PROTECTING THE DOLLAR AGAINST THE NAIRA WITH CBN RESERVES
BY LES LEBA
In the light of popular perception regarding the virtue of large reserves, it may seem incredible for anyone to suggest that the process of accumulating reserves by the Central Bank of Nigeria is in reality, actually the primary reason for a low value naira!
Let us begin to expound this observation with the recognition that out of total current national reserves of about $50bn, the excess crude account apparently holds about $9bn, while about $1bn is domiciled in the sovereign wealth account; the balance of about $40bn comprise what CBN proudly claims as its own reserves, which do not technically belong to the federation account, and cannot therefore be appropriated.
Undoubtedly, such unfettered largesse would pose the grave danger of moral hazards; nonetheless, the $40bn cache represents the answer for those Nigerians who wonder how CBN funded a host of social welfare interventions in the recent past; the cash allocations to victims of Kano and Madalla bombings as well as hundreds of millions of cash donations to selected educational institutions, provide ample testimonies of CBN's unfettered discretion to disburse funds from its bountiful reserves. We also recall that after Prof. Soludo’s consolidation exercise, the CBN equally allocated about $500m each, without collaterals, to 14 Nigerian banks, to fund international operations.
In essence, however, the larger the CBN's component of reserves, the deeper also would be poverty nationwide, with the collateral of average annual double-digit rates of inflation and cost of funds to the real sector equally disenabling.
An inquisitive observer may even wonder what business CBN does to garner such bountiful dollar revenue! The answer to this question is actually quite obvious; the CBN earns its dollar revenue by selling back public sector dollars to the true owners of the dollar revenue; i.e. the three tiers of government. Question then is, how does the CBN achieve this sleight of hand?
Our annual fiscal plans indicate that over 80 per cent of budgeted revenue come from crude oil export, while the balance is derived from internally generated tax revenue. Curiously, however, all monthly allocations to the three tiers of government are fully denominated in naira; the implication, therefore, is that the dollar component of the distributable revenue has obviously been captured and substituted with freshly minted naira allocations, at a rate of exchange that is unilaterally determined by the CBN, with a cursory glance, at prevailing rates in the black market for guidance! Thus, CBN can literally keep printing more naira to buy up increases in dollar revenue!
Evidently, within such a framework the size of naira allocations would definitely increase as dollar revenue also rises; thus, for example, a distributable monthly dollar revenue of N1bn would translate to CBN's cash injection of about N160bn, while $5bn dollar revenue would result in a bloated injection of N800bn fresh funds into the money market.
Consequently,, the larger the naira cash injections, the greater will be the problem of surplus cash or excess liquidity, which is defined as that amount of cash over and above what a bank is legally required to hold for its day to day operations.
Instructively, the greater the extent of excess liquidity, the more urgent will be the need to reduce the cash surfeit, so as to combat the threat of inflation. The process of excess liquidity reduction forces CBN to return to the money market to borrow back some of the burdensome systemic cash surplus. To this end, the CBN would gallantly stride into the money market and offer to pay the commercial banks mouthwatering double digit interest rates to induce them to part with some of the surplus cash in their till!!
In this manner, the CBN competes with genuine manufacturers and industrialists for market funds, and ultimately outbids the real sector, which cannot normally survive if it borrows at a higher cost than the oppressive rates aggressively offered by government. Thus, apart from increased cost of funds to the real sector, the related collateral to this odious market scenario includes a shrinking industrial landscape, an annual inflationary average of about 10 per cent, increasing rate of unemployment, as well as increasing national debt and related service charges.
Curiously, the impact of CBN's naira substitution for dollar revenue is probably less obvious with regard to naira/dollar exchange rate, even though it is easy to recognize that pitching increasing naira against relatively rationed dollars in the market should predictably lead to a weaker naira rate of exchange, while conversely, pitching more dollars against more stable naira in the market will similarly lead to a stronger naira rate of exchange.
As earlier discussed, rising distributable dollar revenue leads to fresh injection of hundreds of billions of naira on which banks can leverage to create the burdensome spectre of excess cash, which may then become ultimately pitched against the rationed dollar sums, sold in bi-weekly auctions by the CBN.
It is not surprising, therefore, that in consonance with open market supply and demand mechanism, humongous naira sums chasing relatively rationed sums of dollar will lead to a weaker exchange rate for the naira. In such market place, therefore, CBN's self-styled share of dollar reserves will certainly increase whenever CBN auctions less dollars in the forex market, notwithstanding the reality that the less dollars offered for auction, the greater will be the demand for dollars, and ultimately the weaker also will be the naira rate of exchange!!
Consequently, Nigerians have to be wary about celebrating optical increases in CBN's share of dollar reserves, as quite clearly, the current arrangement forebodes doom for the naira rate of exchange, and ultimately also for the domestic purchasing power of our naira with oppressive social and economic consequences.
Nonetheless, our seeming economic dilemma will be favourably resolved by the adoption of dollar certificates for the payment of allocations of dollar-derived revenue.
SAVE THE NAIRA, SAVE NIGERIANS!!