SUICIDAL DEFENCE OF THE NAIRA
BY: LES LEBA
The management of the Naira exchange rate has been characterized, historically by a series of trial and error strategies which have never stopped the steady decline of the Naira rate from stronger than N1=$1 to the present N305-400=$1, ironically, despite healthy foreign reserves which could provide over 12 months imports cover.
Regrettably, rather than seriously interrogate the underlying reason why Naira rate appreciation remained barely marginal, even when CBN had custody of $60bn, as our best ever consolidated reserves, sadly, the choice weapon often suggested by local and international experts for protecting the Naira, has always been to increase dollar supply to the market. Clearly the present humble Naira exchange rate reflects a stark relief of Nigeria’s monetary policy makers’ futile pursuit of an elusive goal by eternally repeating the same prescriptions that led to earlier failures.
The above title was first published, in the Vanguard newspapers on 16th February, 2009. A summary follows, hereafter; please read on….
“The awareness of the correlation between lower naira exchange rates and deepening poverty motivated the “Save the Naira, Save Nigerians!” by-line in this column since 2004.
Despite the obvious debilitating impact of Naira devaluation on inflation, industrial expansion, employment and social welfare, the Central Bank of Nigeria (CBN), Governor, brazenly declared on January, 13th 2009 that the Naria has been deliberately devalued from below N120/$1 to almost N150/$1; regrettably, CBN declared a war against our welfare by this action. The apex bank however, insists that devaluation was necessary to stabilize the economy and ensure that monthly naira allocations matched the 2009 projected expenditure budget.
I daresay, however, that such fiscal strategy is counterproductive, as the resultant bloated Naira allocations will still be inadequate to cover recurrent and capital expenditure budgets which were earlier projected with at least 25% stronger naira values.
When the folly of this strategy ultimately dawned on our monetary policy makers, the CBN Governor quickly recanted and later alleged that, the devaluation was in fact, the handiwork of speculators!! Now, let us examine his claim. The first pertinent question is, how speculators accumulated almost N2,000bn between October and November 2008 to exchange for $7bn plus from CBN? Indeed, prior to the alleged strategic devaluation, the monetary authorities, reportedly held internal consultations and sought President Yar Adua and the National Economic Council’s approval; inevitably, prominent Nigerians with heavy interest in banks became privy to the dastardly blow awaiting the naira! Curiously, despite the very late passage of the 2008 budget in October, and the parallel delay in the execution of capital projects, the Federal Executive Council, nonetheless, promptly authorized 100% release of all outstanding budget provisions, not minding that with Sallah, Xmas and New Year- holidays imminent, there were barely seven weeks left to 31st December 2008 to complete projects which should normally be implemented within 12 months.
Invariably, with the subsisting, embarrassingly surplus Naira Liquidity, and the open secret of imminent Naria devaluation, the banks and myriad speculators besieged CBN with demands for unusually large dollar purchases, which they would later sell with huge profit after devaluation. Alarmingly, the CBN willingly, ‘bravely’ matched the obviously bogus dollar demand between October/November 2008 with over $7bn from reserves; in contrast, between January and September 2008, the CBN had only sold less than $5 billion to the banks. Ironically, after over $7bn had bolted, CBN shut the barn door and banks were belatedly instructed to only bid for foreign exchange, specifically for their customers (RDAS) rather than for themselves (WDAS); meanwhile, official dollar supply to Bureau De Change (BDCs), was kept slightly less than the erstwhile unsolicited $3bn monthly allocation to nebulous BDC customers. The question is, why CBN knowingly gleefully met the evidently bloated dollar requisition of banks between October and November only to shamelessly thereafter cry wolf! Wolf in January 2009? Why would CBN subsequently blame speculators when it had earlier announced that Naira devaluation was carefully considered and deliberately implemented to stabilize the economy and protect our industries?
Incidentally, despite several allegations of commercial banks’ complicity in fostering round tripping and its poisonous economic impact, so far, heavy penalties or criminal convictions are rare! Even when a prime Nigerian bank, like UBA was indicted and fined $15m in the United States for money laundering, involving federal government funds irregularly deposited via the controversial “African Financial Corporation,” curiously, no one was brought to book! Furthermore, there is still no rigorous audit or system to distinguish genuine and spurious dollar bids from banks; besides, CBN’s deliberate instigation of blatant dollar speculation between in the last quarter of 2008 does not suggest any seriousness to tackle capital flight or strengthen the naira rate!
The truth is, Naria rate will continue to slide so long if the money market is constantly flooded in a pool of surplus Naira. The critical question is how this ‘burdensome’ excess naira comes about? The truth, is that, the market becomes awash with excess naira supply, when the three-tiers of government receive huge monthly naira allocations. The resultant extended credit capacity of Money Deposit Banks, invariably provides surplus naira that can easily swallow the weekly auctions of dollar rations by CBN (as was the case in late 2008)!
However, in recognition of the serious threat of excess Naira supply, CBN will step up the very costly process of reducing Naria liquidity by borrowing back part of the cash glut created by the payment of huge naira allocations and relatively modest cash reserves requirement for banks. Consequently, CBN would auction Treasury bills and bonds with excessive returns (upto N300bn annually) to predominantly the same banks which are also the ultimate receivers of surplus Naria credits; invariably, such damage control can only be superficial and will never tame the naira glut;
Evidently, with this unforced destructive framework, in place, the CBN is incapable of howering its own monetary policy rate below 3 percent, in line with international best practice to stimulate our economy, because of the fear that loans will become cheaper and the expanded credit capacity of banks will sustain further speculative tendencies and unhealthy consumer lending that will fuel inflation and inflict more pressure on naira rate! Thus, the naira rate will continue to fall while the gap between official and parallel market rates will continue to widen; any measure taken by CBN to restore sanity will inevitably also fail, so long as CBN continues to defend the naira within a payments framework that ceaselessly overbloats the liquidity base of banks with huge naira allocations. Sadly, ultimately, the era of counter productive and high-handed exchange controls will return and CBN would have brought us back full circle, to our distressed state over two decades ago, after we were goaded to adopt a series of half-baked economic experiments.
However, I have consistently advocated that the Nigerian economy will right itself and the monetary policy paradoxes, lately decried by CBN Governor, Professor Soludo, will be resolved, if government beneficiaries receive dollar certificates (not raw cash) for the dollar component of monthly distributable revenue!! This framework is not only constitutionally correct, it will dispel the enduring burden of excess Naira liquidity and also save us over N300bn, which is the annual cost of removing excess naira liquidity from banks and simply sterilising these funds in CBN. Interest rates will also fall to single digit to promote industrial recovery and generate employment; inflation will nosedive; the festering pool of corruption will similarly diminish and speculation and round tripping will reduce while the naira rate will appreciate below N100=$1, as increasing dollar certificates chase the closely managed and limited naira balances in the banking sector.
A word, they say, is enough for the wise”
SAVE THE NAIRA, SAVE NIGERIANS!