IS IT BETTER TO KEEP LARGER RESERVES? 06112006

Last week in this column, we condemned the rationale behind the CBN Governor’s decision to continue to shore up our external reserves as savings rather than share more of our increasing dollar revenue for the purpose of infrastructural and other employment generating development in the country.  Amongst the feedback and rejoinders to our articles came a mail from one John Tuyi, who disagrees with our indictment of Prof Soludo, and instead preaches the classical virtue of thrift even in the face of the adverse effects and abject poverty of the majority of our people.  The following excerpts from Tuyi’s mail are indicated in italics with our own comments and responses in standard print.  Please read on.

TUYI: “Are you saying that the little amount of money our dear country has managed to save should now be allocated/distributed to a bunch of governors whom a very crucial institution - EFCC, has claimed to be under one investigation of corruption or another?”

LEBA:  The deprivation of most of our people who live on less than $1/day in the face of spiraling idle external reserves cannot be justified by the need to closet our national revenue from the kleptomaniacs in government; otherwise, this fear may as well justify a total ban on any form of government expenditure until honest men of integrity come into power.   There is no guarantee that the incoming government in 2007 will be supportive of the EFCC; in which event, all the reserves which have been diligently saved up by dint of tremendous sacrifice can be squandered in a jiffy as was the case between 1979 – 83!

TUYI: “Are you also saying that spending what we have in our foreign reserve on "infrastructures" in the current political climate is the best option available to us? We have always done this and it has never worked for us.”

LEBA:

Yes, Mr. Tuyi! We cannot develop with decrepit infrastructure with the cold comfort of heavy untouchable foreign reserves in our national treasury.  Over the years, we have generally spent about 20% of our national income on capital expenditure (for improvement of infrastructure) in the face of revenue constraints.  This amount is generally regarded to be inadequate and with massive treasury looting, it is not surprising that over the years, we have depreciating and unmaintained infrastructure.  

However, the upsurge in international crude oil prices has provided us with a rare opportunity to invest in mega power plants including transmission and distribution systems so that the current power capacity of 3000 megawatts can rise above actual requirement of over 10,000MW.  The current piecemeal approach to power generation even with the proposed plants in the Niger Delta and the Mambilla Plateau will still not guarantee uninterrupted power supply; and our industries, especially the SMEs cannot fully perform their role as the backbone of a progressive economy.

We now have enough revenue to transform our colonial rail network into an efficient and modern system with safety and low transport costs as prime features.  A huge investment on railways, not the token sums currently being considered, would reduce road accidents and unnecessary deaths of our people in incessant multiple crashes; the prices of goods and foodstuffs will also fall to the benefit of the masses for both our intercity and urban routes.

Well, our universities and colleges are currently adjudged to have largely failed in their mission statement to provide educated and socially oriented young people.  Our health facilities and training institutions need fundamental restructuring so that no Nigerian dies as a result of an inability to find about N1,000 (less than $10) to cure simple malaria or typhoid afflictions.  The inadequacy of safe pipe borne water and attendant health problems need to be urgently addressed

Now, in the absence of funding for all the above, what benefits do our huge, highest ever reserves confer on us?  Well, under the current dispensation, it affords us the ability to share the reserves not to the true constitutional beneficiaries (i.e. the three tiers of government,) but to Nigerian banks to trade with under the guise of schooling Nigerian banks on international funds management!  To say the least, the benefits from this largesse are vague and undefined, as the banks only pay Nigeria a modest interest rate of about 4-5% on this unsolicited, uncollateralized and time unlimited loan!  Never mind that the government itself pays an interest rate of 17% for what it borrows from the same banks domestically!  Most Nigerians, would consider such benevolence to the banks as reckless, especially when the banks are not obliged to invest the money in Nigeria, while our government goes cap-in-hand soliciting for foreign investors to make Nigeria their investment destination of choice!

TUYI: “We will all do better to support the current anti-corruption war gathering pace in our land and ensure that we rid our Nation of bad leadership, whose only ambition is to transfer what belongs to a whole nation to foreign lands.” 

LEBA:  Yes, you are right; we must stop the CBN from dashing our reserves to Nigerian banks to do as they please.  We must also stop the CBN from frivolously selling about $400,000 to every registered Bureau De Change (BDC) every week, especially with  the knowledge that smugglers of banned goods and treasury looters, who want to stash away their loot abroad, are the major patrons of BDCs.  Genuine users of foreign exchange patronize the official market!

TUYI: “Lastly, what will happen if we wake up say in a year’s time and oil is selling for $16?...”

LEBA:  In the event that our current buoyant reserves have been properly spent on infrastructure and human capacity development, the country would be weaned of its almost total dependence on a single export commodity (crude oil) and would have the appropriate platform to diversify export earnings from manufacturing, agriculture and indeed, the service industries, and a fall in crude oil prices to $16, as you imagine, would not create too adverse an impact.  If on the other hand, appropriate infrastructure is not in place, sooner than later, we will consume all our reserves without a capacity to regenerate them, and we will be poorer still when crude prices fall!

If the truth must be told, our monetary authorities understand the above analysis, but their fear is the huge naira cash injection, which would be made into the banking/money market, when more of our dollar reserves are unilaterally converted into naira before sharing to the three tiers of government!  This singular act is the bane of Nigeria’s monetary system.  It dislocates and crates all sort of distortions to economic activity and development and deepens poverty.  

However, this monster can easily be tamed, so that we can enjoy the benefits of buoyant reserves, improved infrastructure and human capital, single digit inflation and interest rate structure and better living for all Nigerians, if the dollar reserves are distributed as dollar certificates (NOT CASH) so that beneficiaries can negotiate their certificates with respective banks for naira equivalent.  When this happens, a new dawn of improved welfare and prosperity will be ushered into our country.