SYSTEMIC SURPLUS NAIRA AS ECONOMIC POISON
BY: HENRY BOYO
In last week's article, we discussed the adverse consequences of a flagging naira exchange rate, and observed that historical evidence suggests that further naira depreciation would simply deepen poverty nationwide. However, we also noted that available evidence, in fact, suggests that the naira exchange rate has ironically, steadily dipped inversely with vastly improved foreign reserves and extended imports demand cover".
Hereafter, we will provide answers to some questions relating to the primary cause of a constantly depreciating naira despite bountiful dollar revenue predominantly garnered from crude oil export.
QUESTION: Why have you relentlessly campaigned for a stronger naira for over 10 years?
ANSWER: By 2001, I became concerned that in spite of our rapidly increasing dollar reserves, the naira exchange rate inexplicably continued to depreciate below the N80:$1, which existed prior to our return to democracy. I considered this outcome to be an anomaly, especially when it was clear that our relatively buoyant reserves were officially reported to provide extended imports cover than was possible with the existing $4bn total reserves between 1996 and 2000.
QUESTION: What was responsible for the weaker exchange rate despite more bountiful reserves?
ANSWER: Well, it was clear that the weaker naira was not actually the result of dwindling exports revenue, and it was worrisome that the Economic Management Team also insisted that there was surplus naira supply in the system, even when the real sector, particularly the Small and Medium Enterprises (SMEs), bitterly complained of lack of access to cheap funds.
QUESTION: So, what causes the surplus naira in the system, and why is it not available to the real sector at reasonable costs?
ANSWER: After several months of diligent observation, it became clear that the destabilising burden of excess naira supply is accentuated every month, whenever hundreds of billions of naira allocations are paid into the bank accounts of the three tiers of government.
QUESTION: Are you saying that it is wrong to make these allocations?
ANSWER: No; it is constitutionally appropriate to make monthly revenue allocations, but it was disturbing that in spite of the reality that 80 per cent of government revenue was denominated in billions of dollars from crude oil export, surprisingly, only naira values were ultimately distributed.
QUESTION: What happened to the original dollar revenue?
ANSWER: It was clear, therefore, that someone or some government agency had unilaterally substituted naira allocations for the distributable dollar revenue at their own unilaterally determined rate of exchange, (contrary to the provisions of Section 162 of the 1999 Constitution).
QUESTION: How does the ensuing consolidated bloated naira allocations affect the economy?
ANSWER: If, for example, the CBN substitutes a fresh supply of N160bn as the equivalent of $1bn revenue, such fresh naira cash inflow would support almost a ten-fold leverage in the credit capacity of commercial banks. Thus, if the mandatory cash reserve ratio stood at 10 per cent, the banks will consequently, have an enhanced capacity to lend out about N1600bn, instead of the actual initial deposit of N160bn.
QUESTION: Is this what is generally termed as excess liquidity?
ANSWER: Yes, if the banks were to take full advantage of their enhanced credit capacity to liberally extend loans, this would induce excessive demand with so much easy money being available for bank loans for all forms of consumptions.
QUESTION: This would lead to inflation. Wouldn't it?
ANSWER: Yes, it would; as you know, too much money chasing too few goods would precipitate an inflationary spiral, which will quietly deepen poverty. Similarly, excess naira chasing rationed dollar supply will also weaken the naira exchange rate.
QUESTION: So, how does Central Bank react to such a situation?
ANSWER: The Central Bank “altruistically” steps in and offers to borrow and reduce the bloated size of cash and credit available, by offering mouthwatering double-digit interest rates to commercial banks, to encourage them to part with some of the perceived surplus funds in their custody.
QUESTION: How do the banks react to the CBN's strategy?
ANSWER: The banks are, of course, happy to lend government's money back to government at between 10 and 16 per cent interest rates, as belatedly revealed by Lamido Sanusi, last year. Thus, with such abnormally huge returns for what are actually sovereign risk-free loans, it is not surprising that the banks show little interest in lending to an infrastructurally-challenged real sector.
QUESTION: Do you mean that the CBN is actually responsible for the high interest rates charged by the banks?
ANSWER: Yes, the CBN’s objective is to restrain access to the surplus funds in the system, so as to arrest inflation; higher interest rates, clearly, remains a useful deterrent to borrowing. Regrettably, other public sector borrowings will inevitably also suffer the resultant oppressive cost of funds.
QUESTION: So, what does the CBN do with the funds it mops up at such high cost?
ANSWER: Curiously, those funds so borrowed by CBN are simply kept idle; the objective of CBN’s borrowing is to reduce spending. It will, therefore, result in misapplication (compounded naira surplus) if the borrowed funds are again made available by the same CBN for either public or private spending.
QUESTION: You can't be serious!
ANSWER: No, this is no joke. Indeed, this kind of socially oppressive borrowing by government, annually increases the size of our national debt, and it costs the nation over N300bn to service such debts annually.
QUESTION: How does the surplus naira affect the exchange rate?
ANSWER: Well, it is a matter of supply and demand; CBN's unilateral substitution of naira for dollar revenue inevitably induces the destabilising burden of excess naira supply. Consequently, with available naira values in multiple fold excess of the actual amount of substituted dollar revenue, the naira exchange rate will inevitably, consistently fall against the dollar in the money market. As I say, it is simply a matter of demand and supply.
QUESTION: So, are you saying that the naira rate has nothing to do with productivity and a diversified economy?
ANSWER: In reality, our rebased Gross Domestic Product is a clear indication of increased productivity; however, it is inexplicable that despite the almost doubled GDP, the naira exchange rate has ironically continued to weaken in the last 20 years.
Indeed, the expectation of a diversified and inclusive economy with increasing job creating opportunities will hardly materialize, so long as government consciously continues to borrow back its own money at double-digit interest rates, while actively preventing access to adequate and supportive cost of funds to the real sector, particularly the SMEs, which are the engines of growth in all economies.
Fortunately, however, allocation of dollar revenue with “dollar certificates” is undoubtedly a potent antidote to the economic poison of surplus cash in our developmental strategy. (See “The Sensible Path to Economic Prosperity” of March 2013, at www.lesleba.com)
SAVE THE NAIRA, SAVE NIGERIANS