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                                                                                                 WHY HIGHER OIL PRICES CRIPPLE THE ECONOMY
                                                                                          By: Sir Henry Olujimi Boyo (Les Leba) republished in June 2015

Last week, this column republished ‘Victims of Devaluation’. The article discussed faulty monetary practices carried out by the CBN that serve to degrade Nigerians’ quality of living.

(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)

This week’s republication poses relevant questions in an interview format, to which clear responses are given for readers of this column to understand the connection between the Naira exchange rate, oil prices, and how they impact the welfare of local businesses and Nigerians.

As you read through the below article taking note of previous events and rates, keep in mind its first republication (2015), a clear indication that Nigeria’s economic situation has indeed worsened.

The crash in crude oil price is usually identified as the major contributor to the prevailing parlous state of our economy; clearly, the drop in oil prices from over $120/barrel to a humbler price below $50/barrel and the significant drop in output, certainly reduced revenue inflow. Thus, one may be tempted to suggest that if "fortuitously", oil prices soar well above $120/barrel, once more, with production also constantly exceeding 2.5mbd, our revenue base should expectedly flourish and all will be well again.

Hereafter, we shall examine this popular perception in the following interrogative narrative.

Q)  Will higher oil prices and output be a blessing to Nigerians?
The popular expectation that increasingly bountiful oil revenue will assuage our economic distress may not actually stand up to scrutiny. We may recall that even when oil price approached $150/barrel, with a dollar reserve windfall above $60bn, more Nigerians inexplicably joined the ranks of the poor with a subsistence income of less than $2/day!

Q)  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 when we earn increasingly more dollar revenue. But the reason is quite simple; for example, if China were to immediately create the Yuan equivalent for her trillions of dollars export earnings, what do you think will happen to the Chinese economy; of course, the local currency will become embarrassingly surplus everywhere and will inevitably quickly lose much of its purchasing value. Ultimately, even the Chinese will prefer to hold a more stable currency than their own Yuan; indeed, any country that subjects their currency to such reckless humiliation will inevitably turn bountiful export earnings into a curse! This is exactly what increasing dollar export revenue from higher crude oil prices and output does to the Naira and Nigerians.

Q) Are you saying that increasing dollar earnings is actually the cause of the unrelenting burden of too much naira in the system?
Yes, that is so and until the current misguided system of infusing export dollar revenue into the system is stopped, it would be better for us to pray that oil prices do not rise to enhance our export earnings!

Q)  How can systemic surplus cash be a problem when both the public and private sectors have severe funding deprivation?
That is the irony of the obtuse monetary strategy that the monetary authorities embrace; it is equally inexplicable, that cost of funds should also become more expensive when cash is surplus.

Q)  Why is it that the surplus money cannot be put to good economic use?
Well, the Central Bank which has the mandate for monetary policy management creates hurdles that discourage liberal access to the readily available surplus money in the system.

Q)  What sort of hurdles?
First of all, the CBN raises its own price of funds when commercial banks come to borrow to supplement their cash positions. Ultimately, if CBN rates are as high as the current 13%, the banks would in turn lend money to their customers with a profit which may exceed 80% of their own cost of funds as is currently the case. Furthermore, the CBN could also order commercial banks to reduce credit by sequestering increasing portions of their customers' deposits as idle funds; presently, the mandatory cash reserve ratio for banks is 31% of all deposits. These ratios would be reduced if Central Bank wants to encourage credit expansion to increase consumer demand that will induce more investments and create jobs.

Q) So, it's not as if there are no funds to stimulate consumer demand and spur investment.
No, in fact less than 25% of total bank lending capacity of well over N60Tn is currently utilized; this compares unfavorably with a ratio of 130% for China and about 70% for South Africa.

Q) So, why does the CBN put hurdles in the path of bank lending?
Well, the Apex bank is concerned that if the banks utilize all the Naira values substituted for dollar denominated revenue, the resultant rising tide of inflation will reduce the purchasing power of incomes and deepen poverty, particularly amongst the working class.

Q) What is the impact of the special intervention funds from the CBN?
Well, as you can imagine, if the system is already deluged with problematic surplus Naira, the infusion of any additional Naira will only worsen the already suffocating burden of too much money. Consequently, if government makes sectoral interventions with hundreds of billions of Naira when surplus cash is already a problem, you will understand that the impact of spending the additional intervention funds in any manner whatsoever, will simply 'inadvertently' exacerbate the threat of inflation.

Q) Why is it that the naira does not really appreciate in value when oil prices are high and our dollar earnings soar?
This is simply because the increasingly surplus Naira deliberately substituted for export dollar earnings confronts CBN'S rationed dollar supplies in the money market; the resultant forces of supply and demand will inevitably tilt in favor of the dollar so that Naira will be priced lower. We will recall that even when so called reserves approached $60bn, the Naira exchange rate remained stagnant.

Q)  Why is fuel price not cheaper in this country when we have oil in our backyard?
The truth is that 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. For example, if the Naira exchange rate improves to N100=$1, domestic fuel price will immediately fall below the regulated pump price of N87/litre and quietly eliminate any form of subsidy. Indeed, a sales tax of up to 10% can be levied on fuel without breaching the current pump price.

Q)  So how can the Naira exchange rate be improved?
The Naira exchange rate will gradually become stronger despite lower crude oil price, if distributable dollar revenue is not unilaterally substituted with fresh naira values; this is the prime cause of the ever-surplus Naira that gulps up the relatively meager rations of dollars, subsequently, intermittently auctioned by the CBN.

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 precipitated, as both the Federal and State governments are heavily burdened by debt, while workers are owed several months salaries.



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