Sensible path to a stronger naira and economic prosperity

Henry Boyo

Henry Boyo

This column has consistently maintained that the root cause of our economic paradox of increasing income, with unbridled unemployment rate, 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.

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

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

CPM:-2 If, however, the CBN’s mandatory cash reserve ratio for banks is, for example, 10 per cent, the N200bn inflow can be leveraged 10-fold, to create additional credit and expand consumer spending power which will invariably 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, when spent, into private sector bank accounts and invariably expand naira liquidity, consumer demand and the banks’ credit capacity.

CPM:-3  In response to the resultant inflationary threats, the same CBN, ironically, “altruistically” sells treasury bills and borrows money it does not need

, often, at over 10 per cent, just to combat 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 sterile, while fresh cash interventions are created to stimulate sectors of the economy, despite the subsisting systemic liquidity challenge.

CPM:-4 Since unrestrained access to excess cheap funds fuels inflation with adverse economic and social consequences, the CBN responds by raising its Monetary Policy (Control) Rate to force banks to also significantly increase their own lending rates, so that higher cost of funds would ultimately discourage borrowing, and sadly, inadvertently also reduce any prospect of industrial growth and job creation. Thus, the CBN unexpectedly becomes vicariously liable for the very high cost of funds that cripple the real sector.

 CPM:-5 Meanwhile, the ministries and state governments that require imports to enhance social infrastructure, become constrained to buy back their earlier captured dollars at a higher regulated rate from commercial banks, that strangely become the prime beneficiaries of the CBN’s dollar auctions. Ultimately, naira exchange rate comes under threat as increasingly surplus naira is unleashed by the CBN to chase the dollar rations it regularly auctions. Consequently, the market dynamics of demand and supply become unfavourably skewed against the naira, ironically, despite the CBN’s custody of relatively impressive “reserves”.

CPM:-6 The less dollars sold, the larger would be the CBN’s purported reserves, but the weaker ironically also will be the naira rate, as less and less dollars compete against the flood of excess naira that the apex bank earlier instigated. Ultimately, the gap between official and black market naira rates will invariably, widen, to provide irresistible opportunities for speculation, hoarding and currency round tripping.

CPM:-7 In order to reduce the gap between parallel market and official exchange rates, the CBN commits the unforced error of allocating dollars to the Bureau de Change operators, who in turn funded the requirements of treasury looters and smugglers of contrabands, not minding the adverse economic impact of such misguided dollar allocations. (Thankfully, after seven long years of our advocacy of this recklessness, the CBN terminated this clearly obnoxious strategy of official dollar sales to the BDCs in January 2016).

Conversely the Advocated Payments Model will turn around the existing counterproductive process and operate as follows.

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

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

APM:-3 In the absence of the usual naira surplus, the CBN does not have to mop up excess naira liquidity by borrowing money it does not need, often with interest rates above 10 per cent. Consequently, the present N12tn ($60bn) oppressive debt and related service charges will become restrained. Additionally, reduced government borrowing will also naturally force commercial banks to chase the real sector for business and promote economic growth.

APM:-4 Furthermore, with optimal naira liquidity, the CBN can gradually align its Monetary Policy (Control) Rate to international best practice below three per cent; commercial banks will also, without persuasion, correspondingly drop lending rates across board to single digit, and chase real sector borrowers.

APM:-5 The MDAs and state governments can directly exchange for naira, all or portions of their dollar allocations from time to time, through commercial banks. Thus, in the absence of the usual naira surge when the CBN substitutes fresh naira creations for dollar revenue, the market dynamics will inevitably change to favour the naira, with relatively more dollar supply chasing the already existing naira balances. A stronger naira rate will expectedly reduce production cost and also lower fuel prices to make subsidy totally unnecessary. Furthermore, a 10 per cent sales tax on cheaper petrol and kerosene would favourably consolidate over N1000bn annually into the treasury.

 APM:-6 The CBN’s usual monopolistic dollar auctions will cease, as the constitutional beneficiaries directly trade their dollar certificates for existing naira balances with banks before spending, (as the dollar is not legal tender in Nigeria). Nonetheless, the dollars will remain domiciled with the CBN, irrespective of the ultimate buyer, until the apex bank receives appropriate instruction from respective banks to directly pay overseas suppliers of “authorised” goods/services, from the dollar balances in the dormicilary accounts the banks maintain with the CBN. This payment process certainly provides a more transparent usage of funds than presently.  It is understandable that banks and other rent seekers would reject this reform.

APM:-7 With optimal naira liquidity and relative dollar surplus, the naira rate will gradually improve, and stabilise; this will promote the perception of naira as a safe store of value over time. Furthermore, with reduced opportunities for round tripping, capital flight and speculative dollar purchases, the black market for the dollar will rapidly contract.

Sadly, the patriotic and rational fervour evident in President Muhammadu Buhari’s recent affirmation, at a meeting with the Nigerian community in Kenya, that he did not see any valid reason to further devalue the naira, may ultimately come to nothing if the increasing pressure from local and international experts and powerful interest groups persists and the gap between official and parallel exchange rates further widen beyond N100/dollar.

In conclusion, therefore, the present payment system will shunt us back to the fourth world, while the advocated model will propel us amongst the top world economies within a decade. Clearly, our fate as a nation is not in our stars, but obviously in the choices we make!

This article is reproduced in response to several inquiries to explain the thrust of the solution regularly proposed in this column for a stronger naira.