By Henry Boyo
THE crash in the Naira exchange rate from N199=$1 in Dec. 2015 to almost N500=$1, by January 2016, was popularly attributed to the erosion of Nigeria’s foreign reserves from a relatively lofty perch around $60bn to a less exotic retreat of about $35bn.
Although the Naira rate has since stabilised between N305-360=$1, conversely however, unexpectedly higher (and still rising) oil prices have reportedly since buoyed reserves nearer $47.62bn by September 2018.
The question therefore is, if the Naira crash was caused by dwindling reserves, why then, does the rate still remain relatively static between N305-360=$1, even when reserves have evidently increased by about 50%?
Indeed, even if forex reserves exceeded premium levels beyond $60bn, ironically the Naira rate may witness only marginal improvement, despite the bountiful reserves and the related extended cover, this provides for payment of imports.
Instructively, nonetheless, this dilemma has been discussed, for many years in several articles in this column. The above title was first published in June 2015; perhaps, a summary of that article which follows hereafter, in an interrogative prose, will improve our understanding of this dilemma and facilitate a positive resolution of the oppressive, one way direction of the Naira rate. Please read on.
- Q) Will higher oil prices and output be a blessing to Nigerians?
This popular expectation does not stand up to scrutiny. Nigerians may recall that, even when oil price approached $150/barrel in 2008, with reserves beyond $60bn, more Nigerians inexplicably became poorer with subsistence income of less than $2/day!
- Q) Why does the Nigerian economy suffer when crude oil price, and forex revenue rise?
The reason for this irony is quite simple; for example, if China substitutes Yuan equivalent for her trillions of surplus dollar export earnings, the Chinese currency will inevitably become embarrassingly surplus everywhere and its exchange value will rapidly depreciate. Indeed, any country that subjects their currency to such reckless humiliation will inevitably turn bountiful export earnings into a curse! This is exactly what increasing dollar export revenue from higher crude oil prices and output does to the Naira rate and Nigerians.
Q Are you saying that increasing dollar earnings is actually the cause of the unrelenting burden of too much naira in the system?
Yes, that is so and until the current misguided system of creating Naira values for export dollar revenue ceases, it would be better to pray that oil prices do not rise to improve export earnings significantly!
- Q) How can systemic surplus cash be a problem when both the public and private sectors have severe funding deprivation?
That is the irony of the obtuse strategy that the monetary authorities embrace; it is equally inexplicable, that cost of borrowing should increase when CBN is equally besieged by the perennial challenge of surplus Naira supply.
- Q) Why is it that the surplus Naira cannot be put to good economic use?
Well, the Central Bank which has the mandate for Monetary Policy management deliberately creates additional hurdles that will also discourage liberal access to the readily available surplus money in the system.
- Q) What sort of hurdles?
First of all, CBN raises its own interest rate when commercial banks borrow to supplement their cash positions. Ultimately, if banks borrow from CBN at rates as high as the present 13% in 2015, banks may be compelled to lend to their own customers at over 20%. In addition, CBN could also restrain commercial banks’ lending and reduce spending by raising the ratio of cash reserves that each bank must keep sterile. Conversely, the mandatory cash reserve ratio can also be reduced if Central Bank plans to encourage credit expansion to stimulate consumer demand and expand industrial production and more job opportunities.
- Q) So, it’s not as if there are no funds to stimulate consumer demand and spur investment.
No, infact less than 25% of total bank lending capacity of well over N60tn is currently utilized; in South Africa, for example, this ratio is presently over 70%.
- Q) So, why does the CBN create hurdles in the path of bank lending?
Well, the Apex bank is concerned that if banks lend out more of the Naira values which substituted for dollar denominated government revenue, the resultant rising tide of inflation will invariably reduce the purchasing power of all incomes and deepen poverty nationwide.
- Q) What then is the impact of the myriad special intervention funds from CBN?
Well, if the system is already, reportedly besieged by the inflationary challenge from surplus Naira, the infusion of additional Naira sums, will invariably, drive higher rates of inflation. Consequently, government’s sectoral interventions with hundreds of billions of Naira, despite a systemic Naira surplus, will simply ‘inadvertently’ drive much higher inflation rates.
- Q) Why is it that naira rate does not appreciate significantly when oil prices and reserves also increase?
The reason is that increasingly, surplus Naira deliberately created with Naira substitution of export dollar earnings, ultimately, confronts CBN’s rationed dollar auctions, to tilt the forces of supply and demand, inevitably, in favor of the dollar so that the Naira rate will shrivel; this explains why the Naira exchange rate remained almost static at N115=$1, even when forex reserves approached $60bn in 2008.
- Q) Why is fuel price not cheaper in Nigeria when we have oil in our backyard?
The benefit of having oil in our backyard should be reflected in a stronger Naira, because, higher crude prices and output should increase dollar supply and induce a stronger local currency, as more dollars become available in the market place against existing Naira values. For example, if Naira exchange rate improves to N100=$1, domestic fuel price will immediately fall below the regulated pump price of N87/litre and quietly eliminate any form of subsidy, even if a 10% sales tax is imposed on fuel price.
- Q) So how can the Naira exchange rate be improved?
The Naira exchange rate will gradually become stronger, even when crude oil price falls, if distributable dollar revenue is not unilaterally substituted with fresh naira values; this is the prime cause of the ever surplus Naira that invariably drives higher inflation and also gulps up the small dollar rations, intermittently auctioned by CBN.
- Q) Are you saying that lower crude oil price is better for our economy?
The answer to this question is obvious, we are all current witnesses of the economic dislocation and social distress that low oil prices and output have precipitated, as both the Federal and State governments are heavily burdened by debt, while workers are owed several months salaries.
- Q) Are you saying head or tail the economy loses?
Yes, that is how the cookie crumbles!