Rational Perspectives

April 24, 2017

‘NEEDS’ and monetary policy circular No. 37 (part 2)

Cost of funds fall as interbank liquidity rises 42%


By Herry Boyo
THE projections of the National Economic Empowerment and Development Strategy (NEEDS) for the critical macro-economic catalysts of inflation, interest rates and liquidity for 2004, were evaluated against projections in Central Bank of Nigeria’s Monetary Policy Circular No.37, of February 2005 and the prevailing reality on ground.


Despite of the excellent score sheet presented by the authorities, the dilemma and contradictions of monetary instruments have become very glaring!   This week, the Naira exchange rate and external reserves will similarly be assessed against projections in MPC No 37, which extolled CBN’s alleged success in keeping the naira rate stable against dollar at about N133=$ for most of 2004, against the backdrop of the NEEDS blueprint which projected N142=$ for 2004.

Nonetheless, have critics alleged that CBN maintains an obtrusive   market monopoly since it supplies over 80% of all foreign exchange sold, while dollar demand comes from of thousands of both private and corporate bidders. Furthermore, a naira rate determined in dollar auctions by a monopolistic supplier will never provide a truly free-market determined exchange rate!

Allegedly, this monopolistic market distortion explains why dollar depreciated against the Euro and Pound Sterling, by about 15% lately, but inexplicably remained resistant at N132.8 = $ despite a 100% increase in Nigeria’s external reserves between 2003-4. The natural expectation from the extended imports cover provided by more bountiful reserves should have induced a Naira rate possibly below N100 = $ in a free-market.

Consequently, the NEEDS projection of N142=$ for year 2004 was probably ill-advised and misguided, while the actual framework which generated the rate of N142=$ was never explained.

Besides, in deference to the purchasing parity principle, most Nigerians for example,   can indeed treat themselves to reasonable lunch for less than N150, i.e. about one dollar. Conversely, you would need about $10, to the chagrin of Nigerian tourists for a simple lunch in most parts of Europe or America.

However, if dollar exchanges for N10 or even N20, Nigeria, would according to the purchasing parity principle, be transformed to a middle income country overnight, with average per capita income well over $2,000 instead of its current bottom ranking in the World’s Poverty ratings.

A much stronger naira would undeniably make it much cheaper for local industrialists to retool and expand production, as prices of critical machinery, spare parts and raw materials would drop by almost 80% with N10=$1 exchange rate.   New cars and buses would replace the liabilities of other countries that we currently import as Tokunbo vehicles; our youth would stay and work in Nigeria rather than express their often unbridled passion to emigrate to more clement economies to earn dollars; hospitals will also stock genuine drugs at cheaper prices and our children will have access to affordably priced, quality education!

In defiance to these numerous benefits of a stronger naira, it is worrying therefore, that NEEDS which is, promoted as the blueprint for our economic salvation actually projected a lower naira exchange rate in place of the current actual of N133=$, especially when historical evidence suggests that a weak naira has never led   to additional non oil export earnings. Besides, oil export which provides 85% of our dollar revenue actually has nothing to do with the naira rate!

The proposal in CBN ‘s MPC No. 37 to adopt a wholesale Dutch Auction System, will only transfer the supply end of the forex market to a cartel of banks, who cannot ensure demand and supply equilibrium, so long as CBN’s monopoly of dollar supply subsists. It is also unclear how wholesale DAS will eliminate the unresolved burden of multiple exchange rates as per CBN’s expectation in –MPC-37.

Analysts have suggested that a liberalized foreign exchange market, where all constitutional beneficiaries of dollar revenue, will approach their individual commercial banks, for conversion of dollar allocations which are paid with non-negotiable dollar certificates, as a more practical and realistic process of   promoting macro -economic stability.

The comparative statistical table in CBN’s MPC – No. 37 indicates that NEEDS projected a stock of about $7.68 billion external reserves for 2004, but the reported $18.5bn year end actual stock, obviously exceeded this target by over 100%,     as crude oil price unexpectedly shot up from around $30 to over $50/ barrel by December 2004!   Admittedly, nonetheless this windfall had nothing to do with the content of the NEEDS programme or the weak Naira exchange rate.

Notwithstanding, the dollar windfall, the Naira rate remained impervious to the bountiful export revenue. Incidentally, between 1992– 98 our external reserve stock hovered between 4–5 billion dollars, while naira exchanged for N80 = $. Fortuitously, today, we can boast of $20 billion reserves, but contrary to expectations, naira rate has nose-dived against the dollar and currently exchanges, surprisingly, for close to N133 = $.   The phenomenon of the unexpected Naira freefall of the naira, despite bountiful reserves, becomes more baffling since the increasing reserves, undeniably also provide extended cover to fund imports.

Instructively, CBN’s MPC-37 of 21st February 2005 confirms that the adopted West African Monetary Zone National Reserves ‘comfort’ target is three months import cover.   Consequently, the present $20bn reserves would probably fund imports for over 12 months!   Cynics may therefore, suggest that Nigeria currently has a huge excess of burdensome foreign reserves just as CBN is also burdened with the challenge of unceasing systemic surplus Naira liquidity despite the scarcity of   cheap funds to drive the real sector. Incidentally, our already ‘uncomfortably’ high reserve stock may prove more ‘embarrassing in 2005!

As oil prices continue to rise, we will obviously   need to inject more and more of the increasing reserves into the economy to remediate education, health, transport and power infrastructure. However, an expansionary fiscal policies to improve these sectors in 2005’ will create a serious ‘challenge for macro- economic stability’ so long as the additional dollar revenue earned is first, unilaterally substituted with naira, at a rate of exchange , that is solely determined by CBN, while the inflationary process of creating naira cover for the increasing dollar allocations remains unchanged.

The resultant excess liquidity caused by this distortional currency substitution and CBN’s reflex action of adopting high Minimum Rediscount Rates ( MRR ), with sales of Trillions of Naira Treasury Bills at horrendously   high rates of interest, will instigate inflation, low capacity utilization   and weaker Naira rates and will consequently precipitate, low consumer demand, high unemployment rate and insecurity.

The current framework of monetary policy, therefore, implies that the more the export revenue we earn, the greater the challenges to macro-economic stability; a strange anomaly to say the least.   But it is evident signal that the framework adopted to promote macro-economic stability by CBN, is fundamentally defective!

The above article was first published in February 2005.