THE DIVIDENDS OF A LIBERALISED FOREIGN EXCHANGE MARKET
By: Late Sir Henry Olujimi Boyo (Les Leba),first published in June 2005
The “Rational Perspectives” column has regained its voice- since the death of Sir Henry Olujimi Boyo, in November 2019- in shedding light on the economic state of our beloved country. Today’s article titled “The Dividends of a Liberalised Foreign Exchange Market”was initially published in June 2005.This article is a follow up to last week’s republication of “The Merits & Demerits of a weak Naira in Spite of Increasing Dollar Reserves”. As the foundation of our economic system remains unsteady and the value of the naira plummets vis-à-vis the dollar, the applicability of these articles is apparent in light of current realities.
(The below article is also available on his online platform, betternaijanow.com for easy reference).
The main dividend to be derived from the adoption of a liberalized foreign exchange market as proposed in section 3 of this paper is the quick evolution of a realistically priced naira that will infuse the positive multiplier effects inherent in a free-market economy dictated by the dynamics of demand and supply. Indeed, the defects of the current system; viz lack of transparency, parasitic chain, price distortion and economic dislocation; would be cleansed by a liberalized market; the inherent features and desirable benefits may be summarized as follows:
4.1 A NEW IMPROVED CBN!!
The CBN would emerge unencumbered by the distraction of forex hawkings and intrigues and assume its role as a patriotic custodian of the naira and a nimble and effective policeman of the money market in line with national aspirations.
4.2 BREAKING THE JINX OF EXCESS LIQUIDITY
The mirage of excess liquidity whenever the federal pool is disbursed and the regressive reflex of mop-up activity inherent in the current system will disappear forever!! In other words, the CBN would not have to plead with beneficiaries of the federation pool to desist from spending their income even when the economy is crying out for a dose of public expenditure to stimulate demand and investment.
4.2.1 The ghost of excess liquidity in the system will be laid to rest in the proposed liberalized foreign exchange market because of the following factors inherent in its operation:
18.104.22.168 The bulk of all foreign exchange earnings is expended in its original form (without any prior conversion into naira to needlessly and vastly swell money supply) to pay for the nation’s total import needs, that is, industrial goods, finished goods, contractors’ imports, services, every permissible “importable”, name it. This insulates the economy from a deluge of naira with extensive money creation possibilities by banks as at present.
22.214.171.124 Foreign exchange not required for domestic transactions by governments, public agencies and private sector operators will remain in the owner establishments’ domiciliary accounts with the CBN and will not be regarded as part of commercial banks’ liquidity base.
126.96.36.199 A substantial proportion of foreign exchange converted into naira for domestic transactions is likely to be taken up by economic operators utilizing naira already in the system.
188.8.131.52 Thus, only a small portion of foreign exchange earnings may translate into injection of fresh money.
184.108.40.206 The subsequent arrival of imports paid for with the bulk of foreign exchange earnings especially consumer goods implies the introduction of additional physical goods which entails stretching the relatively unchanged money supply in the system to absorb the new imports. This situation will tend to leave prices at moderate levels. Inflation will therefore be at minimal levels that are conducive to economic growth.
4.3 REDUCTION OF PRESSURE ON THE NAIRA VALUE AND GENERAL STABILITY OF THE NAIRA
The effect of tamed excess liquidity on the industrial sector will be as follows:
4.3.1 Industrialists will obtain cheaper dollars and consequently be able to bring in more raw materials and machinery with the same outlay as hitherto.
4.3.2 Prices of locally manufactured goods will fall
4.3.3 Industrial capacity utilization will improve
4.3.4 Increased employment generating opportunities will evolve
4.3.5 Disposable income will increase and overall demand will expand
4.3.6 Demand for imported consumer goods will reduce as local manufacturers will rise up to the challenge of filling the gap.
4.3.7 The above will lead to a reduction in demand for foreign exchange and consequently stabilize the exchange rate.
4.4 REDUCTION OF THE PRESSURE OF COST-PUSH INFLATION ON THE ECONOMY
Similarly, an improvement in the value of the naira will be reflected in reduced and stable costs of imported raw materials. As noted, investors in the real sectors of industry and agriculture can bring in more machinery and raw materials for production with less amount of naira. Industrial and agricultural capacity will expand with the positive linkages in areas of employment generation, food sufficiency and generally improved welfare of the Nigerian masses.
4.5 INTEREST RATE REDUCTION AND STABILITY
The CBN Minimum Rediscount Rate (the Commercial Bank Base Rate) need not be excessively weighted upwards in order to mop up excess liquidity caused in the current system by the conversion of dollar revenue to naira before sharing to constitutional beneficiaries of the federation pool. Lower interest rates would stimulate investment and enhance employment and generate aggregate demand with other salutary benefits in tow!
4.6 DEFLATION OF SPECULATIVE EARNINGS FROM THE FOREX MARKET
Speculative demand for forex at any cost from the CBN will disappear as the CBN will no longer sell dollars and any foreign exchange for that matter at a local bazaar! The erstwhile parasitic chain, round-tripping, excessive arbitrage income, dollar hoarding, artificial scarcity and the search for dollars at any cost will evaporate. Naira will be king and CBN will be well positioned to manage its good health! The parallel or black market will now provide less attraction and may be expected to gradually disappear as the dollar will be available everywhere in the money market!
4.7 EFFECTIVENESS OF CBN MONETARY INSTRUMENTS
The erstwhile discordant monetary instruments of the CBN can now be used to fine tune the money market and bring harmony to our country’s monetary and fiscal policies; for example, the CBN will not have to impose an MRR of 20% on the banks while government is at the same time pressurizing the banks to lower their commercial lending rates!
4.8 CONVERTIBILITY OF THE NAIRA
A stable and vibrant economy with a stable and resilient currency would give the naira the elite status and the prospect of transforming into a convertible currency. Naira convertibility would engender confidence in the country and the foreign direct investment that we have sought unsuccessfully so far in faraway lands, the same foreign investors will enthusiastically beat a path to our doors voluntarily! Convertibility will also transform Nigeria to the engine of growth for the ECOWAS sub-region in particular and a leading emerging industrial nation.
4.9 AVAILABILITY OF PROMPT AND ACCURATE INFORMATION
The late and often inaccurate returns which characterize the current system will disappear under the proposed liberalized foreign exchange market. As in advanced economies the CBN will have a fairly good picture of the state of the economy within a lag of no more than two days.
4.9.1 The CBN audit officers located in financial institutions will be expected to send correct returns of each institution’s transaction in forex activities as well as other financial transactions of interest to the CBN every day. Availability of such database would enhance the CBN’s ability to perform its statutory job of policing the banks to ensure that their operations are in line with policy.
4.10 MANUFACTURING FOR EXPORT
The presence of a transparent and level playing field and a liberalized foreign exchange market will provide additional motivation for foreign direct investors who recognize the huge opportunity presented in a market of 120 million people with rising disposable income. The net result will be an expansion in industrial capacity and ultimately the satisfaction of local demand for erstwhile imported consumer goods. Excess output from such production will become available for export.
4.10.1 Foreign direct investors will be encouraged to show interest in the commercial development of areas of infrastructure that have retarded our social and economic growth. This will supplement the services provided by the public sector and reduce the pressure on public sector capital votes.
SAVE THE NAIRA, SAVE NIGERIANS!!