THE SENSIBLE PATH TO ECONOMIC PROSPERITY
BY LES LEBA
This column has consistently maintained that the root cause of our economic paradox of increasing income, with unbridled unemployment rate, and deepening poverty will be found in the conscious and incorrect adoption of a faulty process for the infusion of our crude export dollar revenue into the economy.
In order to facilitate readers’ understanding of our prescription, we will juxtapose the related consequences of the Current Payment Model (CPM) against the Advocated Payment Model (APM) in the distribution of $1bn export revenue, for example, to the three tiers of government! We will rely on the same eight step related scenarios adopted in an earlier article titled "ECONOMY AND RESERVES: BETWEEN THE TRUTH AND GOVERNMENT CLARIFICATIONS" to explain the disenabling impact of the current payment model.
Thus, Scene-1, CPM: CBN unilaterally determines naira exchange rate and unconstitutionally captures the distributable $1bn revenue and prints/creates (read as monetizes) N160bn as statutory allocations, which are domiciled in the commercial bank accounts of beneficiaries!
Scene-1, APM: The $1bn is not substituted with N160bn; instead, beneficiaries receive dollar certificates for their respective portions of allocation, and the $1bn remains domiciled with the CBN, while naira exchange rate is determined by market demand and supply.
Scene-2, CPM: The banks enjoy almost ten-fold leverage on the fresh naira inflow, with an enhanced credit capacity, which could suffocate the money market with excess spending power, and fuel inflation!
Scene-2, APM: With strictly dollar allocations, the supply of naira in the system remains the same, and cannot therefore instigate the usual disenabling systemic spectre of surplus naira.
Scene-3, CPM: In response to the threat of rising inflation, the CBN 'altruistically' steps in with treasury bills to borrow money it does not need at over 10 percent from the banks, to curb inflation. Despite the oppressive cost, the borrowed funds are simply kept idle!
Scene-3, APM: In the absence of the usual naira surplus, CBN does not have to borrow money it does not need at over 10%; consequently, our increasingly oppressive debt burden would cease! Banks would have no choice but to chase the real sector for business!
Scene-4, CPM: In order to further prevent liberal access to excess cheap funds in the market, CBN increases its Monetary Policy Control Rate (MPR) to instigate the banks to increase their own lending rates, and thereby restrain the motivation for customers to borrow, in the light of existing crushing cost of funds! Consequently, interest rates, often above 20 percent, reduce the prospects of industrial growth and the creation of increasing job opportunities while irrepressible inflation and contracting consumer demand prevail nationwide.
Scene-4, APM: In the absence of the usual excess naira and heavy government borrowing, CBN would reduce its Monetary Policy (control) Rate (MPR); commercial banks will consequently drop their interest rates across the board to single digit, so that businesses can access cheaper funds to finance new businesses as well as grow existing industries with increasing employment opportunities.
Scene-5, CPM: Ministries and State Governments, who require imports, are constrained to buy back dollars from banks who are the prime beneficiaries of CBN dollar auctions. Ultimately, naira exchange rate comes under threat as increasingly surplus naira in the market chase the rationed dollars auctioned weekly by the CBN! The market dynamics of demand and supply consequently become unfavourably skewed against the naira, particularly more so, whenever CBN's total monthly forex auction falls below the $1bn earlier unconstitutionally captured in Scene-1!
Scene-5, APM: The three tiers of government own actual dollar values domiciled with the CBN; however, these government agencies can exchange for naira, all or portions of their dollar allocations from time to time, directly through commercial banks. Thus, the usual naira surge when CBN prints/creates fresh naira balances for allocations of dollar revenue will cease; inevitably, the naira will become stronger against the dollar in the forex market!
Scene-6, CPM: The less dollars sold by CBN, the larger are CBN’s 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 consequently widens.
Scene-6, APM: The usual bi-weekly CBN dollar auctions will also cease, as constitutional beneficiaries directly trade their dollar certificates for existing naira balances with banks; (since dollar certificates are not legal tender in Nigeria). The dollars, however, will remain domiciled with the CBN, irrespective of ultimate buyer!
Scene-7, CPM: In order to reduce the gap between the black market and the official rates of exchange, CBN commits the unforced error of allocating dollars to Bureau de Change, who in turn funds the requirements of treasury looters and smugglers of contrabands, not minding the adverse impacts of such misguided dollar supply on the economy. Indeed, such monetary policy management must be far from international best practice!
Scene-7, APM: In the absence of the usual liberal spectre of surplus naira, banks become wary of over committing their naira balances to just foreign exchange purchases. The black market for the dollar will rapidly contract, while the motivation for smuggling and money laundering will similarly be curtailed.
Scene-8, CPM: Despite a gasping manufacturing sector and deepening poverty nationwide, the banks and other speculative foreign investors celebrate another bumper year!!
Scene-8, APM: The absence of systemic excess naira will promote single digit and lower inflation rates with positive knock-on impact for increasing consumer demand, industrial consolidation and job opportunities. A stronger naira will drive down fuel prices and ultimately eliminate subsidies!
SAVE THE NAIRA, SAVE NIGERIANS!!