THAT EXCESS $400M MOP UP! 10042017




The Late I. K. Dairo, one of the pioneer innovators of the Juju music genre observed in a popular melody that no rational person will ignore the bare waistline of his own daughter and eagerly adorn the child of another with his cultural beauty beads!  A base expression of the same theme is that you do not take bread from your own hungry child to nourish an obviously better endowed stranger!

Anyone with a regular acquaintance with Nigerian newspapers would have come across the ubiquitous phrase, ‘mop up’, in relation to the efforts of the monetary authorities to remove presumably excess cash from the system so that too much money will not chase the limited goods and services available, thereby instigating rising prices, i.e. inflation, with a decreasing purchasing value of the Naira in your pocket.
In this regard, ‘mop up’ may be seen as keeping faith with the objective of maintaining the value of the Naira at an exchange rate that is ‘conducive’ with growth of the economy.  

In order to avoid such a dismal prospect, the Central Bank, in accord with its enabling Act, every month, embarks on removing excess cash and mops up billions of Naira by selling short term bills and longer term bonds.  Interest alone on these government borrowings will eat up almost N300bn or about 18% of this year’s federal budget, as the pains of debt repayment become sweet gains to the banking sector!

Some analysts, however, argue that N300bn is the price we have to pay to avert inflation; besides, they claim, the Naira exchange rate will continue to fall with serious consequences if the huge monthly Naira allocations to the 3-tiers of government are left intact as part of money supply in the system!  In this regard, ‘mop up’ may be seen as keeping faith with the objective of maintaining the value of the Naira at an exchange rate that is ‘conducive’ with growth of the economy.  Indeed, the CBN has often praised its own success in keeping the Naira rate stable within the N125-130=$1 range, and its gleeful reports of the slightest contrived minimal marginal gains may reflect its satisfaction that the current exchange rate is supportive of a revival of  the economy.

The stark reality on the ground, however, is that inspite of the best efforts of government’s spin doctors, our people can see that industries continue to fold up and more people are forced into the already saturated job market; high interest rates continue to dampen investment drive and earned incomes purchase less and we have consequently become poorer, inexplicably, in the face of unprecedented external reserves!

It is self evident, therefore, that if appropriate exchange valuation can positively influence growth as anticipated in the spirit of the CBN enabling Act, the current exchange rate has failed to fulfill that objective and we may rightly conclude that a band of N125-130=$1 is probably inappropriate!

The apparent mindset of our monetary policy team has always revolved around the potential of cheap Naira in stimulating productivity and export competitiveness.  The truth, however, is that inspite of the Naira falling from the exalted level of 50Kobo to N130=$1, our industries have collapsed and we are worse off today as exporters of both agricultural and processed goods than we were two decades ago, when the Naira was much, much stronger.  It is surprising that inspite of this graphic correlation, the government’s economic blueprint, NEEDS, was predicated on further Naira depreciation to close to N200=$1, as the required level for economic take off!  

Indeed, a close observation of CBN’s management of the Naira rate may suggest that Naira has been abandoned as an orphan child in favour of the foreign Dollar, as every effort has been made to protect the value of the Dollar against the Naira ; for example, while all major trading currencies, particularly the Euro and Sterling have gained over 30% against the Dollar in last six years or so, our Naira has actually fallen against the US currency, so that the optically stable band of N125-N130=$1 is indeed a de facto devaluation of the Naira against other major currencies, especially the Euro and Sterling, with adverse consequences for the cost of imported industrial raw materials and machinery, and the poverty rating of our people.

Our monetary authorities cannot give any explanation as to why the rate of the Naira has not obeyed the basic economic principle of demand and supply.  No reason has been advanced for the Naira exchanging for N80=$1 when our external savings was only $4bn (4 months’ imports cover in 1996) and today for over N125=$1 when our reserves have increased over ten fold to above $45bn (almost 30 months import’s cover)!  The rational expectation should have been a current Naira rate that is at worst a fraction of the N80 that it exchanged against the Dollar about ten years ago!  However, when the CBN recently announced its plan to share the monthly Dollar component of statutory allocation without prior unilateral conversion to Naira, some observers sighed in relief, that at last, the Naira will receive due protection, and become appropriately priced, as the table will be turned in favour of the Naira when increasing Dollar allocations chase existing limited Naira supply in the system.  Undoubtedly, this would lead to a rapid appreciation of the Naira with attendant lower raw material and machinery costs for our industries, which would lead to lower product prices and increase in consumer demand which would in turn stimulate further investments and more jobs!  

Surprisingly, a week or so after the announcement of the new payments system, in what appears to be a somersault, the CBN abandoned the object of a market determined Naira rate via payment of Dollar allocations and embarked on an unprecedented aggressive intervention to ‘mop up’ the sudden glut of Dollars in the forex market.  Several newspapers, e.g. D.Independent 21/8/2007 carried reports with titles such as “CBN MOPS $400M FROM INTERBANK MARKET”.  Part of the report reads as follows:  “Dollars are being hurriedly disposed off on the inter-bank and autonomous forex markets in reaction to the policy shift of the CBN on the Naira….

“The CBN intervention during the week resulted in the purchase of $400 million from both inter-bank market and autonomous sources.  Consequently, the bank did not sell foreign exchange at WDAS window during the week. …”

Two things emerge from the above report, (a) the banks obviously maintain dollar hoardings, and (b) the prevailing dollar glut would have led to a rapid appreciation of the naira based on demand and supply, but the CBN clearly does not want this to happen, and quickly moved to purchase $400m, at a premium rate of N127=$1, while it had earlier sold same dollars for below 126=$1!  The question is, why would the same CBN, which decries the presumably ‘inevitable’ perennial excess Naira in the system, and which is always ready to borrow such excess cash at great cost, jump at the ‘opportunity’ to unleash a whopping N50.784bn into the banks in an unforced initiative, just to protect the prevailing lowly rate of the naira against the Dollar, inspite of the inherent loss in such transaction? 

An independent observer of such odd behaviour may be forgiven for seeing the CBN as an agent of American interests rather than a true Nigeria patriot, as the US Federal Reserve Bank has never reciprocated such loyalty for our Naira!