23

Mar

ECONOMY & RESERVES: BETWEEN THE TRUTH AND GOVERNMENT CLARIFICATIONS 04032013

2013-03-04

ECONOMY & RESERVES: BETWEEN THE TRUTH AND GOVERNMENT CLARIFICATIONS
BY LES LEBA

In apparent response to the Action Congress' admonition that the nation's economy was "gradually grinding to a halt", the Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, unexpectedly painted a brighter economic picture, and sought to clarify popular misconceptions on the issues of our external reserves and the alleged discrepancies between reported reserves balances of  the Finance Ministry and the Central Bank of Nigeria (CBN).  Regrettably, however, the canvassed positive indices of GDP growth and claims of fiscal prudence are not corroborated by the ugly reality on ground.  

In the light of the apparent depraved level of wastages and corruption in the management of public funds, remedial fiscal surgery would require an amputative scalpel rather than a fine and delicate surgical blade like Okonjo-Iweala's resolve to reduce the usual bloated recurrent expenditure in annual steps of 2%!

Inexplicably, also, neither privatization of the wasteful drainpipes of public enterprises nor the elimination of hundreds of thousands of ghost workers from the public service, nor innovations in the public procurement process have so far fulfilled popular expectation for leaner, more transparent and efficient resource application in public service.

Despite Okonjo-Iweala’s tripartite classification of reserves, the process of consolidating both the excess crude and CBN's component of reserves remains hazy in public consciousness, as the Excess Crude Account unnecessarily accommodates increasing budget deficits and national debt!  Paradoxically, such avoidable deficits are ultimately funded by borrowing at costs, which exceed such risk-free sovereign debts elsewhere!

Consequently, the nagging question is how surplus revenue kept idle in a designated Excess Crude Account can exist side by side with increasing budget deficits, which are ironically financed by borrowing at rates often above 15%!  

The truth, of course is that such inexplicable faux pas will become inevitable so long as government deliberately understates the crude oil price benchmark in the computation of each year's budget.  

Besides, a centrally managed surplus revenue account has no constitutional backing, even in our pseudo-democratic federal constitution!

Furthermore, the process of consolidating CBN's lion share of reserves is equally bizarre; it is often suggested that the bigger the CBN's share of reserves, the stronger also will be the naira, and the economy, but the reverse is the case with our economy

This defective policy framework may be better explained in five related stepwise scenarios/consequences, with the example of $1bn as part of distributable government income in one month.  So, let us proceed accordingly with; scene-1, where CBN captures the $1bn and prints/creates (read as monetizes) N160bn as statutory allocations, which are domiciled in the bank accounts of the three tiers of government.  

Scene-2; the banks enjoy a ten-fold leverage on the fresh naira inflow, with an enhanced credit capacity, which could suffocate the money market with excess spending power (excess liquidity)!  

Scene-3; to prevent too much naira chasing too few goods (rapid inflation), CBN 'altruistically' steps in to borrow money it does not need at over 10% from the banks! 

Scene-4; in order to further avert liberal access to excess cheap funds in the market, CBN increases its Monetary Policy Control Rate to force the banks to increase their own lending rates, and thereby restrain the motivation for customers to borrow, because of the crushing high cost of funds! 

Consequently, costs of funds, often above 20%, reduces the prospects of industrial growth and the creation of increasing job opportunities while irrepressible inflation and contracting consumer demand prevail nationwide.

Additionally, ministries and state governments that require dollars for their imports are constrained to buy back such dollars from banks who are the prime beneficiaries of CBN auctions.

Worse still, naira exchange rate comes under threat as increasing surplus naira in the money market chase the rationed dollars auctioned weekly by CBN!  The market dynamics of demand and supply consequently become unfavourably skewed against the naira, particularly more so, whenever CBN's total forex auction in the month falls below the $1bn earlier captured in Scene-1!

Furthermore, the less dollars sold by CBN, the larger will be the size of CBN reserves, but the weaker also will be the naira, as less and less dollars become pitched against excess naira in the market.  The gap between official and black market naira rates inevitably widens.

Scene-5; in order to reduce the gap between the black market and the official exchange rates, CBN commits the unforced error of allocating dollars to Bureau de Change, who  in turn fund the requirements of treasury looters and smugglers of contrabands, not minding the adverse impacts of such misguided dollar supply on the economy.

Instructively, despite a gasping manufacturing sector and deepening poverty nationwide, banks and other speculative foreign investors celebrate another bumper year!!  

This cannot be international best practice as claimed by government!

SAVE THE NAIRA, SAVE NIGERIANS!!