EL DORADO AND CBN’S DOLLAR MONOPOLY 13032006

Last week, I endeavoured to explain in simple language the reasons why the results of the operation of the WDAS (Wholesale Dutch Auction System) and its antecedent DAS are inimical to the smooth running of the economy and a major cause of poverty in the land.  The reason for this is the CBN’s unhealthy monthly habit of unilaterally changing the nation’s dollar revenue into naira before sharing to the three tiers of government.  The huge naira equivalent which is paid into the bank accounts of beneficiaries engenders so much cash in the banking system so that the CBN is forced to clean up the mess by borrowing back some of this cash by the sale of Treasury bills with interest rates in excess of 15%.   The huge amounts borrowed in this manner (often in excess of N200bn per month) is not in fact used for any productive or developmental project, but simply sterilized in CBN vaults!  The high yield from risk-free treasury bills makes bank investment in the real sector (commerce and industry) unattractive!   Under this system, the fate of the value of the naira is compounded by the huge amount of naira pumped into the system every month by the CBN and these huge cash balances also induce the contradictory scenario of a naira under pressure in the face of increasing dollar earnings (check current exchange rate of N127.5/$1 with our current healthy reserve base of about $30bn and the exchange rate of N80=$1 when our $5bn reserve base was barely enough for our five months import bill in 1999)!  

The truth is that the new WDAS has the potential to be a more fraudulent and restrictive mechanism for determining the appropriate value of the naira.  In the first place, the CBN has never condescended to explain why it continues to change the monthly dollar revenue at less than N110=$1 so that the states and local governments who are paid the resultant naira sum are forced to buy back the same dollars at a higher price of N127=$1 at DAS or WDAS for needed imports, thus stimulating an inflationary spiral in the economy!  Furthermore, the system promotes an economy of rent seekers, such that media reports have suggested that 80% of all bank profits are derived from foreign exchange and treasury bills.  The new WDAS will not eliminate the scourge of multiple exchange rates in the system and the official  rate will continue to try in vain to catch up with the parallel market rate, in a relationship that would encourage round tripping and support capital flight! 

So, even if the new WDAS has attendant negative features, why, you might ask, would the CBN describe it in glowing terms as progressive and a liberalized framework (a belated admission of the constraint of the erstwhile DAS!) for exchange rate determination?  I have also pondered over this question myself and I can only come to the conclusion that the CBN believes that Nigerians are ignorant and the intelligentsia would not have the temerity to question decisions handed down to the people from the Olympian mountain of CBN!  A casual observation of our economic history over the last 30 years or so will show that poverty has followed very closely the trend in the depreciation of the naira from stronger than 1:1 in the early 1980s to the current level of N127=$1 inspite of a record level of foreign reserves.

Indeed, all the exchange rate systems adopted so far featured too much naira in the system chasing available dollars.  So if we are to firmly tackle the dilemma in our economy, we have to find a solution to the incidence of too much cash in the system whenever the monthly dollar revenue is unilaterally converted by the CBN to naira before sharing.  If this problem is solved, the nation would not have to pay interest of over 15% when it borrows its money back with sales of Treasury bills and government bonds at a time when it has no need to borrow because of existing excess reserves.  The sources of cheap and unearned income from treasury bills will disappear, and the CBN can then bring its control rate (MRR – Minimum Rediscount Rate) from the current 14.5% to as low as 2-4% as in other focused and progressive economies (check zero rate in Japan)!  Commercial lending rates to the real sector would automatically fall to more realistic single digit level, and the seemingly impossible task of creating an enabling environment for industrial growth will become a reality.  

So, we must stop pumping huge naira cash balances into the banking system every month through the payment of allocations to the three tiers of government.  If the traditional conversion of the monthly dollar component of distributable national revenue stops, so that beneficiaries receive undiluted dollar certificates for their respective constitutional allocations; the perennial albatross of too much cash and a ‘heated economy’ and the attendant economically destructive results will be shaken off forever!  Each beneficiary will be free to exchange all or part of its holdings of dollar certificate in duly registered transactions with authorized commercial banks.  The CBN will credit the dollar accounts of each respective bank with the face value of each certificate transacted on receipt of appropriate notice and confirmation.  The banks, on their side, will be free to service the dollar needs of genuine importers from each bank’s dollar account with the CBN; this arrangement would conserve our funds by discouraging capital flight and round tripping and the naira will quickly appreciate to a value that is commensurate with our reserves and by extension our foreign revenue potential in the next five years or so!

The absence of a huge monthly cash inflow into the banking system will automatically constrict the demand for dollars and a situation where there are more dollars (mainly government owned) searching for naira will quickly improve the value of the naira significantly by up to 50% (i.e. naira rate of N65=$1 within two months.  The improved value of the naira will increase its purchasing power and even erstwhile paltry pay packets will buy more goods and services than was previously possible.  Nigerians will not inherit the liabilities of Tokunbo vehicles, and petrol prices will fall to less than N35/LITRE..  Industries can retool and expand their raw material demands with a stronger naira and the attendant demand will stimulate more employment.

Under this arrangement, interest rates will crash to below double digit and banks will not need any persuasion to face the real sector as the ‘hot and easy’ money from treasury bills and foreign exchange arbitrage will disappear, and the Nigerian economy will be rapidly transformed as we enjoy the benefits of a truly liberalized foreign exchange market, which is diametrically opposed to the charade canvassed as WDAS by CBN! 

The South African rand appreciated from almost 15 rands to the dollar less than three years ago to its current respectable rate of about 6 rands inspite of South Africa’s ‘mere’ four months imports cover with only $20bn reserves!  Rand would have taken a downward spiral like the naira if it was also traded in an auction where the odds have been deliberately loaded in favour of a competitive foreign currency.  Indeed, last week, no less a person than the current ICAN President has recently labelled the CBN’s unilateral conversion of the Nation’s dollar revenue as supportive of corruption in the country.  This column is totally in accord with this observation.