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By Henry Boyo
The Late I.K Dairo observed in a popular melody that no rational person will ignore the bare waist line of his own daughter and eagerly adorn the waist line of someone else’s child with his own cultural beauty beads; in other words, you do not take bread from your own hungry child to nourish an obviously better endowed stranger.
The following article was first published in the Vanguard Newpaper on 24th September 2007.
A regular patron of Nigeria’s media reports would have come across the ubiquitous phrase, “mopping up of excess liquidity”, in relation to the regular interventions of the Monetary authorities to remove presumed excess Naira from the system, so that the surplus money supply will not instigate inflation to deplete consumer demand and the purchasing power of all Naira incomes earners.
In order to avoid the dismal prospect of spiraling inflation, the Central Bank, in accord with its enabling Act, persistently embarks on removing some of the perceived, bloated cash surplus, every month by borrowing hundreds of billions of Naira with the sales of short term bills and longer term bonds, despite the attendant oppressive interest rates. The interest payments on these government borrowings will gulp almost N300bn or about 18% of the total federal budget for 2007; ironically, the pains of such heavy debt repayments, become sweet gains to the banking subsector!
Some analysts, however, argue that the crushing interest payment of N300bn is the price we have to pay for checkmating inflation and further Naira depreciation, when bloated Naira denominated allocations to government become compounded, every month, with the existing money supply and an inappropriately modest cash reserve requirement for banks! Indeed, CBN has often extolled its success in keeping the Naira rate, ‘stable’ between N125-130=$1; the self adulating reports of even the slightest contrived marginal Naira gain, probably reflects CBN’s satisfaction that prevailing exchange rates are purportedly supportive of economic revival.
The stark reality, however, is that despite the best efforts of government’s spin doctors, it is evident that industries have continued to fold up and more people are now forced into an already saturated job market; furthermore, high interest rates will continue to dampen investment activities while Naira incomes will also purchase less and less with disturbing consequences for consumer demand; it is inexplicable, in such circumstances that poverty should deepen inspite of the unprecedented bountiful blessing of N40bn plus dollar reserves.
However, if the present N125=$1 is presumed to be the appropriate or equilibrium exchange rate, then, this rate has obviously failed to fulfill the CBN’s redemptive objective of price stability in the economy and we may, therefore correctly conclude that the present band of Naira exchange rate is actually adversely distortional rather than supportive of economic growth.
The apparent mindset of Nigeria’s monetary policy team has always been predicated on stimulating productivity and export competitiveness, with cheaper Naira exchange rates. The reality, however, is that, despite Naira rates sinking from an exalted level of 50kobo to N130=$1, our industries, have in contrast, steadily collapsed and Nigeria is worse off today as failed exporters of both agricultural and processed goods, than we were two decades ago, when Naira rate was much much stronger!
It is surprising that despite this graphic correlation, government’s latest economic blueprint, NEEDS, had infact, predicated the optimal exchange rate for our economic take off, on further Naira depreciation closer to N200=$1!
Indeed, even a casual observation of CBN’s management of the Naira rate, will suggest that Naira has been abandoned as an orphan child, in favour of the foreign dollar, as every effort is always made to protect the dollar value against Naira; for example, while all major trading currencies, particularly the Euro and Sterling gained over 30% against the dollar in last six years, our Naira actually fell against the US currency; thus, the optically stable band of N125-N130=$1 is indeed a de facto Naira devaluation against other major currencies.
Sadly, this obvious faux pas, ultimately instigates higher cost of imported industrial raw materials and machinery and also worsens the rate of unemployment and reduces the purchasing power of Nigerians.
Our monetary authorities cannot give any plausible explanation why Naira rate has not obeyed the basic economic principle of demand and supply, despite CBN’s celebration of its introduction of “liberalized foreign exchange market”. No reason, for example, has so far been advanced why Naira exchanged for N80=$1 when external reserves was only $4bn (i.e. up to 4 months import’s cover) in 1997, while it presently exchanges for over N125=$1, even when our dollar reserves, have fortuitously increased over tenfold above $45bn (i.e. providing almost 30 months import’s cover) by over 2007!
The rational expectation should have been a current Naira rate that is, at worst, a fraction of N80 that it exchanged against the dollar, ten years ago! However, when CBN recently announced its plan to share the monthly dollar component of statutory allocations without prior unilateral conversion to Naira, as persistently advocated in this column since 2004, some observers sighed in relief, and hoped that finally, the Naira will receive due protection, and become appropriately priced, as the table will turn in favour of Naira when increasing dollar allocations chase the existing limited Naira supply.
Indeed, such a deregulated forex market will propel Naira appreciation and induce lower raw material and machinery costs to make our industries more competitive; the reduction of Naira liquidity will also precipitate lower inflation and increase consumer demand; in other words, the sustenance of a deregulated forex market will invariably stimulate further investments and certainly create more jobs!
Surprisingly, a week or so after the announcement of the new payments system, CBN, in August 2007, in what is evidently a policy somersault, summarily abandoned the object of a market determined Naira rate, with the payment of dollar allocations for dollar denominated revenue and instead embarked on an unprecedented aggressive intervention to ‘mop up’ an unexpected glut of dollars in the forex market.
Several newspapers, e.g. D.Independent 21/8/2007, carried reports with titles such as “CBN MOPS $400M FROM INTERBANK MARKET”; excerpt from that report reads as follows: “Dollars are being hurriedly disposed off on the inter-bank and autonomous forex markets in reaction to the policy shift of the CBN on the Naira….” “The CBN intervention during the week resulted in the purchase of $400 million from both inter-bank market and autonomous sources. Consequently, the Central bank did not sell foreign exchange at the wholesale auction window during the week. …”
Two things emerge from the above report, (a) the banks obviously maintain substantial dollar hoardings, and (b) the prevailing dollar glut instigated by the new payments policy would have led to a rapid Naira appreciation based on increased dollar supply and reduced Naira allocations; but the CBN clearly did not want this to happen, and quickly moved to purchase $400m, at a higher rate of N127=$1, while it had earlier sold the same dollars for below 126=$1!
The question is, why would the same CBN constantly decries the oppressive challenges of a seemingly ‘inevitable’ persistent systemic excess Naira liquidity, which it readily borrows back and yet readily borrows back at great cost, also jump at another ‘opportunity’ to unleash a whopping N50.784bn into banks to purchase of $400m, in an unforced initiative, just to ‘protect’ the prevailing lowly rate of the naira against the dollar, despite the Apex bank’s inherent trading loss in such transaction?
An independent observer of such reckless financial management may be forgiven for seeing CBN as an agent of the American dollar rather than a true defender of the Naira; afterall, the US Federal Reserve Bank has never reciprocated such loyalty or support for our Naira!
SAVE THE NAIRA, SAVE NIGERIANS!