IS CBN DEFENDING THE NAIRA OR DOLLAR?
BY HENRY BOYO
Clearly, the travails currently confronting our economy are as daunting as the challenges we faced as a nation during the IMF inspired Structural Adjustment Programme (SAP) of the late 80s and early 1990s. It is apparent that the serial Naira devaluations, from stronger than one Naira to one dollar to what appeared to be an abysmal low of about N70=$1 at that time, was the most significant cause of the tragic economic somersault caused by SAP. The once pulsating engines of our expanding industrial base soon became almost silent, with increasing idle capacity, which threw millions of our countrymen into a famished job market.
Worse still, those lucky Nigerians who were still employed, regrettably earned wages and salaries which were reduced to ‘peanuts’ by the twin bullets of Naira’s suffocating devaluation and inflation; inevitably, the ‘check out’ syndrome became fashionable, and well heeled professionals, and technocrats sought greener pastures abroad in order to maintain their accustomed lifestyles; the brain drain, particularly amongst our youths, now approaches epidemic proportions. Sadly, the impact of the near fatal blows from SAP still impairs our development till this day, and Nigeria has since remained listed as one of the world’s poorest nations.
Curiously, not even exceptionally high crude prices, between $100-$140/barrel, and the attendant bountiful dollar reserves accumulated in latter years, succeeded in redeeming our economy and improving social welfare. Inexplicably, increasing dollar reserves, with extended payments cover for our imports, have continued to foster weaker Naira exchange rates, such that one is forced to wonder if less dollar reserves would actually stimulate a stronger Naira!
Well, we do not have to wonder any longer, as reduced revenue from crude oil prices falling below $60/barrel has clearly constituted another major onslaught on the Naira exchange rate and Nigeria’s economic progress.
It seems that, in our quest for foreign reserves and socially and industrially supportive exchange rates, we now find ourselves in a bizarre twist of “heads you lose, tails I win”. Indeed, as with SAP, IMF has curiously also been in the forefront of the vanguard for further Naira devaluation. The embedded role of IMF technocrats in the management of our economy has also fostered the unfortunate notion, that the Naira is overvalued despite prevailing best ever foreign reserves and extended imports payments cover! Regrettably, government economic blueprints such as NEEDS were formulated with this obtuse mindset and the premise, that inclusive growth cannot be achieved before economic diversification or that fortuitously bountiful reserves should not induce, a stronger Naira exchange rate.
Well, today, the Naira exchange rate is close to the N180=$1 projected to induce economic diversification and growth in the NEEDS blueprint, but clearly, supportive price and exchange rate stability remain, sadly, still unattainable.
Certainly, no economy can succeed when the real sector is constrained to access loanable funds at over 20% while consumer demand remains severely hamstrung with annual inflation rates of 8-12%, or with Naira exchange rate also depreciating, despite increasing reserves and extended import payments cover, or indeed where a government knowingly pays over N600bn interest on loans that are simply kept idle despite an acute shortage of funds to drive SME growth.
Sadly, CBN and our Economic Management Teams have never been able to construct an appropriate foundation which accommodates low cost of funds (3-6%), low inflation rate (1-3%) and a liberalised foreign exchange market to drive the elusive quest for economic diversification.
Nonetheless, politicians, experts, and the public are once again chorusing the need for diversification, and as usual, with the unfortunate misconception that we will get to El Dorado by simply throwing hundreds of billions of Naira at various sub-sectors to induce a vibrant and successful multi-sectoral economy. Indeed, in an economy with a burdensome abiding problem of stupendously surplus Naira, intervention funds, regrettably, only make things worse as they simply compound the problem of eternally surplus Naira when expended; ultimately, the intervention funds instigate another kind of government intervention, which makes it necessary for government to step up its rate of borrowing to mop up increasingly surplus Naira with excruciating and destabilising rates of interest which crowd out the real sector from loanable funds in the market with collateral adverse consequences for inflation, economic growth and job creation.
Clearly, the unyielding burden of ‘eternally’ surplus Naira is actually the major obstacle in the path of achieving those supportive indices necessary to grow and diversify the economy. Regrettably, we refuse to interrogate the process with which CBN consolidates it’s so called “own reserves”! Clearly, CBN’s reserves are consolidated by the process of capturing distributable dollar derived revenue and substituting freshly created Naira values as statutory allocations. This arrangement, undeniably, constantly increases CBN’s cache of dollars but it sadly also, induces the burdensome spectre of surplus cash in the economy; furthermore, the pitching of such eternally surplus Naira against rationed auctions from CBN’s cache of dollars, unwittingly, ultimately protects the dollar market value against the Naira; in which case CBN may have inadvertently become a greater defender of the dollar than the Naira in the foreign exchange rate market!
Ironically, therefore, the higher and more bountiful the dollar revenue (from high crude prices and output) the greater also would be the fresh supply of Naira that CBN would create and unleash on the economy as substitute allocations for dollar derived income.
Consequently, whenever we celebrate CBN’s rising dollar reserves, we must recognise that the accumulation of such reserves, unfortunately, ultimately precipitates an increasing spread of surplus Naira or excess liquidity in the money market; unfortunately, the greater the Naira liquidity the harsher and more counter-productive would ultimately also be CBN’s monetary measures to reduce Naira supply so as to restrain lending and contain inflation despite the adverse consequences of such measures on a prostrate economy.
In view of the foregoing narrative, it seems farcical that the same CBN whose monetary measures actually intimidate and pulverise the Naira in the foreign exchange market can be so wrongly favourably perceived as defending the Naira with its accumulated self-styled “own reserves” which necessitated the “curse” of surplus Naira.
It is ironical that the same Agency which instigates a market disequilibrium in favour of the dollar when it substitutes fresh Naira values for dollar denominated revenue, now turns round in apparent defence of the Naira exchange rate to increasingly auction fractions of the dollars the same CBN earlier captured after substituting and infusing hundreds of billions of Naira into a market already soaked in surplus cash. Unfortunately, such pervasive Naira liquidity invariably precipitates weaker Naira exchange rates when pitched against the rationed auctions of dollars from CBN’s cache.
In this event, the CBN must immediately stop digging itself into a deeper hole with a Naira defence strategy that has consistently worked against the local currency over time to make our people poorer.
Surely, the adoption of dollar certificates for allocations of dollar denominated revenue will eliminate or critically reduce the burden of excess Naira liquidity and therefore give the Naira a fighting chance against the dollar in the foreign exchange market.
SAVE THE NAIRA,SAVE NIGERIANS!!