I’M UNDER PRESSURE TO SHARE EXCESS RESERVES - SOLUDO 23102006

Professor Charles Soludo, Governor of the Central Bank of Nigeria (CBN) revealed at the 11th Monetary Policy Forum in Abuja “that he was under intense pressure  (from the nation’s political leaders) to share Nigeria’s excess crude oil revenue”.  (Daily Independent 27/10/06 pg A4).   The value of annual revenue derivable from crude oil would increase or decrease according to the volume of oil, which we sell as well as the price at which we sell.  Thus, our revenue would move in response to various impacting factors such as wars, natural disasters in oil producing countries, or increase or decrease in consumption/demand patterns.

However, for the purpose of our national budget projections, only one price level is applicable.  To this end, the budget adopted the price of $35/barrel for an output of about 2.4 mbd for the year 2006 budget.  Although the projected output has not been met, the price of crude oil in the market has touched $80/barrel, and generally remained around an average of $60/barrel this year.   In this event, any revenue over and above the budget benchmark of $35/barrel is consolidated in an escrow account for subsequent disbursement to the three tiers of government who are the true owners of this additional revenue, described by the CBN as excess crude oil reserves which has propelled our national dollar savings to about $40bn today.  Indeed, the word ‘excess’ is a misnomer, as excess connotes a figure that is over and above a certain requirement; in other words, we cannot truly claim to have superfluous reserves at a time when all aspects of our social infrastructure cry out for urgent injection of funds to improve the lives of over 54% of our people who, according to official statistics live on less than $1/day.

In the light of the above, Nigerians may wonder why the CBN Governor would need to be pressurized to release more of our accumulated foreign reserves to ameliorate the welfare of our people and create a robust and dynamic environment for industrial and economic growth.  Indeed, constitutional adherents may even question the right of the CBN Governor to sit on money that in reality belongs to the people!  The fact that revenue exceeds a formal budget projection does not transfer right of ownership of the ‘surplus’ to the office of the CBN Governor!  

In this regard, the clamour and insistence by political leaders that the money be shared according to constitutional provisions may be in order.  On the other hand, as per the Daily Independent report, Prof. Soludo “warned that what the political leaders, especially governors were asking for would only worsen the liquidity over hang, which would lead to high inflation rate and make life more overbearing for Nigerians, if they have their way!”

Now, let us understand this correctly, there can be no doubt that there is urgent need for huge injection of capital to improve our infrastructure and improve the lives of our people, as Mr. President has spent most of the last seven years crisscrossing the globe for the very reason of encouraging foreign direct capital (which is generally also expressed in dollars – the same thing we have in abundance as reserves!) into Nigeria.  Meanwhile, Prof. Soludo regrets that most of the legitimate agitators for increased spending “had failed to appreciate the need to save for a rainy day!”  Pray, Mr. Governor, how can you justify such advice to a poverty-ravaged citizen, who can not feed properly or live a life of modest dignity to desist from spending part of his savings in the bank to plug his leaking roofs and provide good education and adequately support the health needs of his family!  If the multilateral statistics of the gross poverty level of the average Nigerian do not reach our CBN Governor’s table, then he can be forgiven for not knowing that the rainy day is already on us!

But, what really are the haunting fears of Prof. Soludo?   Well, the Prof. warned the Forum which comprised the MDs of banks that excess liquidity and high inflation, which will impact adversely on Nigerians would be the product of spending more of our reserves!  Now, let us examine why or how this excess liquidity (or excess cash in the system) originates.  The reality is that whenever the 85% of national revenue, which is derived from crude oil sales is unilaterally converted into naira by the CBN and paid into the bank accounts of the three tiers of government, the huge injection of a naira value in excess of N300bn every month creates a bloated cash base for the beneficiary banks, who can then multiply their credit to customers many times, over and above the actual cash injection with disastrous consequences for the price level, (inflation); as the huge cash/credit availability is not backed by actual direct productivity.

But the paradox that emerges from this scenario is that the excess cash in the system increases the cost of borrowing rather than decrease the  rate payable for commercial loans!  For example, if the country experiences a super bumper yam harvest and yam is available in excess everywhere you go, you would expect the price of yam to fall abysmally, but no!  Not so with the excess cash in our system.  The cost of money is still above 20% and the CBN itself competes for this money by paying up to 17% for the government bonds it sells in the market thereby crowding out serious and genuine investors who know that it is suicidal to borrow for industrial ventures with employment generating potential with medium to long term gestation at interest rates above single digit!

In the light of the above, it seems that we have boxed ourselves into a corner where increased oil revenue constitutes an embarrassment for our monetary authorities as they find it difficult to explain their policy of shoring up reserves amidst grinding poverty!  Part of the strategy to ameliorate the embarrassment appears to be a reckless disbursement of an unsolicited and uncollateralized and time unlimited loan of $7bn dollars to 14 Nigerian banks.  Never mind that these lucky bank beneficiaries can round-trip the funds to the Nigerian capital market and earn returns of up to 17% for government bonds and 12% for treasury bills (government borrowings) even though they may not pay more than 4% interest on the $7bn shared to them by the government.

Worse still, government borrowings as bonds and treasury bills for mopping up the excess cash in the system will increase our domestic debt to over  N2 trillion (about $20bn) without impacting meaningfully on the lives of our people.  The 2007 budget indicates that we will need to service these domestic debts with about N250bn next year. Prof. Soludo himself indicated that we have spent about N75bn to keep inflation in check between January-June 2006!  Please tell me, someone, how do you pay interest of N75bn on loans that are not geared to the productive sector and expect to win a war against inflation?

In Nigeria, wonders will never end!