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By: Late Sir Henry Olujimi Boyo (Les Leba), first published in April 2009 


This week’s republication is the third article in the ‘Operation Save the Naira’ series, the second of which was also republished on the 5th of May 2021.

Both the first and second articles discussed the naira rate vis-à-vis the dollar and pointed out the issues offset by a poor monetary framework that serves to depreciate our currency. The fact that we continue discussing issues that over a decade ago remained problematic, tells us that we have not progressed as much as we should have.

Last week, on April 15th, an article by Soyombo Opeyemi titled ‘Delimiting the powers of Death’ made reference to Sir Henry’s unrivalled passion for economic prosperity in our country. The author went on to ask the right questions akin to Sir Henry’s lines of inquiry. I quote “Why should the Central Bank of Nigeria pump trillions of Naira into the system or wet the system with overflowing liquidity and then turn round to complain of too much money in the system, fueling inflation…?”. The author pointed out the consistency of this act which serves no one but those in the seats of power, and also mentioned the importation culture we have adopted which continues to leave the Naira in a devalued state. I must say, it is certainly a relief to see that people did understand Sir Henry’s proposals, which served to tackle the currency crisis that has plagued us for decades!

Today’s republication, Operation Save the Naira (3), continues in a similar vein as its counterparts. It highlights our perpetual mismanagement of the money supply which has greatly contributed to the crisis in which we find ourselves. It employs the use of flowcharts to portray precisely how these faulty frameworks and practices affect local businesses and the layman. We need to start asking the right questions, and in order to do this, we need to be more aware of how our system works versus how it ‘should be working.

In an age where more people have found a voice due to the ‘internet culture’, we can no longer feign ignorance about the things that directly impact our welfare.

As we read this article, let us keep in mind its initial release date in light of the issues we face currently. (These articles are also available on Late Sir Henry’s web portal, www.betternaijanow.com.)

In the last two articles in this series, we examined the merits of a stronger naira against the merits of a weak naira and observed that within the context of our economy, there is actually no tenable argument for the promotion of a weak naira. We also noted the distinct correlation between deepening poverty and a depreciating naira, while conversely recognizing the enabling environment of lower rates of inflation, increased capacity utilisation, higher employment, lower petrol prices, etc., that prevailed in the past, when the naira gallantly rubbed shoulders with the dollar and pound sterling even at a time our foreign reserves endowment did not approach the exalted level of recent years.

In the above event, we deduced that the real cause of our weak naira is not really lack of productivity, multi-cultural economy or meagre export earnings as generally claimed, but rather the poor management of money supply, which incidentally is also the bane of our dislocated economy. We noted the examples of countries such as Japan and Switzerland, which have little natural resource endowments but remain first world nations because of their superior management of money supply, and by extension their larger economy with consistent and transparent policies and much lower interest rate structure to galvanize industrial growth. The truth is that even if fiscal policies are misdirected for political reasons, good management of money supply could still salvage an economy, but no quality of fiscal management can redeem an economy with poor management of money supply. In this week’s article, we will take a closer look at how we have continuously mismanaged the money supply over the last three decades.

We will simplify our analysis with the aid of a schematic graphic flowchart. The flowchart titled ‘A’ – “Negative Impact of Faulty MonetaryFramework” graphically displays the current process of infusing export dollar earnings into the economy and the poisonous effect of this framework on our social and industrial welfare. A1. We assume for sake of simplicity that $1bn is the available allocation to constitutional beneficiaries in one month.

A2. Indicates the capture of the $1bn by the CBN and the substitution of, say, N150bn instead.

A3. Indicates the payment of the N150bn into the bank accounts of beneficiaries. However, this cash surge enables the banks to expand credit to borrowers by at least five times the cash deposits. Thus, the banks have an additional credit capacity of N750bn on receipt of cash allocations of N150bn.

A4. The CBN is alarmed at the increased capacity of, say, banks to extend credit and worries that such expansion would fuel inflation. Consequently, the CBN attempts to deter borrowing by ensuring a high-interest rate structure with the instrument of a high monetary policy rate (which at one time rose above 14%). Not yet done, the CBN also steps into the market to mop up (read as remove) some of the extended credit capacity of the banks by selling treasury bills at relatively attractive rates to encourage the patronage of the banks. Such government borrowings of money which are simply kept idle in CBN vaults and accounting records will cost Nigerians close to N300bn in 2009 according to this year’s budget.

A5. The result of CBN’s mop up means that the real sector is crowded out of the market and the attendant fallout of this exercise are as listed, thus, high interest rates, high production costs, rising unemployment, etc, etc.

A6. In spite of the mop-up, the CBN only succeeds in minimally reducing the credit capacity of the banks. In this particular case, if N150bn is removed from the extended credit capacity of N750, at least N600bn credit capacity still remains available with the banks.

A7. The N600bn becomes available to chase the intermittent supply of dollars to the market by the CBN. Thus, there will be too much naira against those dollars consequently leading to downward pressure on the value of the naira.

A8. The resultant weaker naira produces the under listed unfavourable consequences including the high cost of petrol and inflation.

In chart ‘AA’, we have the consequences of increased dollar inflow from $1bn to $5bn for allocations. We observe that the results are not only the same as in ‘A’ above but actually become more destructive in magnitude to the economy. Thus, instead of the increased export dollar earnings bringing succour, it actually creates more dislocation and pain to the economy. In this wise, we would seek divine intervention so that our dollar earnings will diminish (God forbid!) Note that with this framework, not only do we have increased unemployment and contracting industrial landscape, our naira comes under severe downward pressure because of the higher quantum of naira chasing dollars, a veritable paradox! In addition, the cost of fuel continues to rise with increasing dollar revenue because of a weakening naira! The nation also incurs a fuel subsidy cost of over N800bn a year. Under chart ‘B’ titled: “Positive Impacts of $ Certificates for the Payments of $ Revenue”, we will now evaluate the impact of the adoption of dollar certificates for the payment of allocations for dollar derived export revenue. In

B1, we once again assume that $1bn is available for allocation to the three tiers of government.

B2: Instead of the CBN’s unilateral conversion to dollars, the CBN issues dollar-denominated registered certificates to constitutional beneficiaries for distributable dollar revenue.

B3: Instead of the usual scourge of excess liquidity (or too much naira) in the system, there is in fact, no increase in the money supply in the money market, and consequently, no need for mop-up. The result is huge public sector savings (up to N300bn on interest charges as per the 2009 budget). This amount can be deployed to areas of infrastructural or welfare deficiencies. In addition, interest rates will fall to a single digit as the CBN can conveniently lower its monetary policy rate to stimulate investment and growth.

B4: When beneficiaries approach banks for the conversion of their certificates, to naira (as they cannot spend or transfer their dollar certificates), they create a market where more dollars chase existing naira in the system.

B5: The result is an increasingly stronger naira with all the attendant positive factors such as lower inflation, higher employment and increasing industrialization in tow (as in the 70s and early 1980s)! Fuel prices will also fall with savings of over N800bn paid as subsidies in the current framework. The chart ‘BB’ shows the positive impacts of rising dollar revenue of, say, $5bn instead of $1bn into the economy. All the positive impacts in B are multiplied in the economy as opposed to the poisonous impact of the conversion of dollar revenue to naira. Under this framework, fuel prices will fall as crude oil prices increase because of our rising reserves and stronger naira. This column has consistently maintained that this restructured framework is the portal to our economic salvation. The good news, of course, is that there is no constitutional constraint on the CBN from adopting such a framework. Indeed, Section 162 of the 1999 Constitution does not imply the conversion of earned export revenue into Nigeria but insists that all revenue must be paid into the common pool and shared according to provisions on revenue sharing. Furthermore, the CBN Act 2007, amongst other principal objects lists the maintenance of monetary and price stability and the promotion of a sound financial system in Nigeria; indeed Section 16 of that Act stipulates that the exchange rate of the naira shall be determined, from time to time, by a suitable mechanism devised by the CBN for that purpose. In the context of the above, learned members of the Bar would say “case closed”! Next week, we will discuss AFC’S remittance of $60m and capital flight.

Save the Naira, Save Nigerians!