WHY GOVERNMENT AND BANKS ARE AFRAID OF DOLLAR CERTIFICATES
By: Sir Henry Olujimi Boyo (Les Leba) republished in May 2013
Last week, this column republished “How to Revive Our Failed Economy.” The article provided well-thought-out responses to commonly asked questions regarding inflation, and the hold it has on the Nigerian economy. All republications can be found in the archives using the below link.
(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)
Today’s republication discusses monetary strategies that could improve Nigeria’s economic situation. It defines excess liquidity to ensure the reader is carried along as it explains the need for a reformed monetary system that curbs excess Naira supply in the money market. It explains how the phenomenon of excess supply affects the purchasing power of the Naira, which in turn negatively impacts employment and inflation. Kindly read on for more insight.
As you read through the below article taking note of previous events and rates, keep in mind its initial publication (2013), a clear indication that things remain stagnant even as we face the year 2023.
In the light of government’s reticence to our persistent recommendation for the adoption of dollar certificates for the payment of distributable dollar-derived revenue, a regular reader of this column has suggested reasons why certain stakeholders would oppose the proposition to fundamentally alter the payment system and thereby lift the irrepressible perennial burden of surplus cash and its attendant adverse collaterals such as inflation, high cost of funds, rising national debt, weaker exchange rate, rising unemployment, N2000bn annual fuel subsidy and deepening poverty nationwide!
In his online rejoinder, a certain ‘Mr. Has’ noted that "… the money deposit banks that should mobilize deposits for proper financial intermediation depend heavily on the monthly naira distribution to the tiers of government… for their operations. With dollar certificates, this source of funds will no more be available. The banks may experience some liquidity crisis. This probably explains why the banks exhibit lukewarm attitude to your proposals. Previous directives that the accounts of MDAs be held by the CBN were reversed owing to the banks' agitation, as many of them exhibited inherent liquidity crisis! I believe the dollar certificates will have similar effect on the banks".
For sake of clarity, excess liquidity is defined as cash held by a bank above the usual regulatory requirement for that bank.
Presently, Nigerian banks are required to hold a minimum of 12% of their assets strictly as cash; consequently, cash availability above 12% may encourage banks to recklessly and indiscriminately expand credit to customers. Such credit expansion is synonymous with increasing the supply of money, and driving inflation, as so much money chase less goods!
Evidently, Nigerian banks become flush with excess liquidity every month, when hundreds of billions of naira are substituted for monthly distributable dollar revenue and paid into the bank accounts of the three tiers of government.
In response to the threat of inflation caused by the ensuing naira surplus, the CBN would seek to withdraw and keep as redundant and idle, hundreds of billions of naira, which it borrows from the banks at between 10 and 17% rates of interest.
In place of such obnoxious strategy, government proposed, some years back, that cash allocations to the three tiers of government should be domiciled directly with the CBN rather than commercial banks; in this manner, the burden of government paying outrageous charges for accumulating idle funds borrowed from the banks to restrain inflation will be averted.
Understandably, the banks rose up in concert to oppose this arrangement, which would have removed their veritable source of free meal tickets.
Consequently, the real sector eternally cries for credit, and gradually contracts with adverse impacts on employment opportunities, while banks continue to declare extraordinary profit results from operations in an otherwise retrogressive economy.
Alternatively, however, adoption of dollar certificates would avoid the pitfalls of attendant double-digit inflation, high cost of funds, a weakening naira, the collateral of increasing fuel subsidies above N2tn annually, and will ultimately also halt the plague of unemployment!
Furthermore, ‘Mr. Has’ also observed online that “…the state governments that will be beneficiaries of the (proposed) dollar certificates require naira to meet their monthly recurrent expenditure, which range from 40 – 80%. Why issue them with dollar certificates? Probably, that explains why the state governments are not enthusiastic about the dollar certificates”.
In practice, dollar certificates are not legal tender; consequently, beneficiaries would need to exchange them for naira at market-determined rates through the banks. Thus, in the absence of the usual cash bonanza with 100%-naira allocations, more dollars will consequently, chase stable naira supply and alter market dynamics in favour of a stronger naira! Thus, in place of naira value coming under threat with increasing dollar revenue, as before, the reverse will become a benign trend!
The presumed liquidity enjoyed by the three tiers of government from CBN's payment of 100%-naira allocations has failed to yield the desired positive impact on real economic growth and social welfare nationwide. Nonetheless, government’s heavily lopsided recurrent expenditure budgets accommodate all sorts of spurious expenses, including dedicated salaries for hundreds of thousands of ghost workers and other such duplications and wastages in most public establishments!
Conversely, the adoption of dollar certificates will not only mop up the burden of surplus cash, but would also certainly boost naira purchasing power. Such increase in naira value will be welcome to all income earners, who would immediately find that their otherwise meagre wages and salaries could command much more goods and services than previously possible. The resultant increase in consumer demand would create an array of opportunities for production expansion in existing ventures and similarly attract new investors who wish to target the exploding consumer thirst for various goods and services.
Consequently, multiple job opportunities would become available to reduce unemployment and also mop up those ‘victims’ of a more efficient streamlining of public establishments in response to their adjusted liquidity positions. Ultimately, government coffers will become beneficiaries of increased personal and corporate tax revenue.
Finally, Mr. Has, in his rejoinder, is concerned that a payments reform as proposed will create a multiplicity of beneficiaries of dollar certificates and this may in return result in multiplicity of exchange rates in the market. This may not necessarily be so, for example, in the absence of rogue consignments, the multiplicity of tomatoes sellers in a market does not generally engender a wide spread of prices; indeed, this is what a free market is all about; ultimately, an equilibrium price with minimal deviations will always evolve.
In reality, centralized price control promotes corruption and is generally also a precursor of market distortions and inefficiency, as currently evident with CBN’s monopoly of the foreign exchange market. This odious practice promotes the interest of the banks and the operators of a collaborative government structure, at the expense of over 90% of Nigerians, whose welfare and sense of dignity have become deflated by this conscious oppressive payment model.
SAVE THE NAIRA, SAVE NIGERIANS!!