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Economy & Reserves: Between the truth and government clarifications

By Henry Boyo

The issue of ownership of Nigeria’s foreign reserves, has always been hazy in public consciousness. However, at the 58th  Annual Conference of the Bar Association in Abuja, last week, President Muhammad Buhari commended his government’s consolidation of increasing foreign reserves, which presently stands at about $47bn.

Buhari-naira

Hereafter, the question of ownership and the economic impact of increasing reserves, will be examined, in a summary of the above title which was first published in July 2014.  Please read on.

“In apparent response, to the opposition Party’s ‘alarm’ that the nation’s economy was “gradually grinding to a halt”, the Coordinating Minister for the Economy, Ngozi Okonjo-Iweala, conversely painted a brighter picture, and sought to also clarify popular misconceptions between Nigeria’s external reserves balance of about $45bn and alleged discrepancies between Excess Crude Account balances of the Finance Ministry and the Central Bank of Nigeria’s foreign reserves.”

“Regrettably, however, the Minister’s canvassed positive index of a healthy 6% growth in Gross Domestic Product and claim of fiscal prudence are, clearly not corroborated by the ugly reality of a bourgeoning national debt from below N1tn to almost N10tn since 2007, with rising unemployment, near double-digit inflation rates with an inexplicable fiscal deficit.”

“The Finance Minister’s response to concerns on high cost of governance, was also equally unconvincing.    Inexplicably, neither privatization of the erstwhile wasteful drainpipes of public enterprises nor the elimination of hundreds of thousands of ghost workers from the public service, nor the touted reforms in the public procurement process, have so far fulfilled popular expectation for leaner, more transparent and efficient resource application in public service.”

“The Minister’s resolve to reduce clearly bloated recurrent expenditure below 70% of budget, in steps of just 2% annually, also compromises any serious commitment to rapidly effect meaningful change in the unhealthy fiscal imbalance!”

“Furthermore, the impact of consolidating both the Excess Crude Account (ECA) and CBN’s component of foreign reserves, still remains hazy in public consciousness.    For example, the reserves accumulated in ECA, actually have the unnecessary collateral of increasing budget deficit and national debt.”

“Consequently, the nagging question must be, why surplus forex reserves, kept idle in a designated Excess Crude Account, exists side-by-side with increasing budget deficits, which are financed ironically by borrowing at rates which are inappropriate for such risk-free sovereign debts?”

“Indeed, this inexplicable faux pas, will remain inevitable so long as government deliberately understates the crude oil price benchmark in annual budgets.    Thus, for example, if crude prices remained at an average of $100/barrel when the adopted budget benchmark is barely $70/barrel, this would mean a surplus of about $30/barrel or a consolidated ‘surplus’ of almost $30bn annually, if average output remains 2.5m barrels/day.”

Question is, why borrow when huge idle funds exist?

“Similarly, the consolidation of CBN’s lion-share of over $32bn, out of total external reserves of about $40bn is equally bizarre; it is often suggested that the bigger the share of CBN’s external reserves, the stronger will be the economy and CBN’s capacity to defend the naira.    Conversely, however, increasing CBN reserves, have actually threatened naira exchange rate and instigated a destabilizing anti-social economic ripple.”

“The dysfunctional impact of the framework for consolidating reserves, may be better explained with an example of $1bn revenue allocation to constitutional beneficiaries, in eight related steps and consequences.    In step-1, the CBN would independently capture the $1bn distributable revenue, to increase its own reserves, and then, turn round to print/create (read as monetize)  a  fresh supply of N160bn ($=N160) as statutory allocations, which are deposited in bank accounts of all beneficiaries.”

“Step-2; if prevailing Cash Reserve Ratio is say 10%, for example, the banks would enjoy almost ten-fold leverage on the fresh naira inflow, to create a disposable Naira surplus, which floods the money market with excess spending power (excess liquidity) to fuel inflation!”

“Step-3; in response to the inflationary threat, CBN would ‘altruistically’ step in to sell treasury bills to borrow hundreds of  billions of Naira,  that it actually does not need, from banks with double-digit rates, in order to reduce the volume of systemic cash; inexplicably, however, the borrowed funds are deliberately sterilized from use by CBN, despite the attendant high interest rates and the related industrial contraction!”

“Step-4; furthermore, in order to prevent liberal access to cheap excess, disposable funds, in the money market, CBN would increase its Monetary Policy Control Rate to compel banks to raise their own lending rates to customers. Consequently, interest rates to businesses may rise well above 20% to challenge industrial growth and increasing job opportunities, while irrepressible inflation and contracting consumer demand will prevail.”

“Step-5, Ministries and State Governments, who require imports, are constrained to buy back dollars from banks and BDCs who have become the prime beneficiaries of CBN’s dollar auctions, from the forex stock that it earlier impounded, in Step-1 above.”

“Step-6, the less dollars sold by CBN, the larger are CBN’s reserves, but the weaker also will be the naira and the higher would be the value of fuel subsidies, as less and less dollars become pitched against the excess naira consciously created by CBN. The market dynamics of demand and supply would, ultimately, become, unfavourably skewed against the naira, particularly more so, whenever CBN’s total monthly forex auctions fall well below the $1bn earlier unconstitutionally captured in Step-1! Thus, with CBN’s contrived short supply of dollars, the gap between official and black market naira rates would inevitably widen.”

“Step-7; in order to reduce the gap between the black market and the official rates of exchange, CBN would commit the unforced error of allocating dollars to BDCs, who in turn, fund treasury looters and smugglers of contrabands, not minding the adverse impacts of such misguided dollar supply on the economy.”

“Step-8, despite a gasping manufacturing sector, increasing unemployment, and deepening poverty nationwide, banks and other speculative foreign investors may celebrate another bumper year!!”

“Instructively, therefore, if substitution of Naira allocations for $1bn revenue wreaks such economic havoc, one can imagine what happens if, distributable public sector dollar-revenue ‘fortuitously’ grows to $5bn, which CBN, would equally hoard, after substituting bloated Naira allocations to government beneficiaries. Thus, for CBN reserves to grow under the current monetary framework, cost of funds must continue to rise, inflation must remain high and unemployment and poverty must consequently deepen nationwide. You don’t have to believe me but recent history confirms that our national misery index has risen, curiously, simultaneously with rising CBN reserves!  POSTSCRIPT SEPTEMBER 2018: Debt is well over N22tn, and sadly Nigeria is now the World’s greatest producer of poor people and the worse is yet to come!”

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