By Henry Boyo
A seemingly
responsible fiscal plan will become unimplementable, in the modern era, if the
underlying monetary indices are out of sync with budget projections.
Conversely, the stubborn sustenance of appropriate monetary benchmarks for
inflation, cost of funds and exchange rate may still rescue the performance of
an otherwise bad budget.
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| *Buhari |
The dwindling
purchasing power caused by inflation will invariably erode consumer demand for
goods and services, and also constrain domestic industrial output, while
further investment decisions will ultimately be kept on hold. Thus, in addition
to a significant loss in real income values and deepening social poverty, an
uncontrolled inflationary spiral will severely challenge the implementation of
any fiscal plan that does not accommodate the prevailing rate of inflation; for
example, the clearly recklessly ambitious 2016 N6tn budget, has become
difficult to implement because of reduced revenue and significant Naira
devaluation that has increased local production cost and further spurred
inflation closer to 20%.
For the above
reasons, Central Banks, in successful economies everywhere, endeavor to sustain
strategies that will keep money supply at an equilibrium level that will not
push inflation rate beyond say 3-4%, so as to conserve price stability. Similarly,
if foreign exchange is in short supply and auctioned in a market where Naira
supply is constantly in excess, the local currency will, invariably depreciate
in value, and also make all imports (including industrial raw materials)
correspondingly more expensive. Furthermore, the competitiveness of local
enterprise will become even more seriously challenged, if CBN’s MPC decides to
counter inflationary pressures by increasing the rates at which commercial
banks borrow from the CBN to as high as 14-16% as per their recent position in
July 2016.
The preceding
narrative hopefully explains the need for best practice management of money
supply to avert the disenabling and distortional consequences of spiraling
inflation in the economy. Clearly, horrendous inflation rates above 20% will
seriously challenge any attempt to diversify any economy or foster inclusive
economic growth. Indeed, if the inflation rate remains untamed, the Naira’s
purchasing power will become seriously diminished and the N1000 note may ultimately
be worth less than a dollar. Price stability is threatened and the economy will
invariably underperform whenever the CBN readily admits its unending engagement
in a very costly battle against perceived systemic surplus Naira.
So the critical
questions should therefore be, what causes the evidently systemic excess Naira
liquidity and why is CBN losing the battle to wrestle inflation to best
practice rates below, say 4% and protect our incomes and industries. Naira
supply will obviously increase if government continuously prints more Naira or
borrows heavily without caution to fund its budget, as clearly demonstrated in
the 2016 budget structure. Furthermore, Naira supply also increases
inordinately, whenever government’s forex receipts are directly substituted
with fresh Naira supply as allocations, while CBN keeps and auctions the
dollars. Fortunately, the CBN also has the option to modulate money supply by
establishing appropriate cash levels which banks must retain in relation to
their assets.
Thus, the amount of
spendable Naira will increase if banks are mandated to keep only one percent of
their reserves as cash; in other words, even though such low rate of cash
reserves will increase the level of risk, it would, however, provide banks with
the increased capacity to extend more loans to borrowers. Nonetheless, the
increase in spending from such loans will inadvertently instigate a mismatch
with the inadequate supply of goods and services to sustain inflation and evoke
the adverse consequences earlier discussed above. The persistent presence
of excess Naira supply and the adverse collateral of spiraling inflation
generally compels the imposition of higher mandatory cash reserve ratios so as
to reduce credit liberalization and restrain spending while also improving the
risk cover for all banks.
Alternatively, the
CBN may resort to borrowing the perceived surplus cash in commercial banks’
custody (this process is described as CBN mopping up of excess liquidity) so as
to prevent liberal bank credit which could drive consumer spending and propel
higher inflation rates in a market already characterized by much more cash than
output. For example, by December 2015, the CBN had already concluded that it
would mop up of over N6000bn from the systemic cash surplus projected in the
2016 fiscal year, despite the attendant oppressive cost to government.
Regrettably, the
average interest on these CBN loans is about 10%; thus, banks and other
portfolio investors will earn easy returns of over N600bn for adding absolutely
nil value to the economy, from their purchase of government treasury bills.
Over the years, the CBN has disturbingly shown more affinity for using the
instrument of liquidity mop up, despite the collateral of its crushing national
debt burden; conversely an increase in the mandatory cash reserve requirement
for all commercial banks, even beyond 70% if necessary, would similarly mop up
excess liquidity, ironically at zero cost. Inexplicably, therefore, despite the
crying need of the real sector, particularly SMES, for cheap lonable funds to
drive their businesses and increase the rate of employment, the CBN
inexplicably still engages in a process that in fact fires inflation and
impedes inclusive growth and increasing job opportunities by reducing the availability
of cheap loanable funds to businesses.
It is notable that
the N6trn plus that will be borrowed for liquidity mop up by CBN this year
cannot be dedicated or applied to any capital or recurrent expense; indeed,
such application will be counterproductive, and simply amount to re-injecting
more liquidity into a market, that is already clearly seriously encumbered by
the subsisting stock of admittedly bloated money supply, which will drive
inflation beyond the comfort zone for everyone.
Furthermore, the CBN
also instigates higher cost of funds to all sectors by increasing the rate at
which the Apex bank lends to commercial banks to augment their cash needs from
time to time. Indeed, this monetary strategy becomes self flagellation, as the
Apex bank also becomes a victim of higher interest rates whenever it sells
Treasury Bills to reduce the unyielding systemic Naira surplus and counter
spiraling inflation, which truncates our expectations for inclusive growth,
improved social welfare and increasing job opportunities nationwide.
SAVE THE NAIRA SAVE NIGERIA
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