Skip to main content

Suicidal Defence of the naira

February 15, 2009

Image removed.The awareness of the correlation between lower naira exchange rates and increasing poverty motivated the signoff “Save the Naira, Save Nigerians!” in our articles in this column!  Consequently, I should be favourably disposed to any realistic and sensible attempt to defend the value of the naira.

In spite of the adverse and debilitating effects of Naira devaluation on inflation, our industries, employment and the welfare of our people, the Central Bank of Nigeria (CBN), brazenly declared that it deliberately devalued the naira from less than N120/$1 to the current rate of just below N150/$1.  Some critics have observed that the CBN, by this act, declared a war on the welfare of Nigerians!  The CBN on its own side countered that the deliberate devaluation was necessary to stabilize the economy and ensure that monthly naira allocations would remain in consonance with 2009 budget expectations.   


 However, I daresay that anyone who adopts such a framework to cover budget deficits would be living in a fool’s paradise!  But surprise, surprise, or own monetary authorities confidently assure us that with declining oil revenue, they chose the best option for meeting naira shortfalls in the 2009 budget and also to protect our industries!  The question is whether the resultant bloated naira sums would command the same purchasing value, and cover expenditures, on both current and capital accounts, which were projected on the basis of at least 25% stronger naira values.  But, this is not a problem for our policy makers; afterall, the naira can still be deliberately devalued further and container loads of naira notes printed to cover any additional shortfalls, not minding the impact of ravaging inflation and reduced purchasing power for all income earners!


googletag.cmd.push(function() { googletag.display('content1'); });


 Well, as if the folly of this strategy soon dawned on our monetary policy makers, we were later informed that the devaluation, even though deliberate and necessary to stabilize the economy, was in fact, the handiwork of speculators!!  Now, let us examine this claim.  The first pertinent question is, how did the speculators accumulate almost N2,000bn between October and November 2008 to procure over $7bn from the CBN?  Indeed, it is clear that prior to the deliberate naira crash, the monetary authorities held internal consultations and sought the approval of the President and National Economic Council.  In other words, some prominent Nigerians with interest in the banks were privy to the dastardly blow being prepared for the naira!  It is odd that with the late passage of the budget in October and the consequent delay in capital projects execution, the Federal Executive Council still authorized 100% release of all outstanding budget provisions, not minding that with three major public holidays in view (Sallah, Xmas and New Year), there was probably less than seven weeks left in the year for completion of projects which should have been spread over twelve months.  There is no doubt that the inexplicable release of 100% allocations to MDAs contributed immensely to a huge liquidity base for most banks, and significantly expanded the credit capacity in the respective banks who were beneficiaries of the huge deposits!

Thus, in such situation, it did not require an adviser with PhD in Finance to encourage the banks which were suddenly suffocated with excess naira to use their privy knowledge of impending naira devaluation to besiege the CBN with demands for unusually large dollar purchases, which they would later sell after devaluation with huge margins!  Surprisingly, the CBN willfully ‘bravely’ met the demands of the banks to the tune of over $7bn in two months, when, in reality, the total foreign exchange sold by the CBN to the banks for nine months between January and September 2008 was less than $5 billion!  Soon after over $7bn had bolted from our reserves, the barn door was shut and banks were belatedly required to bid for foreign exchange for only their customers, notwithstanding that major patrons of Bureau De Change (BDCs), who are largely looters of the treasury, and smugglers of contraband, continued to be serviced with admittedly reduced CBN allocations (short of the erstwhile unsolicited $3bn monthly) from our fast dwindling reserves!

    


    Incidentally, less than seven weeks after the order to release 100% allocations to MDAs, a counter order was made to return all unspent balances in the bank accounts of MDAs  by the 31st of December 2008, after the looting of our dollar reserves by the banks with the cash backing from the government!  Thus, in spite of previous assurances from the CBN that our reserve base would cover our usual demand for imports servicing for the next 30 months, even if crude oil fell to $1/barrel, our over $60bn reserve base fell to about $50bn within two months!  The question is, why did the CBN consciously and deliberately gleefully meet the evidently bloated dollar demands of the banks in October and November only to cry wolf! wolf!, thereafter?  Why would it also blame speculators when it had announced that the devaluation was carefully considered and deliberately implemented?

     Once again, CBN is boasting that our ‘shock absorber’, predominantly the now, fast-diminishing reserves will ensure that it can meet the ‘genuine’ demands for dollars and defend the current depreciated naira value at around N150=$1.  Some analysts believe that this is another promise that would be difficult for the CBN to keep, especially if it continues to disburse dollars against the bloated demands of those banks which are bent on making a kill from round tripping.

   We recall that in spite of several allegations from our monetary authorities of the complicity of commercial banks in round tripping and the poisonous impact on our economy, so far, heavy penalties or criminal convictions are rare!  Even when Nigerian banks, such as the UBA are indicted and fined $15m in the United States for money laundering involving federal government funds deposited irregularly through the controversial African Financial Corporation (the private baby of our CBN Governor), nothing was done locally in Nigeria to bring anyone to book!  In any event, the monetary authorities can still not boast of any rigorous audit system to distinguish genuine and spurious dollar bids of the banks; besides, the instigative and supportive posture of our monetary authorities to the blatant dollar speculation in October and November 2008 does not indicate much seriousness in curbing capital flight or strengthening the value of the naira!

     The truth is, the value of the naira will continue to be under severe downward pressure so long as there is a constant pool of excess idle cash in the system.  The question we must ask is, how does this excess naira come about?  The answer, quite simply is that, the system becomes awash with excess naira every month, when the huge naira allocations of the three-tiers of government are paid by the government into commercial bank accounts!  The consequent extended credit capacity will always provide ample naira for the banks to chase the intermittent supply of dollars that the CBN auctions every week (as was the case in October/November 2008)!

      In recognition of this reality, the CBN has lately resumed the very costly process of reducing the liquidity/credit capacity in the hands of the banks by borrowing back some of the cash glut created by the payment of huge naira allocations.  In this guise, the CBN will sell its bills and bonds to predominantly the banks which have the custody of excess liquidity, but such damage control can only be superficial and can never really impact significantly on the naira glut; consequently, the banks can continue to have credit capacities that enable them to buy up more dollars than the CBN can ever offer at any one time and still leave the banks with enough cash base to lend to stock brokers and other speculators to purchase their own shares, which generally had been consciously and deliberately overpriced by the banks themselves!

      With this self-induced destructive framework, the CBN is unable to bring down its own monetary policy rate in line with international best practice to stimulate the economy, for fear that credit will become cheaper and the credit capacity of the banks will be further enhanced to condone further speculative tendencies and unhealthy consumer lending that will fuel inflation and inflict further pressure on the naira!  Thus, any attempt, by the CBN to continue the defence of the naira rate with a monetary framework that inevitably ceaselessly  inundates or replenishes the liquidity base of banks with huge naira allocations every month, can only be a sure path to the current plight of Zimbabwe; the naira exchange rate value will continue to fall and the gap between the official and parallel market rates will continue to widen; all the measures that may be taken by the CBN presumably to restore sanity will fail, and not even the current return to the earlier condemned Retail DAS, or the directive for banks to refrain from interbank forex trading, or the instruction that forex must only be procured for bona fide end use customers will save the naira; all these measures have also been  tried in Zimbabwe to no avail.  The era of self-defeating and highhanded exchange controls will be with us once again and the CBN would have brought us full circle to where we were over two decades ago after a series of half-baked economic experiments.

 However, the situation is not hopeless and can be reversed in favour of the naira and the economy even in the face of dwindling oil revenue, if only the authorities will accept the truth.  I have consistently advocated that the Nigerian economy will right itself and the  monetary policy paradoxes lately decried by the CBN Governor will be resolved when we agree to pay the three tiers of government with 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 liquidity and save Nigeria over N300bn annual cost of removing excess naira liquidity from the banks and storing these funds idly in CBN vaults and accounts records.  Interest rates will fall to single digit and instigate industrial recovery and generate employment; inflation will be drastically reduced; the festering pool of corruption will diminish and believe it or not, speculation and round tripping will abate and the naira rate will actually be stronger and will most certainly harden to double digit as increasing dollar certificates chase the controlled and limited naira balances in the banking sector.  A word, they say, is enough for the wise!

     SAVE THE NAIRA, SAVE NIGERIANS!
[email protected], [email protected], www.geocities.com/lesleba, 234(0)8052201997

 

googletag.cmd.push(function() { googletag.display('content2'); });

googletag.cmd.push(function() { googletag.display('comments'); });