23

Mar

NAIRA EXCHANGE RATE: CBN 'DON MISS ROAD'! 21122015

2015-12-21

NAIRA EXCHANGE RATE: 
CBN 'DON MISS ROAD'!
BY HENRY BOYO

The Central Bank of Nigeria, is, currently obviously losing the battle to arrest inflation and the unyielding slide in the Naira's exchange rate.
Regrettably, with inflation consistently closer to 10 percent, all static incomes have lost over 40 percent of purchasing values since 2010; thus, the laborer's N18,000 minimum wage may just be worth less than N10,800 today; inevitably, elder citizens whose pension incomes are static, have also become destitutes.

Instructively, however, spiraling inflation is usually, primarily, triggered by uncontrolled and liberal money supply (otherwise known as excess liquidity), chasing relatively few goods and services. Indeed, spiraling inflation spells doom for the economy and people of any country. Consequently, Monetary authorities in successful economies, invariably endeavor to keep inflation below 2 percent by avoiding a surfeit of money supply!

Unfortunately, the prevailing irrepressible inflation rates were compounded by over 25 percent Naira devaluation this year. Consequently, the Naira plummeted from N160 to below N270=$1 in the parallel market, while the huge margin between both rates has expectedly encouraged financial malfeasance with significant market distortions, which invariably promote rent seeking and discourages any serious commitment to grow the real sector, and create more jobs.

Historically, Nigeria's discomfortingly rising rate of unemployment and deepening poverty correlates loyally with the Naira's steady depreciation from 50kobo to N197=$1; thus, in order to enjoy the same purchasing value that 50kobo commanded before 1980, Nigerians must perform the impossible task of working almost 400 times harder today!
Inevitably, therefore, the consequences of high inflation rates and a sliding Naira exchange rate have ultimately propelled us amongst the World's poorest nations; sadly, this is, conversely against the trend that promised impressive economic growth and social prosperity when the Naira was much stronger at 50kobo=$1.

Incidentally, dollar scarcity cannot be the primary cause of weaker Naira exchange rates as often alleged; for example, Nigeria earned bounteous dollar revenue when crude oil prices rose steadily from $53.41/barrel in 1979 to well over $140/barrel in 2008, while average output has also remained consistently above 2million barrels/day since return to civil rule; indeed, part of the fortuitously, consolidated revenue surplus of over $12bn was sunk into the power sector without much impact, while another $18bn also became available for the controversial London/Paris Club debt exit. 

Furthermore, in compliance with IMF recommendations to liberalise our 'embarrassingly' increasing dollar supply, the CBN licensed about 3,000 Bureau De Change and provided them with weekly dollar allocations that often exceeded total forex provision to the real sector; ironically, Nigerians could, in addition, access up to $150,000 with Naira debit cards at official exchange rates from ATMs abroad annually. However, despite our healthy reserve base, Naira, inexplicably, still depreciated from N80 to N160=$1! 

Nevertheless, in order to conserve forex, in the wake of the present collapse in crude prices, CBN has reduced international ATM withdrawals to $300/day (about $110,000 annually); inexplicably, every account holder is also entitled to additional $7,000 weekly ($336,000 annually), for international POS Transactions. It is undeniable that these liberal payment platforms provide ample opportunity to fund smuggling, currency round tripping and money laundering, and it is therefore not surprising that Nigeria, ultimately became one of the largest markets for Bulk Currency trade. Curiously, CBN has kept these individual forex windows wide open, while genuine real sector businesses which add value and create jobs are constrained to patiently await official allocations or alternatively patronise, oppressive black market dollar rates to fund their operations.

Instructively, however, if the PRIMARY cause of Naira's depreciation is not identified  and addressed, the forex market would steadily become unraveled and the parallel market rate may alarmingly exceed N400=$1 with disastrous economic consequences in 2016.

Historically, CBN's attempts to manage Naira exchange rate have always been targeted at curbing dollar demand. It is instructive however, that increasing dollar demand is actually a function of public perception of the dollar as a stronger and safer store of value than Naira. Thus, unless actual market dynamics alter this perception, any attempt to control dollar demand or restrict access to supply, will invariably only instigate further rejection of the Naira as a safe store of value, and the demand pressure for the dollar will persist.

If, however, the CBN recognises, that persistently surplus Naira is the prime determinant of the dollar/Naira exchange rate, then, our decades long sojourn in the wilderness of monetary strategy will end. Evidently, the unceasing suffocation of systemic Naira liquidity invariably weakens Naira exchange rate in a market where CBN, conversely auctions 'small' rations of dollars weekly. Clearly, so long as Excess Naira supply remains an abiding market albatross, the Naira exchange rate will surely be condemned to further depreciation even if oil prices rebound.

It is critically pertinent therefore to seriously interrogate the primary cause of systemic Naira surplus. Incidentally, former CBN Governor, Chukwuma Soludo noted after an MPC meeting in June, 2005 that:
“The major source (cause) of huge liquidity injection has been the monetisation (read as the substitution of naira allocation for dollar denominated revenue) of $1bn from the 2004 excess crude earnings amounting to over N160bn and this has contributed to the liquidity surge." Soludo therefore warned that… "the (adverse) consequences of excess liquidity (inflation and weaker Naira) stare us in the face.” If, indeed, according to Soludo, Naira substitution for just $1b distributable revenue wreaks such havoc on liquidity, one can only imagine what damage Naira substitution for an estimated $30bn annual distributable revenue would cause.

Instructively however, just two weeks to the end of 2015, in deference to the prevailing problematic liquidity surfeit, the CBN again indicated its intention to borrow and store another N135bn as idle funds.
Similarly, the CBN also decided to remove N1,220bn ($6.13bn) from the projected systemic Naira liquidity with sales of government Treasury bills before March ending 2016. Notably, Treasury Bill sales is CBN's instrument of choice for reducing money supply, and establishing price stability in the market place.

Furthermore, later in December 2015, the Apex Bank and the Debt Management Office also borrowed over N50bn long term loans, despite the attendant double digit interest rates which are clearly inconsistent with sovereign, risk free, loans of resource endowed countries such as Nigeria. Revealingly, these government loans were all oversubscribed by well over a 100 percent, i.e. a loud attestation to the prevailing high systemic liquidity, and also testimony of the stranglehold of banks on sovereign debts in preference to real sector lending. 

Indeed, it is questionable why credit from Nigerian banks should be so expensive in a money market that is allegedly weighed down by Excess Naira liquidity. Surely, no commodity becomes more expensive when it is in surplus supply.
Nevertheless, despite our reduced export revenue, unless, there is an urgent intervention by either President Buhari or the Legislature, Naira liquidity surfeit would clearly remain a challenge to poverty alleviation and the realisation of vibrant and inclusive economic growth in 2016 and thereafter. Advisedly, however, the adoption of dollar certificates/warrant for allocating dollar denominated revenue will surely minimise Naira liquidity and shore up the Naira value in the market and also positively restrain inflation. A steady hardening of Naira exchange rate will also gradually encourage public preference for the Naira as a stronger store of value than the dollar.

Evidently, so long as CBN continues to tackle the problem of an ever sliding Naira rate from the prism of demand for dollars, rather than frontally addressing the bogey of eternally surplus Naira, the end of our economic dislocation and deepening poverty will never be in sight. 

SAVE THE NAIRA! SAVE NIGERIANS!!