SENATE, NIGERIA & MONEY MISS ROAD 06022006

Once upon a time, about two decades ago, there lived a very wealthy man in one of the major towns in the Niger Delta.  The wealth of this man was well known as he owned malls on most of the major high streets in the town; but his unusually lean and austere lifestyle also cut him out as a very strange being.  Inspite of his vast material endowment, our Chief lived in a nondescript home and rode on Okadas for mobility and could be easily mistaken for a hungry labourer on the street if not properly introduced.   It is even speculated that he used kerosene lantern instead of NEPA in his house, just to save money!  A celebration of these peculiar qualities earned him the popular nickname of MONEY MISS ROAD (MMR), as people could not understand why the man would not take better care of himself and his family and instead preferred to hoard his wealth!  I do not know how the saga of Chief MRR ended, but there is no doubt that some other relations and associates who inherited his wealth would not show such undue respect for the pot of money left behind.

In this vein, my attention was drawn to a news report in some of newspapers last Wednesday under different titles on the CBN Governor’s advice to the Senate Committee on Banking, against increasing the budget benchmark of crude oil from $33/barrel to a mere $36/barrel.  The following excerpt from the Daily Independent was titled "SOLUDO CAUTIONS SENATE AGAINST BUDGET BENCHMARK INCREASE".    Please read on “As of today, relative to the size of the economy, we still have no big bank.  All our 25 banks put together is just the size of the largest bank in South Africa.  

 “… Last year, inflation was 28 percent while the external reserve is now $28.3 billion and exchange rate is N129 to a dollar.  On the cost of our monetary policy, the $33 per barrel benchmark is too much.

“It would be better if legislators just allow the $33 per barrel benchmark to remain as it is because if they increase it, it would require issuance of treasury bills and also mop up of the excess liquidity that would be in the system.  This would cost us tens of billions of naira”

The above passage is an overt official endorsement of our position in this column that the former N2bn banks capital base requirement would become $200m if the naira is appropriately priced against the dollar at about N10 = $1;  as things stand, even if all the 24 new ‘mega’ banks were compelled once more to raise their new N25bn capital base to N50bn, these will still form a fraction of their South African counterparts, not minding that our stronger export revenue capacity and reserve base of almost $30bn and over 20 months import cover compare very favourably against a current S. African reserve base of just $20bn  and only five months import cover!  The key to understanding the huge disparity in the capital base of banks in both countries is the inexplicable exchange rate of R6 = $1 while the naira exchanges for N129 = $1 inspite of Nigeria’s resource advantage.

We cannot overemphasize the very close relationship between industrial collapse, mass poverty, and indeed the emasculation of erstwhile internationally competitive Nigerian banks with the history of the devaluation of the naira, from stronger than 1:1 to its current resistant rate of N129=$1 inspite of a quadrupled reserve base.  In the above excerpt, the honourable Senators presumably recognized the decrepit state of infrastructures such as NEPA, roads, mass transportation systems, ill-equipped schools and hospitals, not to mention unpaid salaries, and pensions exceeding one trillion naira and a non-existent social net for the masses in the face of mass and rising unemployment.   All these needs would require funding and urgently too, if we are to climb from our lowly state as the sixth poorest nation in the world!  The additional $3/barrel demanded would have made available an additional sum of {(3 x 2.5m barrel/day) x 365 days} = $2,737.5 million or N353 billion which the Senators hoped could supplement the 2006 budget provisions for the three tiers of government.  Noble expectations, one would have thought, especially when the additional $2.73bn free funds would otherwise earn minimal income as addition to idle reserves!

But, no way!  The oracle cautions that it would be unhealthy for the economy, if more money is injected into the system!  How and why, you may ask, would an expert advise you to intensify your savings for a rainy day, and endure more social and infrastructural deficiencies rather than spend part of your savings repairing your leaking roof?  According to Professor Soludo, “appropriation would require issuance of treasury bills and also mop up of the excess liquidity that would be in the system.  This would cost us tens of billions of naira”!!  Forgive the Senators if they became a bit confused; it is difficult to explain how spending of your free dollars on your own welfare will cost you tens of billions of naira!  

An amplification of the Guru’s explanation is that when the revenue from the proposed additional $3/barrel i.e. about $2.73bn is converted into naira at a rate of about N109-$1, the resultant naira sum paid into the bank accounts of beneficiaries of the federation pool will bring about too much money in the hands of the banks.  In order to restrain unbridled credit expansion without commensurate productivity and inadvertently cause inflation, the CBN, according to Professor Soludo, will be forced to intervene in the market and borrow back part of the cash it earlier injected, with the instrument of Treasury bills at a cost of tens of billions of naira!! Indeed, such redundant exercise cost the nation over N300bn in 2005!  In other words, the CBN is forced to pay annual interest of over 15% on money that it does not need, as the funds are literally sterilized!  Both the CBN and the eminent members of the Senate Committee will agree that this is not a good example of prudence in spending of the people’s money!  In this respect, the prospect of earning over $50bn in 2006 with current crude oil prices at almost $70/barrel, presents a nightmare for monetary policy, as the continuous conversion by the CBN of increasing amount of export dollars into naira will flood the system with cash and needlessly cost the taxpayer billions from forced issuance of Treasury Bills.  

In this dilemma, Nigeria would resemble our friend, Chief Money Miss Road, who could not fathom why or how he should improve his welfare by spending money which he had in surplus!  A former Head of State may have found himself in the same predicament when he was reported to have observed that the problem with Nigeria was not money, but how to spend it.  How true!  But this need not be so; regular readers of Rational Perspectives know that we have unceasingly recommended the adoption of the instrument of dollar certificates for the monthly payment of the dollar component of the federal revenue.  This process will remove the monthly predicament of a cash deluge which is followed by a CBN mop up and the attendant train of adverse impacts on development and growth.  Oh, by the way, the Honourable Senators forgot to ask the CBN Governor the prospect of economic growth with inflation raging furiously at 28%, while focused economies are targeting less than 2% inflation rate!