How not to defend the Naira

By The Guardian Editorial Board

The Central Bank of Nigeriaís statement of January 16, which apparently mirrors the CBN Governor's closed-door briefing of the Senate, together with the communique of the MPC meeting in January only rehashed the full-blown symptoms of Nigeriaís long festering economic disease.
The apex bank, of course, should not have simply recited the stipulations of its mandate, beguile the Senate and confuse the public with self-indicting explanations as prelude to anticlimactic repetition of past monetary measures that only skirted the underlying economic problem. Rather, the acute impact of falling crude oil prices calls for a professional cause-and-effect narrative of failed policy measures with a view to healing the long diagnosed economic disease that has refused to go away at the insistence of the political leadership.

It is general knowledge that the CBN has not been managing public sector dollar receipts (the bulk of total supply of forex) the way foreign central banks treated forex supply with an eye to defending the value of their national currencies. Why then do the Senate and CBN pretend that CBN naira exchange rate not arrived at through international best practice could measure up to major foreign currencies and command public confidence? To be sure, the Presidency-dictated inappropriate handling of Federation Account (FA) dollar accruals substitutes CBN deficit financing of government budgetary spending in place of FA dollar allocations, bloats money supply in the process, causes systemic naira depreciation and periodic devaluation thereby fuelling exaggerated demand for forex to hold and for speculation, among other adverse effects.

The CBNís explanations for the dwindling naira and the poor state of the economy inflict shame on the country. Firstly, the apex bank adduced the normalization of monetary policy by the U.S. Federal Reserve as a reason for the fall in the value of the naira. The Fed action is in the national interest of the U.S. and represents the norm from which may be transient aberrations. In effect, the CBN let it be known to the Senate and the Nigerian people that the naira and the Nigerian economy are doomed for good.

Secondly, when CBN sells withheld FA forex under the pretext of defending the value of the naira, the forex is not channeled like focused central banks do, exclusively to procure the countryís import needs in order to strengthen the economy. Instead, much of the forex is wasted partly on mopping-up excess liquidity brought about in the first place by the wrongfully substituted CBN deficit financing of government expenditure thereby piling up the national domestic debt, partly on shelling out forex to speculators operating bureaux-de change (BDCs) and partly on taking additional amounts out of the system for outright destruction.

Thirdly, the falling oil prices led to lowered inflation in oil-importing industrial countries, but the reverse obtains here owing to the faulty handling of FA forex. Similarly, with legislated budgetary borrowing routinely falling within three per cent of GDP, under best practice exchange rate fixing system, Nigeriaís inflation rate would crash below three per cent and domestic bank credit would be accessible at internationally competitive rates thereby boosting investments. In contrast, the CBN has fixed the so-called tolerance inflation range of 6-9 per cent, which is the repercussion of the withholding of FA dollars and the attendant artificial exchange rates. Consequently, the economy is saddled with a restrictive monetary policy stance that renders bank lending rates unattractively high, impedes private sector investments and fosters mass unemployment.

For the sake of putting an end to the numerous economic difficulties arising from the faulty withholding of FA dollar accruals, the best thing is for beneficiaries to collect dollar allocations which, however, should be retained in their respective CBN accounts in order to prevent abuse. Simultaneously, FA beneficiary CBN forex holdings should be reflected in a dummy dollar account (DDA) opened with deposit money banks. (The DDA is different from standard domiciliary dollar account with cashable dollar holdings.) At the request of DDA holders, DMBs transact in the forex market and convert any portion of forex requested to naira revenue. The TSA rule should be applicable to the converted naira revenue. By the DDA procedure, the economyís total forex supply and total demand will become properly subject to DMB intermediation at the primary stage.

Needless to state, government fiscal responsibility includes passing legislation specifying the countryís import needs and employing discriminatory tariffs primarily as a means of promoting domestic production and moderating demand for foreign exchange. The unwavering objective is to keep the national currency intrinsically strong by ensuring that the Nigerian economy lives within its means literally and metaphorically. Accordingly, it is imperative that eligible demand for forex be based on a carefully chosen basket of items that may be imported to complement what is available or should be produced domestically with an eye to erecting a strong economy. Imports that fall outside the specified basket (however they may be financed) undermine the national economic objective and so should be discouraged by rendering them unprofitable via clamping down on them with multiple import levies. In this connection, revenue generation is incidental to the duties of the Board of Customs and Excise whose proper function is to enforce cast-iron protection of domestic industries. Legislation constituting the basket of imports should explicitly prevent whimsical granting of tariff waivers by the executive arm of government.

An adjunct objective of the permissible import basket is to engineer forex demand to be less than supply to facilitate steady build-up of external reserves. The constitutional exclusive list of functions vests ownership of external reserves on the Federal Government. A portion of the external reserves may be appropriated via the legislature from time to time as FG internally generated forex revenue thereby not only foreclosing external borrowing but also providing the wherewithal to take care of federal forex obligations.

By not pandering to any vested interests, it is actually so easy to place the domestic currency firmly beyond speculative attacks and to actualize Nigeria's self-financed economic recovery, rapid growth and fast development.

Source: The Guardian.