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That excess $400m mop up!

By Henry Boyo

A REGULAR patron of Nigerian’s media would have come across the ubiquitous phrase, “mopping up of excess liquidity”, in relation to the regular interventions of the Monetary authorities to remove presumed excess/surplus Naira from the system, so that too much money supply will not become available to instigate inflation and deplete consumer demand and the purchasing power of all Naira incomes.

In order to avoid this dismal prospect, the Central Bank, in accord with its enabling Act, persistently embarks on removing perceived bloated cash balances by “mopping up” billions of Naira with borrowing through sale of short term bills and longer term bonds every month. The interest payments on these government borrowings will eat up almost N300bn or about 18% of the (2007) total federal budget; however, the pains of such heavy debt repayments, ironically become sweet gains to the banking subsector!

Some analysts, however, argue that the N300bn crushing interest payment is the price we pay for checkmating inflation and further Naira depreciation, whenever bloated monthly Naira allocations to government become compounded with the existing money supply and, inappropriately modest, cash reserve requirements of banks!  Indeed, CBN has often extolled its success in keeping the Naira rate stable between N125-130=$1; the self adulating reports of even the slightest contrived marginal Naira gains may reflect its satisfaction that the prevailing exchange rate is purportedly supportive of economic revival.

The stark reality, however, is that despite the best efforts of government’s spin doctors, it is evident that industries have continued to fold up and more people are now forced into an already saturated job market; high interest rates also continue to dampen investment drive while Naira incomes purchase less and less with disturbing consequences for consumer demand; inexplicably, therefore, despite our unprecedented external reserves, Nigerians have become poorer.

However, if  N125=$1 is presently  the presumed appropriate or equilibrium exchange rate, then, this valuation has obviously failed to fulfill the redemptive objective of price stability and we may rightly conclude that this band is adversely  distortional rather than supportive of economic growth.

The apparent mindset of Nigeria’s monetary policy team has always been predicated on stimulating productivity and export competitiveness, with cheaper Naira rates.  The truth, however, is that despite Naira rates sinking from an exalted level of 50kobo to N130=$1, our industries have in contrast collapsed and Nigeria is worse off today as failed exporters of both agricultural and processed goods, than we were two decades ago, when Naira rate was much much stronger.  It is surprising that despite this graphic correlation, government’s economic blueprint, NEEDS, infact, predicated the optimal rate for our economic take off, on further Naira depreciation closer to N200=$1!

Indeed, a casual observation of CBN’s management of the Naira rate will suggest that Naira has been abandoned as an orphan child, in favour of the foreign dollar, as every effort is always made to protect the dollar value against Naira; for example, while all major trading currencies, particularly the euro and sterling gained over 30% against the dollar in last six years, our Naira actually fell against the US currency; thus, the optically stable band of N125-N130=$1 is indeed a de facto Naira devaluation against other major currencies. Sadly, this obvious faux pas has instigated higher cost of imported industrial raw materials and machinery and further also deepened the poverty rating of our people.

Our monetary authorities cannot give any explanation as to why Naira rate has not obeyed the basic economic principle of demand with the celebrated “liberalized market supply”.  No reason has been advanced why Naira exchanged for N80=$1 when external reserves was only $4bn (i.e. 4 months import’s cover in 1996) while it exchanges today for over N125=$1 when our reserves, fortuitously increased tenfold above $45bn by (2007) (i.e. almost 30 months import’s cover)!  The rational expectation should have been current Naira rate that is, at worst, a fraction of N80 that it exchanged against the dollar, ten years ago!  However, when CBN recently announced its plan to share the monthly dollar component of statutory allocation without prior unilateral conversion to Naira, as persistently advocated since 2004 in this column, some observers sighed in relief, that finally, the Naira will receive due protection, and become appropriately priced, as the table will turn in favour of Naira as increasing dollar allocations chase the limited existing Naira supply.

Nonetheless, such a deregulated forex market will propel Naira appreciation and induce lower raw material and machinery costs for our industries; the resultant lower inflation and increase in consumer demand, would in turn stimulate further investments and more jobs!

Surprisingly, a week or so after the announcement of the new payments system, CBN in what is clearly a policy somersault, abandoned the object of a truly market determined Naira rate with the payment of dollar allocations and embarked on an unprecedented aggressive intervention to ‘mop up’ the unexpected glut of dollars in the forex market.  Several newspapers, e.g. D.Independent 21/8/2007, carried reports with titles such as “CBN MOPS $400M FROM INTERBANK MARKET”;  except from that report reads as follows:  “Dollars are being hurriedly disposed off on the inter-bank and autonomous forex markets in reaction to the policy shift of the CBN on the Naira….” “The CBN intervention during the week resulted in the purchase of $400 million from both inter-bank market and autonomous sources.  Consequently, the Central bank did not sell foreign exchange at the wholesale auction window during the week. …”

Two things emerge from the above report, (a) the banks obviously maintained substantial dollar hoardings, and (b) the prevailing dollar glut instigated by the new payments policy would have led to a rapid Naira appreciation based on increased dollar supply, but the CBN clearly did not want this to happen, and quickly moved to purchase $400m, at a premium rate of N127=$1, while it had earlier sold same dollars for below 126=$1!  The question is, why would the same CBN, which decries the seemingly ‘inevitable’ persistent excess Naira and readily borrows back the burdensome surplus cash at great cost, also jump at the ‘opportunity’ to unleash a whopping N50.784bn into banks for the $400m purchase, in an unforced initiative, to ‘protect’ the prevailing lowly rate of the naira against the dollar, despite its inherent trading loss in such transaction?

An independent observer of such odd behaviour may be forgiven for seeing CBN as an agent of American dollar rather than a true defender of the Naira; afterall, the US Federal Reserve Bank has never reciprocated such loyalty to our Naira!



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