The projections of the National Economic Empowerment and Development Strategy (NEEDS), for critical macro -economic catalysts of inflation, interest rates and liquidity for 2004, were evaluated, in this column, last week, against the Central Bank of Nigeria’s expectations in Monetary Policy Circular No.37, and the actual reality on ground. Inspite of the excellent score sheet presented, the contradictions associated with the application of CBN’s monetary instruments are glaring!  This week, the Naira exchange rate and Nigeria’s external reserves, will similarly be assessed against the backdrop of the NEEDS blueprint which projected N142=$ and $7.8bn reserves respectively for 2004, and the content of MPC No 37 of February 2005, which extolled CBN’s alleged success, in keeping naira rate stable around N133=$. 
Nonetheless, some ‘uncharitable’ analysts have suggested that naira exchange rate remained ‘artificially stable, because, the rate is determined by fiat rather than in a free market space. Critics also insists that CBN maintains an obtrusive market monopoly, because it supplies over 80 percent of all foreign exchange sold, while dollar demand, conversely comes from thousands of both private and corporate bidders. Consequently, a naira rate determined in dollar auctions, by a monopolistic supplier of dollars, will never produce a truly, free-market determined exchange rate!

This monopolistic market distortion explains why dollar depreciated against the Euro and Pound Sterling, by about 15percent lately, but inexplicably remained resistant at N132.8=$ despite a 100 percent increase in Nigeria’s external reserves between 2003-4. The normal expectation from the related extended imports cover, provided by more bountiful reserves should have appropriately induced a Naira rate possibly below N100 = $ in a free-market. Thus, the NEEDS projection of N142=$ for 2004, was probably misguided, while the actual framework which generated the rate of N142=$ was never explained. Besides, in deference to the currency purchasing parity principle, most Nigerians for example, may spend less than N150 (i.e. $1) for a reasonable meal. Conversely, you would need about $10, to the chagrin of Nigerian tourists, for a simple ‘fast-food’ lunch in Europe or America. However, if dollar actually exchanges freely for N10 or even N20 in consonance with the purchasing parity principle, Nigeria would, be transformed to a middle income country overnight, with average per capita income, well above $2,000, rather than remain an aid seeking beggar nation.

A much stronger naira rate of N10=$1, would undeniably make it much cheaper for local industrialists to retool and expand production, as prices of critical machinery, spare parts and raw materials would drop by over 80 percent  Thus, new cars and buses would replace the liabilities of other countries that we currently import as Tokunbo vehicles; our youth would stay and work in Nigeria rather than express their unbridled passion, often with great risk, to emigrate and earn the almighty dollars; our hospitals will also stock genuine drugs at cheaper prices and our children will have access to affordably priced quality education, while infrastructure for power, potable water etc will become cheaper to fund.

In defiance to these numerous benefits of a stronger naira, it is worrying therefore, that NEEDS, which is, promoted as a blueprint for economic salvation, actually projected a lower naira exchange rate of N 142=$1, in place of the current actual of N133=$, despite the unambiguous historical evidence that a weak naira has never spurred non oil export earnings. Besides, a weaker Naira rate will also not stimulate increased revenue from crude oil exports.

The presumed redemptive model adopted in CBN's MPC No. 37 of February 2005, for a wholesale Dutch Auction System, will only transfer the supply end of the forex market to a cartel of banks, which cannot ensure demand and supply equilibrium, so long as CBN’s stranglehold monopoly of dollar supply subsists. It is also unclear how, wholesale DAS will eliminate the unresolved burden of multiple exchange rates as per CBN’s expectation in – MPC 37.
Analysts have suggested that a liberalized foreign exchange market, where all constitutional beneficiaries of dollar revenue, will directly approach their individual commercial banks, for conversion of their dollar allocations, paid with non-negotiable dollar certificates, as a more practical and enabling process of promoting a more realistic, market determined Naira rate that ensures macro -economic stability.

The comparative statistical table in MPC – No. 37 indicates that NEEDS projected a total stock of about $7.68 billion external reserves for 2004, but the reported $18.5bn year end actual stock, obviously exceeded the NEEDS target by over 100 percent, because crude oil price, unexpectedly spiked from around $30 to over $50/ barrel by December 2004!  Admittedly, nonetheless, this windfall had nothing to do with the content of the NEEDS programme or from any benefit from a weaker Naira exchange rate.

Notwithstanding the dollar windfall, the Naira rate remained inexplicably, impervious to the otherwise, welcome bountiful export revenue. Incidentally, between 1992– 98, Nigeria’s total external reserve stock hovered between $4–5bn, while naira exchanged for N80 = $. Fortuitously, today, we can boast of about $20 billion reserves, but contrary to expectations, naira rate has nose-dived, and surprisingly, currently exchanges, for close to N133 = $.  The phenomenon of the unexpected Naira freefall, despite bountiful reserves, indeed becomes more baffling, since increasing reserves, undeniably also provide a healthy buffer and extended cover to fund our imports.

Instructively, CBN’s MPC-37 of 21st February 2005 confirms that the adopted West African Monetary Zone National Reserves ‘comfort’ target is three months import cover.  Consequently, the present $20bn reserves would probably fund imports for about 12 months!  In this event, cynics may therefore, suggest that, Nigeria currently has an increasing excess, of burdensome foreign reserves, just as CBN is also eternally burdened with the challenge of unceasing systemic surplus Naira liquidity, despite the scarcity of  cheap funds to drive the real sector. 

Consequently, our already ‘uncomfortably’ high dollar reserve stock, may actually prove more ‘embarrassing in 2005! If however, oil prices continue to rise, we will obviously need to deploy more and more of our increasing dollar reserves, to remediate education, health, transport and power infrastructure. However, any expansionary fiscal spending to improve critical infrastructure in 2005’, will certainly pose a serious ‘challenge for macro- economic stability, so long as the additional dollar revenue earned is first, unilaterally substituted with naira, at an exchange rate , that is solely determined by CBN, while the inflationary process of creating naira cover for the increasing dollar allocations  to government and its agencies remains unchanged.

The resultant excess liquidity caused by this distortional currency substitution and CBN’s reflex action of adopting high Minimum Rediscount Rates (MRR), and sales of Trillions of Naira Treasury Bills at horrendously high rates of interest, to mop up the resultant Naira liquidity will invariably instigate inflation, low capacity utilization and weaker Naira rates and ultimately precipitate, low consumer demand, high unemployment rate and social insecurity. The current framework of monetary policy, therefore, implies that the more the export revenue we earn, the greater the challenges to macro-economic stability from  Naira liquidity surplus; a strange anomaly to say the least.  But it is an evident signal that the framework adopted to promote macro-economic stability by CBN, is fundamentally defective!”
The above article was first published in February 2005.

Now fast forward to April 2017. The hope that the new Economic blueprint titled ‘Economic recovery and growth plan’ (EGRP), will rescue Nigeria’s economy is also clearly misplaced just like with the 2003 NEEDS blueprint. Regrettably, the fundamental factor that drives persistent excess liquidity and its train of counterproductive economic and social consequences remain unresolved. Indeed, so long as Naira substitution for dollar denominated revenue allocation persists, the EGRP, just like NEEDS will also fail to dry our tears.