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Sensible path to a stronger Naira and economic prosperity – Henry Boyo

THIS column has consistently maintained that the root cause of our economic paradox of increasing income, with unbridled rate of unemployment, and deepening poverty will be found in the conscious but incorrect adoption of a faulty and distortional process for the infusion of our crude export dollar revenue into the economy.

Hereafter, we will discuss the related ADVERSE consequences of the Current Payments Model (CPM) against the positive attributes of the Advocated Payments Model (APM) for the allocation, for example, of $1bn export revenue in the following explanatory steps.


Thus, in CPM:-1 The CBN unilaterally determines the naira exchange rate and thereafter unconstitutionally captures the distributable $1bn revenue and prints/creates in replacement (read as monetizes) N200bn as statutory allocations, which are then domiciled in the bank accounts of beneficiaries.

APM:-1 $1bn distributable government revenue is not substituted with N200bn allocation; instead, constitutional beneficiaries receive dollar certificates equal to their respective allocations, while the actual $1bn remains domiciled with CBN, and the naira exchange rate is conversely determined by competitive free market forces of demand and supply.

CPM:-2 If CBN’s mandatory cash reserve ratio for banks is, for example 10%, the N200bn inflow can be leveraged ten-fold, to N2,000bn to facilitate additional credit and expand consumer spending power which will invariably irrepressibly fuel inflation! The recent establishment of the Treasury Single Account will, regrettably, only temporarily absorb such cash injections, as the N200bn allocation, for example, will ultimately migrate into private sector bank accounts and compulsively expand Naira liquidity, credit capacity and consumer demand once MDAs pay salaries and settle outstanding contractors’ bills.

APM:-2 With strictly dollar allocations, the $1bn income does not translate to additional FRESH naira inflow into the system; consequently, naira supply remains the same, and cannot therefore further instigate the usual disenabling systemic spectre of surplus cash and fuel inflation.

CPM:-3 In response to evolving inflationary threats, the same CBN, ironically, ‘altruistically’ sells treasury bills to borrow money it does not need, often, with 10% rates, just to reduce the challenges of systemic excess Naira and excessive consumer demand! Inexplicably, however, despite the crying need of the real sector for cheap funds, these CBN borrowings are simply kept as idle funds.

APM:-3 Without systemic naira surplus, CBN has no need to mop up liquidity by borrowing money it does not need, often with interest rates above 10%; consequently, our N12tn ($60bn) oppressive debt and service charges would become reduced; additionally, reduced government borrowing, would also force commercial banks to chase the real sector for business!

CPM:-4 Since such liberal access to subsisting excess cheap funds, would instigate spiraling inflation with adverse economic and social consequences, the CBN would respond by raising its Monetary Policy (Control) Rate (MPR) to force banks to also significantly increase their own lending rates, so that higher cost of funds would restrain the motivation for customers to borrow, and thereby inadvertently also reduce any prospect of industrial growth or the creation of increasing job opportunities. Thus, CBN is actually vicariously liable for the very high cost of funds that cripple the real sector.

APM:-4 Furthermore, In the absence of the usual excess naira supply, CBN would reduce its Monetary Policy (control) Rate to international best practice below 3%; commercial banks will also correspondingly drop lending rates to single digit to attract investors.

PM:-5 Meanwhile, Ministries and State Governments, who require imports to improve their infrastructure, become constrained to buy back their dollars from banks, who have become the prime beneficiaries of CBN’s dollar auctions at a higher regulated rate. Ultimately, naira exchange rate would come under threat as increasingly surplus naira is unleashed by CBN to chase the dollar rations it regularly auctions. Consequently, the market dynamics of demand and supply become unfavourably skewed against the naira.

APM:-5 The MDA dollar beneficiaries can exchange for naira, all or portions of their dollar allocations from time to time, directly through COMMERCIAL banks. Thus, in the absence of the usual naira surge when CBN substitutes fresh naira creations for dollar revenue, the market dynamics will consequently change in favour of the naira, with relatively more dollar supply chasing EXISTING RELATIVELY NAIRA BALANCES. A stronger Naira will reduce production cost and also bring down fuel prices and make subsidy totally unnecessary; furthermore a 10% sales tax on cheaper petrol and kerosene could also consolidate over N1000bn annually into the Treasury.

CPM:-6 The less dollars sold by CBN, the larger would be CBN’s purported reserves, but the weaker also will inexplicably be the naira, as less and less dollars become pitched against the excess naira earlier unleashed by CBN. Ultimately, the gap between official and black market naira rates will increasingly widen.

APM:-6 CBN’s erstwhile monopoly of dollar supply and the usual regular dollar auctions will cease, as the constitutional beneficiaries directly trade their dollar certificates for existing naira balances with banks before spending, (since the dollar is not legal tender in Nigeria). Nonetheless, the dollars, will however remain domiciled with CBN, irrespective of the ultimate buyer, until the apex bank receives appropriate instruction from respective banks to directly pay the overseas suppliers of goods/services to their customers, from the dollar balances the banks earlier purchased from MDAs.

CPM:-7 To reduce the gap between the parallel market and official exchange rates, the CBN commits the unforced error of allocating dollars to Bureau de change who in turn fund the requirements of treasury looters and smugglers of contrabands, not minding the adverse impact of such misguided dollar allocation on the economy (thankfully the CBN terminated this obnoxious strategy of official dollar sales to BDCs in January 2016).

APM:-7 In the continuous absence of excess Naira liquidity and dollar surplus; the naira would consequently gradually become perceived as a safer store of value. Furthermore, the black market for the dollar will rapidly contract with little motivation for round tripping, capital flight and speculative dollar purchases.

CPM:-8 The CBN, ironically continues to maintain its monopoly of the forex market and sits on bountiful naira and dollar reserves, while debt accumulation persists and the banks celebrate another bumper harvest.

APM:-8 Optimal Naira liquidity will invariably precipitate lower CBN MPR,  and therefore promote lower single digit interest and below 3% inflation rates, with positive knock-on impact on consumer demand, industrial consolidation as well as increasing job opportunities, with bourgeoning economic prosperity.  A stronger naira will similarly drive down fuel prices and ultimately eliminate oppressive subsidies of about N2tn in favour of petrol sale tax revenue in excess of N1Tn annually.

Clearly our fate as a nation is not in our stars, but obviously in the choices we make!

This article was first published in 18/03/2013.



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