SAVE THE NAIRA SAVE NIGERIANS
BY HENRY BOYO
“Let me issue and control a nation’s money and I care not who writes the Laws” Mayer Amschel Rothschild (1714-1812).
“I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.” Reginald McKenna, Chairman of the Midland Bank, 1924.
One may ask what these quotes have to do with the above title. In reality, however, the unsung collaboration in creating money between our Central Bank and our Money Deposit Banks, infact, has a lot to do with our social welfare, particularly with regard to the adverse consequences of such collaboration on the rate of inflation, the cost of funds and ultimately on the exchange value of the Naira.
Regrettably, successive CBN Governors, have knowingly instigated and liberally expanded the capacity of our banks to create money, such that the Nigerian economy has become oppressively retarded by an enduring suffocation with surplus Naira, otherwise known as, excess liquidity. The resultant systemic Naira surplus endlessly chase relatively limited goods and services and inevitably leads to the need to part with much more Naira for whatever we buy; consequently, the Naira has ultimately commanded less and less purchasing power with uncaged Naira surplus.
Similarly, with excess Naira supply and contrived dollar scarcity by CBN, more Naira will be demanded for each unit of dollar offered; inexplicably, however, cost of funds have remained very high despite increasingly excess Naira supply!
The above contradiction and the attendant adverse consequences for inclusive economic growth, favoured the adoption of the bye-line “SAVE THE NAIRA, SAVE NIGERIANS” in hundreds of this writer’s articles since 2004.
The slogan succinctly captures the essential message that protecting the value of the Naira will redeem millions of Nigerians from deepening poverty. Senior citizens, still remember with nostalgia the pronounced swagger of Nigerians, domestically and internationally, at a time the Naira exchanged for 50 kobo to $1. Ironically, this evident affluence and the bourgeoning industrial landscape existed when Nigeria’s foreign reserve was far short of $10bn with Gross Domestic Product well below one tenth of the current $500bn plus; clearly, the albatross of surplus Naira and the contradiction of high cost of funds were not abiding features of the money market during that golden era.
Subsequently, however, after the adoption of the IMF Inspired Structural Adjustment Programme, distortions associated with increasingly systemic Naira excess began to manifest. Nevertheless, the expert management of money supply (money creation) by the Late Prof. Sam Aluko, who was Economic Adviser between 1995-98 kept the challenges and distortions of excess Naira supply at bay. Thereafter, the flood gates, of unceasing liberal Naira creation by the CBN and banks, were flung open to make the attainment of industrially supportive inflation and monetary policy rates below 3 percent impossible. Ironically, the economic stability of the Aluko years existed with a paltry foreign reserve base of $4b and four months import demand cover which supported an exchange rate of N80 = $1.
Curiously, however, in post Aluko years, much higher export dollar revenue have actually instigated and expanded the capacity of the CBN and commercial banks to recklessly create systemic surplus Naira values which enable banks to lend these Naira values they ‘internally’ created, to government at between 10-16 percent rates of interest, while inadvertently also, providing the primary feed stock for the extensive ‘slush’ funds in the country.
Nevertheless , CBN’s projections suggest that in 2015, banks may earn well over N600bn from investing the surplus funds they create, in buying treasury bills which CBN sells in order to restrain inflation by reducing the capacity of banks to create more Naira and suffocate the system. The result of the above sleight of hand may be seen as a genuine and legal economic activity, but its impact, is the widening gulf between the very rich and the poor masses. Clearly, with such an easy opportunity for banks to make good money, there is little chance of the real sector getting the support they need to grow the economy. Incidentally, Central Banks in more successful economies elsewhere, rather than pay interest, actually receive a fee of about 1 percent from banks to warehouse their surplus funds.
Nonetheless, the collusion of the CBN with banks in the liberal creation of surplus Naira has an equally damaging impact on the exchange value of our currency; expectedly, if the Naira purchasing power is consistently seriously eroded overtime, the public would eventually loose confidence in the Naira as a store of value, and will therefore shift their holdings to other perceived stable currencies, such as the dollar.
Conversely, if there was Naira scarcity in the market while dollar supply is liberal, then one would normally pay less Naira for each dollar offered; sadly, however the Naira suffered devaluation from N80 in 1998 to N140 = $1 despite our best ever reserves surplus of almost $60bn in 2010, because rapidly increasing Naira supply consistently confronted centrally rationed dollar auctions .
The question therefore is, where does the unceasing excess Naira come from; the answer, evidently is that the spectre of surplus Naira is initiated by the Naira values, CBN creates as monthly allocations in place of dollar derived revenue. The commercial banks, inevitably leverage on the bloated Naira deposits from these allocations to create additional Naira values which precipitate the “evil scourge” of too much Naira with its attendant oppressive distortions to consumer demand, cost of funds and the Naira exchange rate.
Over the years the CBN has laboured in vain to maintain equilibrium in Naira supply; in fact, all strategies adopted, including the present clearly desperate mandatory cash reserve ratios and oppressive CBN monetary policy rate of 13 percent, have so far, failed to effectively restrain the credit capacity of (read as surplus money creation by) the banks.
Yet one strategy that the authorities refuse to countenance is the realistic possibility of eliminating or minimally reducing the burden of surplus Naira by paying the dollar component of monthly allocations with dollar certificates or coupons, which beneficiaries can redeem in Naira at prevailing market rates from any commercial bank! At a stroke, this move will exorcize the curse of surplus Naira as the CBN’s usual impulsive supplementary monthly Naira creations will no longer be available to provide commercial banks with the capacity to, in turn create additional Naira values which expand the distortions caused by erstwhile omnipresent Naira surplus, which inevitably also incapacitates CBN’s otherwise potent monetary instruments for establishing monetary equilibrium.
The longer the monetary authorities remain in denial of this reality, not even the unexpected recovery of oil prices above $100/barrel would save the economy or indeed the Naira from further crashing below N300/$1 this year!
Conversely, even if crude oil prices drop any further below $50/barrel, the burden of surplus Naira will remain, as any huge devaluation beyond N300=$1 will compensate for the drop in distributable dollar revenue to reproduce the oppressive burden of excess liquidity and deepen poverty nationwide.
SAVE THE NAIRA, SAVE NIGERIANS!!