Suicidal Defence Of The Naira

By Henry Boyo

The awareness of the correlation between lower naira exchange rates and increasing poverty motivated the “Save the Naira, Save Nigerians!” by-line in articles in this column since 2004. Despite the obvious debilitating impact of Naira devaluation on inflation, domestic industries, employment and social welfare, the Central Bank of Nigeria (CBN), recently, brazenly   declared that it deliberately devalued the naira from below N120/$1 to almost N150/$1; regretably CBN, by this act, declared a war against our welfare.

 The apex bank however, countered that devaluation was necessary to stabilize the economy and ensure that monthly naira allocations matched the projected 2009 expenditure budget. I daresay, however, that such a fiscal strategy is counterproductive; Instructively, the resultant bloated Naira allocations will still be inadequate to cover recurrent and capital expenditure which were earlier projected with at least 25% stronger naira values.

When the folly of this strategy ultimately dawned on our monetary policy makers, the CBN Governor quickly recanted and later alleged that, the devaluation was in fact, the handiwork of speculators!!   Now, let us examine his claim. The first pertinent question is, how speculators accumulated almost N2,000bn between October and November 2008 to exchange for $7bn plus from CBN?   Indeed, prior to the alleged deliberate devaluation, the monetary authorities, reportedly held internal consultations and sought President Yar Adua and National Economic Council’s approval; inevitably, prominent Nigerians with interest in banks became consequently privy to the dastardly blow awaiting the naira!

Curiously, despite the very late budget passage in October 2008, and the parallel delay in capital projects execution, the Federal Executive Council, nonetheless, authorized 100% release of all outstanding budget provisions, not minding that with Sallah, Xmas and New Year- holidays imminent, there were barely seven weeks left to 31st December 2008 to complete projects which should normally take 12 months for implementation.

Invariably, with the subsisting embarrassingly surplus Naira Liquidity, and the open secret of an imminent Naria devaluation, the banks besieged CBN with demands for unusually large dollar purchases, which they would later sell with huge profit after devaluation.

Alarmingly, the CBN willingly, ‘bravely’ matched the obviously the bogus dollar demand between October/November with over $7bn from reserves; in contrast, between January and September 2008, the CBN sold less than $5 billion to the same banks. Ironically, after $7bn plus had bolted from Nigerian’s reserves, CBN shut the barn door and banks were belatedly instructed to only bid for foreign exchange, specifically for their customers; meanwhile official dollar sales to Bureau De Change (BDCs), still remained slightly less than the erstwhile unsolicited $3bn monthly allocation to nebulous BDC customers.

The question is, why did CBN knowingly gleefully meet the evidently bloated dollar demands of banks between October and November only to shamelessly thereafter cry wolf! Wolf?, Why would CBN also blame speculators when it had earlier announced that Naira   devaluation was carefully considered and deliberately implemented to stabilize the economy and protect our industries? Incidentally, despite several allegations of commercial banks’ complicity in fostering round tripping and its poisonous economic impact, so far, heavy penalties or criminal convictions are rare!  

Even when a notable Nigerian bank, like UBA was indicted and fined $15m in the United States for money laundering, involving federal government funds irregularly deposited via the controversial “African Financial Corporation,” no one was brought to book! Furthermore, there is still no rigorous audit or system to distinguish genuine and spurious dollar bids from banks; besides, CBN’s deliberate instigation of blatant dollar speculation in October and November 2008 does not indicate much seriousness to tackle capital flight or strengthen the naira rate!

The truth is, Naria rate will continue to slide so long as a constant pool of excess idle Naira floods the market. The question is how does this burdensome excess naira come about?   The answer, quite simply is that, the market becomes awash with excess naira every month, when the three-tiers of government receive huge naira allocations. The resultant extended credit capacity of Money Deposit Banks will invariably provide surplus naira that dwarf the weekly auctions of dollar rations by CBN (as was the case in October/November 2008)! However, in recognition of the serious threat of excess Naira, CBN stepped up the very costly process of reducing Naria liquidity by borrowing back part of the cash glut created by the payment of strictly huge naira allocations.

In order to control the Naria glut it earlier unleashed, the same CBN would auction Treasury bills and bonds with excessive returns to predominantly the same banks which are the custodians invariably, such damage control can only be superficial and can never really significantly tame the naira glut; With this unforced   destructive framework, in place, the CBN is incapable to bring down its own monetary policy rate in line with international best practice below 3% to stimulate our economy, because of the fear that loans will become cheaper and the credit capacity of banks will be further enhanced to sustain further speculative tendencies and unhealthy consumer lending that will fuel inflation and inflict further pressure on the naira rate!  

Thus, any attempt, by CBN to continue defending the naira rate with a payments framework that ceaselessly inundates or replenishes the liquidity base of banks with huge naira allocations every month, the naira rate will continue to fall while the gap between the official and parallel market rates will continue to widen; any measures adopted by CBN to restore sanity will similarly fail. Sadly the era of counter productive and high-handed exchange controls will return and CBN would have brought us full circle   back to our distressed state over two decades ago after we became victims of a series of half-baked economic experiments.

However, I have consistently advocated that the Nigerian economy will right itself and the   monetary policy paradoxes, lately decried by the CBN Governor Prof Soludo will be resolved if the three tiers of government receive 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 Naira liquidity and save us over N300bn annual cost of removing excess naira liquidity from banks and sterilising these funds in CBN accounts and records. Interest rates will also fall to single digit to promote industrial recovery and generate employment; inflation will nosedive; the festering pool of corruption will diminish and believe it or not, speculation and round tripping will reduce while the naira rate will appreciate below N100=$1, as increasing dollar certificates chase closely controlled and limited naira balances in the money market. A word, they say, is enough for the wise!

*This article was first published on February 16, 2009