ECONOMY & RESERVES: BETWEEN THE TRUTH AND GOVERNMENT CLARIFICATIONS
BY HENRY BOYO
In apparent response last year, to the opposition’s ‘alarm’ that the nation's economy was "gradually grinding to a halt", the Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, conversely painted a brighter economic picture, and sought to clarify popular misconceptions on the issue of our external reserves balance of about $45bn and the alleged discrepancies between the reported Excess Crude Account balances of the Finance Ministry and the Central Bank of Nigeria (CBN) reserves.
Regrettably, however, the Minister’s canvassed positive indices of a healthy 6% growth in Gross Domestic Product (GDP) and claims of fiscal prudence are not corroborated by the ugly realities of the bourgeoning national debt of almost N10tn since 2007 (AMCON bonds inclusive), with rising unemployment, near double-digit inflation rate and inexplicable abiding fiscal deficits.
The Finance Minister's response to concerns on high cost of governance was also equally unconvincing. Inexplicably, neither privatization of the erstwhile wasteful drainpipes of public enterprises nor the elimination of hundreds of thousands of ghost workers from the public service, nor touted reforms in the public procurement process have so far fulfilled popular expectation for leaner, more transparent and efficient resource application in public service.
The Minister’s failed resolve to reduce the discomfortingly bloated recurrent expenditure below 70 percent of budget in annual steps of just two percent also compromises any serious commitment to rapidly effect meaningful change in the present unhealthy fiscal imbalance!
Furthermore, despite the Minister’s tripartite classification of reserves, the process of consolidating both the excess crude and CBN's component of reserves still remains hazy in public consciousness. For example, the accumulations in Excess Crude Account (ECA) actually have, as a negative collateral, the unnecessary accommodation of increasing budget deficits and national debt! Paradoxically, such avoidable deficits are ultimately funded by borrowing at oppressive costs, which are widely at variance for such risk-free sovereign debts elsewhere!
Nonetheless, the related nagging question must be how allegedly ‘surplus revenue’ warehoused with minimal yield in a designated ECA can exist side by side with increasing budget deficits, which are ironically financed by borrowing at rates often above 15 percent! It is also worrisome that proceeds from the ECA are also consumed in the same fiscal year often without appropriation despite the oppressive loans.
Indeed, such inexplicable faux pas will remain inevitable so long as government deliberately understates the crude oil price benchmark in each year's budget. Thus, for example, if crude prices remain at an average of $100/barrel when adopted budget benchmark is only $70/barrel, this would mean a surplus of $30/barrel or a consolidated ‘surplus’ of almost $30bn annually from an average output of 2.5m barrels/day.
Do not ask why the idle surplus reserves cannot be used to plug the deficit rather than the questionable resort to borrowing at atrocious rates of interest!
Similarly, the process of consolidating CBN's lion share of over $32bn out of total external reserves of about $40bn is equally bizarre; it is often suggested that the bigger the CBN's share of external reserves, the stronger will be the economy and CBN’s capacity to defend the naira. On scrutiny, however, rising CBN reserves, within the prevailing monetary policy framework, actually threatens naira exchange rate and instigates a destabilizing anti-social ripple in the economy.
Let us explain the dysfunctional impact of this framework with an example of $1bn revenue allocation to constitutional beneficiaries in eight related stepwise scenarios/consequences. In scene-1, the CBN unconstitutionally captures the distributable $1bn revenue as part of its reserves and prints/creates (read as monetizes) fresh supply of N160bn as statutory allocations, which are deposited in the bank accounts of beneficiaries.
Scene-2; the banks enjoy almost ten-fold leverage on the fresh naira inflow, creating an enhanced credit capacity, which suffocates the money market with excess spending power (excess liquidity)!
Scene-3; in response to the threat of inflation, the CBN 'altruistically' steps in to sell treasury bills to borrow hundreds of billions of Naira it does not need at a cost of about 10 percent from the banks in an attempt to reduce the volume of cash in the market; since the borrowed funds were not intended for any useful application, they are consequently deliberately kept idle despite the attendant oppressive cost of such loans!
Scene-4; in a further attempt to prevent liberal access to cheap excess funds in the market, CBN increases its Monetary Policy Control Rate to instigate banks to raise their own lending rates.
Consequently, interest rates rise above 20 percent and reduce the prospects of industrial growth and the creation of increasing job opportunities while irrepressible inflation and contracting consumer demand prevail nationwide.
Scene-5, ministries and state governments, who require imports, are constrained to buy back dollars from banks who become the prime beneficiaries of the dollars CBN auctions from the stock of foreign exchange it earlier impounded, in Scene 1 above.
Scene-6, the less dollars sold by CBN, the larger are CBN’s reserves, but the weaker also will be the naira and the higher would be the value of fuel subsidies, as less and less dollars become pitched against the excess naira induced by CBN. The market dynamics of demand and supply consequently become unfavourably skewed against the naira, particularly more so, whenever CBN's total monthly forex auctions to banks and Bureau De Change fall below the $1bn earlier unconstitutionally captured in Scene-1! Consequently, with the contrived short supply of dollars by CBN, the gap between official and black market naira rates inevitably widens.
Scene-7; in order to reduce the gap between the black market and the official rates of exchange, the 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.
Scene-8, despite a gasping manufacturing sector, increasing unemployment, and deepening poverty nationwide, the banks and other speculative foreign investors celebrate another bumper year!!
Instructively, therefore, if the substitution of Naira allocations for $1bn revenue wreaks such havoc on all facets of the economy, you can imagine what happens if, public sector dollar revenue ‘fortuitously’ grows to $5bn, which the CBN would similarly hoard while substituting bloated Naira allocations to government beneficiaries. Thus, for CBN reserves to grow under the current monetary framework, cost of funds must continue to rise, inflation must remain high and unemployment and poverty must consequently deepen nationwide. You don’t have to believe me but recent history confirms that our national misery index has risen curiously, simultaneously with rising CBN reserves!
The above article was first published in March last year, the new CBN Governor will be well advised to resolve the issues raised if he expects to fulfill his prime mandate of price stability; but I daresay this objective would remain elusive so long as the CBN maintains its stranglehold monopoly on the foreign exchange market!
SAVE THE NAIRA, SAVE NIGERIANS!!