier article titled “PSEUDO LIBERALISATION OF FOREX MARKET, published (9/4/2006”) in which this writer noted that “What is apparent from all the above is that CBN appears overwhelmed by its new found seemingly inexhaustible pool of dollar inflow from the fortuitous, exceptional rise in crude oil prices lately.  Indeed, the euphoria of huge dollar reserves may have regrettably translated to a reckless dispersal of our foreign exchange earnings with the nebulous objective of convergence of forex rates”

“Conversely, a truly liberalized market has many sellers and buyers! However, a situation where CBN alone supplies over 80% of dollars traded in the market, would invariably represent a stranglehold monopoly”. 

Incidentally, the predictable boom in BDC business prompted an article titled “WHAT A LIBERALISING POLICY” (9/4/2007)!  in praise of CBN’s ‘wisdom’ by Vanguard’s  Babatunde Komolafe; conversely, Komolafe’s shallow evaluation of the forex market was appraised in another article, with the same title published on 30/4/2007, in which this writer noted that “As if in a prodigal desperation to wastefully spend our bountiful dollar reserves rather than apply such to the benefit of the real sector, the CBN gave away at possibly less than 5% interest rate or no cost whatsoever, $7bn to 14 Nigerian banks to engage in international financing, and equally approved $20,000 as basic travel allowance for every Nigerian: (notably, however less than 1% of Nigerians earn $20,000 or N2,600,000 per annum!; worse still, despite our existing relatively ample idle reserves,  CBN continues to lead us down the path of unnecessary local debt accumulation by returning  to borrow funds at over 15% from the same banks to whom CBN had ‘deposited’ a significant portion of both our dollar and Naira revenue.

Nonetheless, despite our humble advice, the CBN marched on aggressively, like a soldier without ammunition, into battle, and today, the chickens have come home to roost, and CBN has since  announced its return to a prescription for  accountability in  forex usage; a process it had glibly discarded against better advice in 2006.  According to reports, CBN would now also cease further sales of forex to BDCs, thus belatedly admitting that it is not best practice, anywhere in the world, for central banks to fund BDCs; furthermore, banks will henceforth also purchase forex specifically for their customers with appropriate cash cover.

But, the question remains whether CBN’s turnaround or born-again posturing is truly altruistic.  Unfortunately, the pattern 2008  forex sales to banks as published in Vanguard’s Business Edition of 12/1/09 is worrisome!  The CBN reportedly  sold  $4.7bn  cumulatively between  January-September 2008; regrettably however, the Naira liquidity surplus knowingly precipitated  fuelled by the 100% release of the years accumulated  budgeted expenditures, as late as October 2008, also triggered a sudden surge in dollar demand between October November,  so that, despite  Soludo’s assurances that our economy was well-insulated from the global meltdown, ultimately, the CBN  inexplicably auctioned a total of $7.068bn in just two months compared with $4.7bn in the earlier nine months apparently to defend the Naira.

In a dramatic twist, the CBN is currently blaming the sudden surge in dollar demand to speculation, and has therefore threatened to deal with round-trippers; nonetheless, the Apex bank was silent on whether it was forced to open the treasury vaults to meet the speculative dollar demand between October – November 2008, since the amount of dollars demanded by banks in both months was clearly out of sync with trend!  Indeed, despite the abnormal dollar demand, the CBN still continued to liberally fund BDCs until late November 2008!

A cursory examination of the money market will show that demand for forex often peaks after the disbursement of monthly Naira allocations to constitutional beneficiaries.  Consequently, the greater the monthly distributable dollars, the greater the naira supply into banks and the greater, also the credit capacity of banks, so that ultimately, the greater also, will be the demand for dollars, with a parallel downward pressure on naira exchange rate.  Thus, CBN is actually the instigator of the recent Naira crash and while CBN Governor is the godfather of forex speculation, especially since no one has so far been seriously penalized, despite the pervasive round-tripping in banks!”





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