The earlier articles in this series explained why the Naira exchange rate remains the primary obstacle to the removal of Nigeria’s debilitating annual fuel subsidy burden of about N1 trillion. Clearly, weaker Naira exchange rates induce higher fuel prices; for example, even if crude oil remains as low as $50/barrel; fuel prices will rise above N300/litre if the Naira depreciates to say, N400=$1.

Conversely, the ‘subsidy free’ fuel price of about N150/litre is the product of the current N200=$1 exchange rate with the same crude oil benchmark of $50/barrel.

Similarly, if Naira is much stronger at N100=$1, while crude price remains at $50/barrel, ‘subsidy free’ fuel prices will predictably fall below N75 per barrel i.e. well below the current subsidized market price of N87/litre, thus, creating room for at least N8/litre as possible sales tax. 

Hereafter, we will respond to some frequently asked questions on the recommendation that Naira will increasingly become stronger with adoption of dollar certificates for payment of allocations of dollar denominated revenue to government.

Will the recommendation for dollar certificates not dollarize the economy?

Answer: The affinity for dollar is clearly because vendors find that the US currency serves as a relatively more stable store of value than the Naira. 

Similarly, before 1980, Nigerians also preferred the Naira because it was a safer store of value than the dollar! In retrospect, the Naira was readily, ironically, accepted in major cities like London and New York, at a time, our total foreign reserves hardly approached $10bn! Unfortunately, over the years, domestic transactions have become dollarised by CBN’s monetary strategies which weaken the Naira in the foreign exchange market.

The recommendation for dollar certificates is therefore an attempt to properly reposition the Naira and give it a fair chance to gradually regain strength. Clearly, the Naira exchange rate can be improved with strategic reduction of the unceasingly surplus Naira that constantly confronts the paltry dollar rations which CBN auctions weekly. Consequently, the adoption of dollar certificates/warrants for payment of allocations of dollar derived revenue will most certainly reduce unyielding Naira surplus and skew market equilibrium in favour of the Naira and its adoption as a good store of value.

Why is surplus cash responsible for our economic woes?

Answer: It is ironic that surplus cash should be an obstacle to economic growth, and it is equally inexplicable that surplus funds should also engender the prevailing high cost of borrowing. Nonetheless, any critical observer will not miss the reality that the current unilateral, direct substitution of fresh Naira values as allocations for dollar derived revenue, actually opens up a can of worms. 

This deliberate misguided payments strategy is the source of the unyielding scourge of excess liquidity, which has made the attainment of a prosperous or diversified economy a mirage, despite our abundant resources. The CBN will certainly not deny that so long as there is increasingly unmanageable surplus Naira in the system, income values will not be preserved as inflation will not fall to international best practice rates below 3 percent, neither would cost of funds become industrially supportive across the board at not more than 7 percent; similarly, the Naira exchange rate will keep depreciating to negate public adoption of the Naira as a safe store of value.

Furthermore, fuel prices will continue to soar as the Naira becomes weaker to ultimately also make the outright removal of subsidy very unpopular!

How will dollar certificates minimize excess Naira supply?

Answer: Despite lower crude oil prices, export dollar revenue from crude oil sales still accounts for the lion’s share of annual budgets; government’s income from taxes on domestic economic activities and the rents and dividends from state assets constitute Naira denominated income.

Indeed, while the Naira income derived from local productive activities has minimal inflationary impact, the unilateral substitution of fresh Naira values for crude oil dollar derived revenue, unduly bloats the monthly consolidated Naira allocations to the three tiers of government. Ultimately, the huge, monthly fresh Naira inflow expands the capacity of banks to liberally increase credit which may inadvertently also spur consumer demand to trigger an inflationary spiral in the prices of goods and services. 

In order to stop such inflationary credit expansion, the CBN would embark on tightening the noose by reducing the extent of the new cash inflow which may be advanced as bank credit; for example, the CBN Monetary Policy Committee decided on 20/5/2015, that banks must keep 31 percent of their cash deposits sterile and therefore lend out only 69 percent.

Furthermore, in order to discourage credit expansion and restrain inflation, commercial banks will also pay a high interest rate of 13 percent, whenever they required temporary cash support from CBN. Clearly, if banks paid 13 percent on their own debts, it is not difficult to understand why banks would in turn charge over 20 percent for loans to their customers, including those loans to the real sector, despite their roles as the engine of growth and employers of labour in every successful economy.

However, this unforced stumbling block to economic and social progress will be reversed if the dollar component of monthly revenue allocations were settled with dollar certificates, so that public beneficiaries would approach their banks to exchange their allocations for Naira at a market determined exchange rate, since dollar certificates are not legal tender.

Such a payments reform will engender minimal ‘surplus’ Naira in the system as fresh Naira values are not introduced, whereas, market dollar supply will become liberalized through direct allocations to 36 State Government’s, 774 Local governments and hundreds of government Departments and Agencies.

Ultimately, prevailing inflationary pressures would recede in the absence of the usually bloated allocations which induced excess Naira, so that in consonance with best practice in successful economies everywhere, CBN could then lower its lending rate to banks to 2-3 percent, while banks, could in turn lend to the real sector at between 6-9 percent; furthermore, without the erstwhile domination of available market credit by government and its Agencies, the banks would inevitably become forced to seek out the real sector for business if they (the banks) must survive.

The sustenance of this payments system will gradually improve Naira exchange rate as liberal dollar supplies chase minimal Naira surplus.

Will dollar certificates facilitate treasury looting and repatriation of illicit proceeds?

Answer: No, infact this arrangement will reduce and minimize the opportunities for forex round tripping, and other such illicit capital flows abroad. The porous leakages associated with the failure of the current payments system is clearly evident from regular media reports of the widespread malfeasance in the foreign exchange market and CBN’s apparent inability to curb the excesses.

However, with dollar certificates, the allocated dollar values will remain domiciled in the accounts of institutional holders, (i.e. government and banks) with CBN. Consequently, dollars exchanged for Naira by government beneficiaries from any bank will also remain domiciled with the CBN, and disbursement will ultimately only be made directly to legitimate recipients abroad by the Apex Bank as payments for approved imports and services on receipt of specific instruction from banks who have adequately funded their dollar domiciliary accounts with the Apex Bank. So unless the CBN is a willing accomplice, Nigeria’s forex income will be better managed with due diligence.