“Dealing with the excess liquidity challenge requires innovative approaches in view of the source of the problem.  One potentially enduring solution, which would avoid the creation of new money and boost the naira value in the foreign exchange market, relates to the allocation of foreign exchange earned from oil to the three tiers of government rather than monetizing it.  But this may be a recipe for capital flight.  Therefore, the Central Bank would need to develop capacity for liquidity forecasting and programming”. Vision 20:2020 ‘Monetary Policy Thrust’ 

In reality, the success or failure of any economy is generally predicated on its monetary strategy, thus, abundant endowment of mineral and agricultural resources alone will not necessarily deliver inclusive economic growth. Consequently, the success of Vision 20:2020 may well rest on the strength of its monetary policy thrust.

Indeed, the monetary policy thrust statement quoted above can be translated into simple English for better understanding as follows:

“We have failed to combat the unusual challenge of systemic surplus Naira which fuels inflation and instigates a weak Naira and very high cost of funds; furthermore, we recognise that Naira surplus, also sustains the reckless strategy of placing government deposits at zero percent while government simultaneously, borrows with double digit interest rates and crowd out the real sector from access to cheap loanable funds. 

“Thus, the failure of our economy is rooted in our reluctance to tackle the source of unyielding Naira surplus which results when CBN monetizes, read as, creates/prints fresh Naira supply as substitute for distributable dollar revenue. Nonetheless, we recognise that if we stopped such monthly creation of additional Naira supply, the Naira value would be boosted in the foreign exchange market”. 

We the 20:2020 Visioners also recognise that if dollar revenue is allocated in its pristine form instead of substituting Naira, this will stop the creation of the economically disenabling Naira surplus, but it may inadvertently also facilitate money laundering and speculative repatriation of Nigeria’s dollar reserves. Consequently, in order to avert such “illegal” forex outflow, the substitution of fresh Naira supply, for dollar derived revenue will continue!”

However, “if we must continue to increase money supply with Naira substitution, the CBN will need to develop its capacity to predict the extent of Naira surplus that is desirable in order to minimise an inflationary spiral!” (End of translation)

In reality, we can confidently conclude that CBN’s preferred strategy of liquidity forecasting and programming has failed, because six years after the launch of the Vision, inflation still remains untamed, and cost of funds remains over 20%, and government continues to borrow money it intends to keep idle at over 10%, while the Naira exchange rate also continues to depreciate inspite of increasingly buoyant reserves. 

Nonetheless, our regular readers will notice that the monetary policy thrust statement clearly agrees with our prescription for economic remediation of the listed economic contradictions; notwithstanding, the 20:2020 Visioners regrettably concluded that the payment of dollar allocations will lead to capital flight!   

Truthfully, in view of the abysmal level of greed, lack of patriotism, and ineffective sanctions for indicted treasury looters, it is indeed likely, that raw dollar allocations may truly worsen the outflow of our export dollar revenue. Nonetheless, it is not true that capital flight will increase if dollar certificates rather than actual dollar cash served as instruments for allocations of dollar revenue.

In the rest of this article, we shall examine whether the process of Naira substitution for dollar revenue as currently practised serves as better protection of the federation’s dollar reserves than an allocation process that adopts dollar certificates which can only be available as legal tender (for domestic spending) after beneficiaries have exchanged their certificates for Naira sums at prevailing market exchange rates from commercial banks.
The comparison is as follows:

1. Under the current system, the CBN captures the dollars and creates new Naira supply as allocations, while, the dollar values remain temporarily domiciled with CBN.

2. The constitutional beneficiaries lodge their hundreds of billions of Naira allocations in banks and thereby provide banks with the leverage to instigate systemic surplus Naira to expand their capacity to create credit and fuel inflation.

3. The CBN, with its monopolistic ‘good fortune’ as suppliers of over 80% of the dollar market, auctions only part of its dollar cache to banks and Bureau De Change; thus, with available surplus Naira chasing relatively limited dollars, the Naira exchange rate weakens as banks and Bureau De Change speculatively purchase dollars from CBN auctions. Ultimately, despite the 20:2020 Visioners’ anxiety on capital flight, CBN ironically immediately transfers the dollars sold into the direct custody of beneficiary banks and BDCs; consequently, the CBN’s dollar balances are reduced accordingly. 

4. The banks and BDCs in turn add their profit margins, which may exceed the current N7/dollar before selling to their customers, who may be importers or indeed government parastatals and ministries, who were the original owners from whom the auctioned dollars were earlier captured by CBN for fear of capital flight!

5. The BDC allocations become the primary source of funding the nefarious activities of treasury looters, currency traffickers and smugglers, despite their obvious threat to  Nigeria’s economic and industrial growth and security; similarly, the banks can also roundtrip or speculatively hoard their dollar purchases to create disenabling market distortions.

1. Conversely, with dollar certificate for allocations, the CBN does not need to create new Naira supply, with the attendant destabilising economic consequences; furthermore, the dollar cash remains domiciled in the CBN instead of the usual direct liberal dispersal to the custody of banks and BDCs.

2. Government beneficiaries of dollar certificates approach banks to convert their dollars to Naira in a market where more dollars chase relatively static Naira balances, as no additional Naira supply has been freshly created by CBN; consequently, the Naira exchange rate becomes stronger while the dollar reserves still remain stable in CBN’s custody.

3. The banks would also domicile the dollars bought from government Agencies in domiciliary accounts with CBN, thus preventing liberal access to dollars for round tripping and money laundering. The unforced error of dollar allocations to Bureau De Change will become unnecessary. 

4. In case governments or its agencies require imports, they simply surrender their dollar certificates through banks to CBN so that the government Agency’s domiciliary accounts with CBN can be debited with the dollar value of their imports. Ultimately, payment for such imports will be made directly by CBN to overseas suppliers on sight of documentary confirmation of satisfactory shipment of such orders. 

5. Private sector importers would buy dollars at open market exchange rates from banks to cover their invoice values. The banks would simply instruct CBN to pay the respective overseas suppliers by debiting their (Commercial banks’) domiciliary accounts with the Apex bank as soon as the CBN receives documentary confirmation from the banks that shipment of imports has been satisfactorily effected.

Obviously, under this arrangement, there is minimum tolerance for unsubstantiated forex outflow or capital flight.