The crash in the Naira exchange rate from N199=$1 by Dec. 2015 to almost N500=$1, in January 2017, was popularly attributed to the erosion of Nigeria’s foreign reserves from a lofty perch of about $60bn to a less exotic retreat nearer $35bn.
Although the Naira rate has since stabilised between N305-360=$1, conversely, however, higher (and still rising) oil prices and output have reportedly buoyed reserves to almost $50bn.
The question therefore is, if the Naira crash in 2016-17 was blamed on dwindling foreign reserves, why then, has the rate remained relatively static between N305-360, even when reserves have evidently increased by almost 50 percent by September 2018?
Notably, nonetheless, even if forex reserves grow beyond premium levels, the reality is that, such bountiful reserves base and the related extended cover for payment of imports, that it provides, will only lead to a marginal improvement in Naira exchange rate.
Arguably, after his campaign promise to make Naira equal to dollar value, President Buhari must be concerned that, not even increasingly revenue from crude export will ginger the Naira rate. Nevertheless, this dilemma has been discussed, for many years in several articles in this column.
The above title, for example, was first published in June 2015; perhaps a summary of that article which follows in interrogative prose hereafter, will improve our understanding of this dilemma and facilitate a positive resolution of the oppressive one way slope of the Naira rate. Please read on.
Q) “Shouldn’t we expect rising foreign reserves to benefit Nigeria’s economy?”
“This popular expectation may not actually stand up to scrutiny. We may recall that even when oil price approached $150/barrel in 2008, with foreign reserves windfall above $60bn, more Nigerians inexplicably joined the ranks of the poor with subsistence income of less than $2/day!”
Q) “So, why does the Nigerian economy suffer when crude oil price rises?”
“This is a good question, because it is ironical that our economy should suffer with increasingly higher foreign reserves. However, the reason for this distortion is quite simple; for example, if China were to substitute Yuan equivalent for her trillions of dollars export earnings, the Chinese currency will be embarrassingly in surplus everywhere, and increasingly propel inflation, while its exchange value will, conversely, rapidly depreciate. Indeed, countries that subject their currency to such reckless humiliation, will inevitably turn bountiful export earnings into a curse! This is exactly what the substitution of Naira for increasing dollar export revenue from higher crude oil prices and output does to the Naira and Nigerians.”
Q) “Is increase in dollar earnings actually the cause of the unrelenting burden of too much naira supply which drives inflation in Nigeria?”
“Yes, and until the current misguided system of infusing export dollar revenue into the system is stopped, it may be better to pray that oil prices do not rise to increase export earnings significantly, because such bountiful foreign exchange from higher oil prices and output will expectedly promote a liquidity challenge, if Naira allocations are deliberately substituted for dollar denominated revenue.”
Q) “How can systemic surplus cash be a problem when both public and private sectors, clearly have severe funding deprivation?”
“That is the irony of the obtuse monetary strategy that the authorities presently embrace; it is equally inexplicable, that the cost of borrowing should also rise, even when Naira supply is actually surplus.”
Q) “Why is it that the surplus money supply cannot be put to good economic use by either the public or the private sector?”
“Well, the Central Bank, which has the mandate for Monetary Policy management, deliberately creates hurdles that discourage liberal access to the excess money available in the system.”
Q) “What sort of hurdles and why?”
“Notably, the CBN would raise the Monetary Policy Rate (MPR), which is the rate commercial banks pay whenever they borrow from CBN to supplement their cash positions. Consequently, if MPR is, for example, as high as the present 13 percent, the banks would be compelled to lend to their customers at over 20 percent. In addition, the CBN could also restrain commercial banks’ lending and reduce spending by raising the mandatory Cash Reserve Ratio (CRR) of deposits that all banks must keep sterile; conversely, the CBN can also reduce the CRR, in order to encourage credit expansion that will spur consumer demand and expand industrial production with more job opportunities.”
“Ironically, however, the same CBN unexpectedly crowds out the productive sector from available credit, by borrowing heavily from banks and keeping sterile, hundreds of billions of Naira, on which it pays the same banks, oppressive rates of interest.”
Q) “So, it's not as if funds are inadequate to stimulate consumer demand and stimulate productive activity.”
“No, infact less than 25 percent of total bank lending capacity of well over N60tn is currently utilized; whereas, in South Africa, for example, this ratio is presently over 70 percent (2015).”
Q) “So, why does the CBN deliberately create hurdles in the path of bank lending and credit expansion?”
“Well, the Apex bank is usually concerned that if commercial banks lend out, more of the huge Naira supply deliberately created and substituted for increasing dollar revenue, the resultant rising tide of inflation, will invariably erode the purchasing power of all incomes and deepen poverty nationwide.”
Q) “What then is the impact of CBN’s several special intervention funds?”
“Well, if a system is reportedly, already, besieged by the inflationary challenge from the presence of surplus Naira supply, the creation of additional Naira values as interventions, will significantly, drive higher rates of inflation. Consequently, government’s sectoral interventions with hundreds of billions of Naira annually, despite a systemic Naira surplus, will 'inadvertently' simply drive much higher inflation rates and deepen poverty.”
Q) “Why is it that naira rate does not appreciate significantly when oil prices and reserves also increase?”
“The obvious reason is that bloated Naira surplus, deliberately created by CBN, ultimately, confronts the Apex bank’s rationed dollar auctions, to tilt the forces of supply and demand, inevitably, in favour of dollar, so that Naira rate invariably shrivels; this infact, is why the Naira exchange rate remained almost static at N115=$1, even when forex reserves doubled and approached $60bn by 2008.”
Q) “Why is fuel price not cheaper in Nigeria when we have oil in our backyard?”
“The benefit of having oil in our backyard should be reflected in a stronger Naira, because, higher crude prices and output should increase dollar supply and induce a stronger local currency, as more dollars become available in the market place against existing Naira values. Notably, for example, if Naira exchange rate improves to say N100=$1 presently, from N199=$1, domestic fuel price will immediately fall below the prevailing regulated pump price of N87/litre and quietly eliminate any form of subsidy, even when pump price also includes upto 10 percent sales tax.”
Q) “So how can the Naira exchange rate be improved?”
“The Naira exchange rate will gradually become stronger, even with lower crude oil price, if distributable dollar revenue is not unilaterally substituted with fresh naira values by CBN; this causes the ever surplus Naira supply that invariably drives higher inflation rates, and also gulps up the small dollar rations, intermittently auctioned by CBN, which ultimately induces weaker Naira exchange rates.”
Q) “Are you saying that lower crude oil price is better for our economy?”
“The answer to this question is obvious, we are all current witnesses of the economic dislocation and social distress that low oil prices and output have caused, as both the Federal and State governments have become heavily burdened by rising debt, while workers are still owed several months salaries.”
POSTSCRIPT SEPTEMBER 2018
Even if former Finance Minister, Kemi Adeosun’s expectation for higher forex receipts from prevailing crude oil price above $80/barrel and the consistently higher output is discounted, forex reserves have undeniably risen by almost 50 percent since 2017, yet Naira rate remains static, while Nigeria is reportedly the World’s largest producer of poor people.
SAVE THE NAIRA, SAVE NIGERIANS!!!