CBN defended naira with $26.6bn in 2013: True or false? -By Henry Boyo

Henry Boyo

It seems strange, but true, that the more dollars we earn, the more severe are the challenges of excess naira liquidity, inflation, higher cost of funds and weaker naira exchange rate on the economy. The above title was first published in The PUNCH and Vanguard newspapers in January 2014. The similarities between the failed strategies adopted by the Central Bank of Nigeria to defend the naira exchange rate at that time and the options currently pursued, for the same purpose, are quite striking. Please read on:

“The PUNCH recently carried a report titled, “CBN defended naira with $26.6bn in 2013.” The report obtained apparently from the Central Bank of Nigeria’s website indicated that $26.6bn was sold to currency dealers in 94 foreign exchange Dutch Auctions between January and December 2013.

Indeed, in consonance with the CBN Governor, Lamido Sanusi’s promise to maintain stability, despite the present fortuitously increasing foreign reserves’ base, the official naira exchange rate has inexplicably remained stagnant between N153 and N156=$1. Regrettably, however, the unofficial (street market) rate has gradually moved from a deviation of N1 or N2 to N20/$. Thus, an ‘ingenious’ bank management or Bureau de Change operator could easily make a monthly profit of about N20m by simply buying $1m directly from such CBN allocations and auctions and thereafter selling the same dollars elsewhere!

The resultant abuse of the CBN’s wholesale forex auctions was predictable and inevitably induced unbridled capital flight, characterised by huge bulk movements of hard currency through our airports and other land and sea borders legitimately. The CBN’s recent reintroduction of the earlier discredited Retail Forex Auction, once more restricted direct sales of foreign exchange specifically to end users, in place of the speculative hoarding by banks, under the Wholesale Auction System.

Furthermore, the CBN also reduced its weekly dollar allocations to the BDCs from $1m to $250,000. Regrettably, however, despite (or maybe we should say because of) such measures, the resultant shortfall in dollar supply to the open market has further instigated a wider gap between official and BDC rates. Invariably, therefore, the naira exchange rate mechanism has persistently been a clear case of the tail wagging the dog, as higher parallel market rates seem to ultimately determine the official rates.

The naira exchange rate is further characterised by the paradox of depreciation, despite significant increases in dollar revenue and extended imports cover! For example, with barely $4bn total reserves, the naira rate remained steadfast at N80/$1 between 1994 and 1998 with four months imports cover, but ironically, officially fell below N150/$1 even when reserves consistently remained buoyant above $40bn with more than 10 month’s imports cover in recent years!

Inexplicably, however, in 2012, the IMF recommended a further official naira devaluation, to reduce the size of government spending and budget deficit, and presumably also to restrain the spiralling inflation, fuelled by the persistently stifling systemic naira surplus.

Nevertheless, with the heavy cloud of mass unemployment (over 25 per cent) particularly amongst the youths, and an inflation-ravaged economy, discerning critics and observers might see the IMF’s prescription to reduce government spending as, ironically, socially antagonistic! Undoubtedly, the universal antidote for low consumer demand and high unemployment is to increase government spending, expand money supply with very low interest rates to stimulate demand and support increasing job creation. Consequently, the IMF’s recommendation and the CBN’s inappropriate presently tight monetary policy instruments, which conversely fuel inflation, and trigger high cost of funds in excess of 20 per cent, will invariably only deepen poverty nationwide!

Nonetheless, some observers blame our parlous economy and weak naira on our ‘inability’ to diversify our economy. However, such observers have never satisfactorily explained how our economy can be diversified when the standard growth engine of the SMEs is ‘eternally’ constrained by high cost of funds, and low consumer demand caused by dwindling job opportunities, plus increasingly low-income values, induced by an oppressive inflation rate.

Conversely, however, I have consistently, rightly, observed for several years, that our economy will remain distressed and unable to satisfactorily diversify because of the CBN’s unconstitutional capture of our export dollar revenue and the substitution of strictly naira payments for monthly allocations to constitutional beneficiaries.

Furthermore, the CBN has belatedly recognised the poisonous impact of commercial banks’ ability to leverage the monthly heavy inflow of naira allocations, which precipitates the unending spectre of systemic excess cash, and the attendant necessity for the CBN to reduce such surplus naira to contain inflation. Ironically, this process demands that the CBN is forced to borrow from the same commercial banks, who are beneficiaries of government allocations at oppressive rates of interest. Unexpectedly, thereafter, the apex bank inexplicably turns round to sequester these oppressive loans as surplus funds, which cannot be applied for infrastructural enhancement, fiscal appropriation or debt service!!

Indeed, it is also instructive that he CBN’s cache of self-styled ‘own dollar’ reserves, which were accumulated from substituted naira allocations, actually increase in tandem with the burden of increasing naira surplus and deepening poverty nationwide! Inexplicably, the CBN’s current respectable ‘own reserves’ of over $40bn is not also available to be applied to reducing Nigeria’s increasingly strangulating debt burden while curiously, the apex bank consciously seeks opportunities to invest ‘its ‘buoyant’ dollar reserves’ in foreign economies, despite the paltry yields associated with such investments!

Nonetheless, the CBN Governor, Lamido Sanusi, confirmed in his controversial letter of September 25, 2013 to President Goodluck Jonathan on the subject of the “$49.9bn unremitted oil revenue” that the treasury had received only about $22bn as of July 2013 for oil exports. Consequently, since oil prices remained consistently over $100/barrel during that year, while output remained steady above two million barrels/day, cumulative oil earnings should probably have exceeded $40bn in 2013. Thus, with the practice of the CBN’s usual substitution of naira allocations for dollar revenue, money supply would have increased by over N6tn (i.e. N155/$1), while commercial banks are supported by the low liberal mandatory Cash Reserve Requirement in place to leverage almost tenfold on the fresh naira inflow, to create systemic naira liquidity of about N60tn. Instructively, the total available spendable naira unleashed on the system in this process can adequately over-subscribe by 10 times (i.e. over $400bn) the purchase of the total estimated $40bn earned from crude oil sales in 2013!

Consequently, the CBN’s substitution of naira allocations for dollar denominated revenue actually weakens the naira exchange rate! Worse still, Sanusi’s confirmation that only $26.6bn (i.e. 65 per cent) out of the total estimated $40bn revenue collected was auctioned, suggests that naira exchange rate would clearly have been under greater pressure if 35 per cent of dollars earned (i.e. about $14bn) were short-supplied in the CBN’s dollar auctions, despite the earlier provision of full naira cover for the total actual $40bn revenue! It is not rocket science to deduce that systemic surplus naira simultaneously existing with such rationed dollar auctions, will deliberately, artificially skew the exchange rate mechanism in favour of the dollar!

So, in conclusion, while it is true that the CBN sold $26.6bn in foreign exchange auctions in 2013 as per The PUNCH newspaper headline, it is not true that the sales process realistically defended the naira exchange rate. If anything, the CBN’s monopolistic rationed dollar auctions, after consciously flooding the system with naira allocations, should more appropriately be recognised as a contrived mechanism to continuously depreciate the naira, especially more so, whenever we earn increasingly more dollars!”

POST SCRIPT 2017: Sadly, the CBN still continues to defend the naira exchange rate against the backdrop of self-inflicted scourge of excess naira liquidity which powers both inflation, and a weaker naira exchange rate. Furthermore, double digit rate inflation would invariably instigate higher cost of funds to seriously challenge economic growth and diversification and further deepen poverty.