Oppressive contradictions in Nigeria’s economy -By Henry Boyo

Filed under: Economic Issues |

 

The question is, Why have we become so poor despite our abundant human and material resources?

The following is a summary of this writer’s presentation to the House of Representatives Committee on Recession, recently. Please read on:

“Readily available evidence, ironically, indicates that the fundamental cause of our presently distressed economy and precariously sliding naira exchange rate is undeniably that of ‘too much money supply,’ in both naira and foreign exchange terms. However, it is certainly unexpected that too much money could also make a nation very poor. Arguably, the Central Bank of Nigeria’s failure to successfully manage an irrepressibly surplus naira supply has continued to sustain higher inflation rates for several years, with serious consequences for the purchasing power of all naira incomes, consumer demand, productivity, investment and social welfare.

Similarly, with foreign reserves, we have deliberately created a market paradigm, that at best, ensures that the naira rate will remain static, even if dollar earnings quadruple, as witnessed in recent years. It is a contradiction that naira exchange rate depreciates with increasing foreign reserves, and a horrendous faux pas that we seek to borrow ‘paltry’ dollar sums despite relatively buoyant reserves and extended imports cover.

Instructively, with an abiding tradition of systemic surplus naira liquidity driving higher inflation, it would be presumptuous to expect any economic succour from the critical monetary indices, which sustain inclusive economic growth. Furthermore, since it is unrealistic for the cost of borrowing to be lower than the inflation rate, double digit inflation rates will inevitably also predicate cost of funds above 10 per cent to make Nigeria’s industries less competitive, and therefore challenge domestic import substitution. Consequently, if the problem of persistent excess naira liquidity which fuels inflation remains unresolved, Nigeria will remain a dumping ground for imports. It may, however, seem incredible to the ‘uninformed’ that too much money is actually the major obstacle to inclusive economic growth, industrial competitiveness and lower interest rates.

Similarly, if poorly managed surplus naira supply drives inflation nearer 20 per cent, all static income earners will invariably lose 100 per cent of the value of their incomes every five years. Inflation is an economic ravager, and Nigeria’s economy will never truly flourish, until the monetary authorities eliminate or drastically reduce the dismal presence of persistently surplus naira supply, which invariably fuels inflation, which in turn, propels higher cost of funds, and also drives weaker exchange rates, which propel higher fuel prices to make deregulation of the fuel supply business and removal of subsidy very unpopular.

It will be impossible for the CBN to deny the horrid challenge caused by excess liquidity when it is decidedly on track to mop up (remove by borrowing) over N7tn of perceived inflationary excess funds from the money market this year. Incidentally, banks will earn over N700bn as interest with such borrowing! So, how does one reconcile the ‘celebrated’ N7tn plus 2017 budget expenditure with the simultaneous necessity for the CBN to also borrow N7tn this year to reduce the burden of surplus naira and restrain inflation? How do we rationalise higher cost of funds to both government and businesses, when surplus money supply actually becomes a burden? How can anything become more expensive when it is in surplus?

Obviously, if the CBN and the public sector readily pay up to 17 per cent to borrow and sterilise burdensome excess funds, banks would be unlikely to show enthusiasm for lending to the real sector, particularly, with the attendant challenges of power, multiple taxation and high interest rates which will, inevitably, also increasingly induce non-performing loans.

Nevertheless, Nigeria’s monetary authorities have brazenly hoped that Nigerians will never interrogate the true cause of the disenabling spectre of excess naira liquidity that spurs the three demons of rising inflation, rising cost of funds and weak naira exchange rates, simultaneously with the CBN’s consolidation of higher foreign reserves.

It is also undeniable that although substitution of freshly minted naira values for distributable dollar revenue, invariably, optically pumps up the CBN’s alleged forex reserves, this practice has also served as a primary feedstock for the relentless burden of systemic surplus naira which drives higher inflation and interest rates, and a train of other oppressive consequences.

It is clearly a contradiction that Nigerians expect a stronger naira exchange rate, when the constitutional custodian of the naira, i.e. the CBN, persistently AUCTIONS rations of dollars against the naira, in a money market that is undeniably suffocated with excess naira supply created by the CBN’s unilateral substitution of naira allocations for distributable dollar denominated revenue. Thus, the CBN’s forex interventions are in fact a conscious, suicidal approach to gradually kill the naira, since the CBN would invariably sell its dollar stock for higher naira bids in such auctions.

Nonetheless, despite over 15 years of this writer’s advocacy against this clearly deliberate enemy action, it is still business as usual, and the banks flourish, while the rest of the economy wrestles with deepening poverty.

It is evident, however, that if dollar certificates are adopted for paying allocations of dollar denominated revenue, the persistent debilitating burden of systemic excess naira liquidity will vaporise, and the CBN’s Cash Reserve Ratio can then be modulated nearer an equilibrium rate, where the apex bank has no need to aggressively restrain inflation by enticing banks with high interest rates to borrow from them to reduce and sterilise the naira liquidity surplus that plagues the system. Such a payment reform will reduce the volatile spectre of excess naira and rising inflation. Consequently, the resultant lower inflation rates would expectedly also induce lower cost of borrowing, while the naira would also have a better fighting chance, if the CBN’s dollar auctions cease, and the forex market is released from the CBN’s stranglehold monopoly and the attendant distortions to efficient resource allocation.

Nigerians may continue to remain in denial of this reality to their eternal peril. Indeed, naira rate will never significantly improve, even if income from crude oil quadruples. For example, it is a contradiction that naira steadied around N80=$1 despite a paltry $4bn reserves between 1995-98 but inexplicably fell below N150=$1 even when the CBN reserves expanded beyond $60bn with an extended capacity to pay for our imports between 2006 and 2007!

Presently, with $30bn reserves, the naira ironically, exchanges for between N305 and N400=$1, even when crude oil price has risen beyond $38 to $50+/barrel, while naira rate still remains under siege. The authorities recognise this truth, but it is clear that they certainly hope that Nigerians will look elsewhere for an appropriate solution, while they and their collaborators continue to lap up the cream from this excess liquidity fraud!

Conversely, if dollar allocations are paid with dollar certificates, the dollar will always remain domiciled in the CBN, even after banks have purchased the certificates in a free market, outside the present monopolistic framework, from constitutional beneficiaries. The banks would subsequently sell their dollar purchases in an open market (devoid of a naira liquidity surfeit) to local importers to pay for only approved and attested import bills. The commercial banks would subsequently instruct the CBN to directly pay such overseas suppliers from the forex credit balance in the respective bank’s forex domiciliary account with the CBN on presentation of validated shipping documents. Obviously, banks would resist any attempt to maintain such transparency in the forex market.

This arrangement will, however, minimise round tripping, currency hoarding, multiple exchange rates and the misadventure of funding Bureau de Change operators with official dollars etc. The list of positives to the economy is endless, but the pains to the oppressors who make stupendous gains from the current arrangement, will become sweet relief for all other Nigerians.

Truth they say is monochrome! This is the time to free our economy from the clutches of these financial sharks who masquerade as bankers.”

 

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