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By: Sir Henry Olujimi Boyo (Les Leba), first published in July 2012
Last week, we republished the article titled “Nigeria: Where Prosperity is Unconstitutional”. The article discussed sections of the constitution, highlighting the duty of the Nigerian government to do right by its people, and questioned the failure of the government to fulfill its aims. If you missed this article, it can be found using the link below.
(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)

“How to Revive Our Failed Economy” was initially published in the year 2012. It is being republished due to the weighty dialogue it contains in which it engages with readers of this column to shed light on the workings of the Nigerian economy- specifically monetary policy and the role it would play (if properly utilized), in reviving failed systems within Nigeria. Please note that the figures/numbers referenced in the below article might vary with current figures due to its initial publication date.

We will provide answers to some frequently asked questions regarding inflation, interest rates, and naira depreciation.  Kindly read on.

Would the adoption of a different monetary policy framework stem the inflationary spiral?

Inflation is a silent plague, which gradually erodes the purchasing power of all income earners, particularly that of the poor.  In the context of our economy, the uncomfortable rate of inflation is the consequence of a defective monetary policy model.

There has been an average annual rise of 10 percent in the general price index in the last 20 or so years.  This compares unfavorably with maximum of 3 percent in successful economies elsewhere.  Regrettably, the CBN, who has the prime responsibility for establishing price stability, has in reality become the instigator of inflation. 

CBN has failed to reduce inflation and foster a benign rate of funds so that industries, particularly SMEs, can borrow at between 5 and 7 percent, thereby stimulating rise in employment, creating demand, and growing the economy. 

Why has CBN’s monetary Policy Rate remained so high?

The extremely high current monetary policy rate of 12 per cent and cost of funds to the industry at over 20 per cent and inflation targeted by the same CBN Governor at 15 per cent are all glaring indicators of the failure of a monetary policy model, which is eternally fighting the flood of excess liquidity induced by CBN’s substitution of naira for distributable export dollar revenue.

While it simultaneously continues to decry the inability of banks to lend to the real sector, because of scarce funds, the current monetary policy model, whereby CBN suffocates the market with its injection of naira allocations for dollar revenue, will inevitably necessitate eternal excess liquidity mop up, The CBN will be constrained to pay as much as 15 per cent for its risk-free borrowings with treasury bills in order to reduce the amount of spendable money in the system; no economy has been known to grow with inflation and cost of funds at almost 15 percent and over 20 percent respectively.

How can CBN halt naira depreciation in spite of healthy reserves?

It will be impossible for CBN to stop the unyielding pressure and continuous depreciation of the naira under its current monetary policy model; this is because, whether we earn more or less dollars, the naira will remain under downward pressure.  For example, whenever we earn more dollars, the substitution of larger naira allocations for distributable dollar revenue will provide additional cash injections/money creation, which the banks will leverage on to engender a specter of excess liquidity, which can over-subscribe many times over the actual value of dollars offered for sale by the CBN, who controls over 80 percent of dollar supplies in the market.

Consequently, there will always be too much naira chasing limited dollars.  Thus, market equilibrium will only result in a lower price naira whenever we earn increasing dollars.  On the other hand, the naira is also under similar pressure when we earn less dollars, as the government may have no other alternative than to further officially devalue the naira, in order to keep their naira revenue projections stable in nominal terms.  Once again, the result is too much naira chasing fewer dollars. 

The only plausible way that the CBN can stem this tide and break the jinx of naira depreciation will be to turn the table of supply and demand against the dollar; this can simply be done when we break CBN’s monopoly of the foreign exchange market, so that distributable export dollar revenue is not unilaterally ‘monetised’ (substituted with naira) before sharing to the three tiers of government.

If the instrument of dollar certificate is adopted for this purpose, the naira rate of exchange would be positively favored.

The erstwhile eternal burden of excess liquidity would be lifted. There would be no new naira printing/creation for the banks to leverage; consequently, there would always be more dollars chasing stable naira sums in the system.  The naira will become stronger, cost of funds will fall to single middle digit, price of fuel and electricity tariff will plummet significantly, even without subsidy component in their pricing!  Transport costs would fall and inflation would recede to lower single digits.  The government would save close to N500bn annually from the funds, usually set aside for debt servicing and equally save over N1 trillion formerly paid for fuel subsidy. In fact, the government can also earn between 5 and 10 percent sales tax per litre from the 35 million litres of fuel sold every day (an income of N350m/day.)

So far, there is no better plausible argument on ground that would redesign our monetary policy model and rescue our people from the grip of poverty than the one proposed above.