BY: LES LEBA
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In response to the anomaly of increasing income coexisting with increasing poverty in Nigeria, I embarked on a close observation of the operation of the national economy sometime in 2001, and discovered that the root cause of our problem was the subsisting monopoly of the CBN in the supply of both the dollar and naira in the economy. In august 2002, together with a colleague, we presented a paper: "A Liberalised Foreign Exchange Market: a proposal for a liberalised foreign exchange market in Nigeria and its economic benefits" - Boyo/Ojomaikre, to the National Economic Intelligence Committee (NEIC) and proposed that our crude oil derived dollar revenue be allocated to constitutional beneficiaries in the form of dollar certificates, as a way of restoring sanity and development in our economy. In addition, my colleague and I wrote several articles in various newspapers and made ourselves available for numerous interviews in the print and electronic media. Over 4000 copies of our paper were also circulated within the academia, the Federal Executive, Legislature, the organized private sector, and two workshops were conducted at our own expense to promote our prescribed solution.
In the end, we received no reply from the Ministry of Finance and Dr. Nnana, the Central Bank’s Director of Research at the time gave a tepid formal response to the effect that CBN could only act on the instruction of the Federal Executive! However, surprisingly, in the first quarter of 2006, the CBN rolled out with fanfare its own version of a ‘Liberalised Foreign Exchange Market’, which to all intents and purposes was a travesty of our original concept of liberalization. The CBN replaced the existing DAS with a WDAS (Wholesale Dutch Auction system). The article “El Dorado and CBN’s Monopoly” published in this column on 13/3/2006 was my first response to CBN’s ‘considered’ strategy and I maintained that ‘the new WDAS had the potential to be a more fraudulent and restrictive mechanism for determining the appropriate value of the naira”.
On the 3rd of April 2006, a follow up article titled “Bogus Liberalisation = Capital Flight” appeared in this column. Now that the chickens have come home to roost, I crave the indulgence of readers of this column to take another look at this article. Please read on:
“Every keen observer of the management of our economy over the recent past must be totally befuddled by the apparent contradictions between the objectives of government economic policy and the dismal results, which are brought about by the adoption of wrong instruments of offence. Regrettably, the failures of these economic measures are often celebrated by the promoters as major successes, in spite of the bewilderment of the masses!
“We have ceaselessly advocated the enthronement of a liberalized foreign exchange market as the first step to rapid economic recovery and prosperity. In this regard, we had insisted that our Central Bank’s unilateral monthly conversion of the distributable dollar revenue to naira at a lower rate of about N110=$1 and its subsequent sale of the same dollars to the commercial banks at a higher rate of exchange creates a monopolistic market structure, which distorts the cash supply in the system with adverse consequences for interest rates, inflation, employment and the already battered value of the naira. In place of this obtuse and destructive system, we proposed a truly liberalized foreign exchange market in which the 36 states, 774 local governments and other agencies, which are constitutional beneficiaries of the federation pool, receive their monthly share of distributable dollar revenue in certificates which they can negotiate at any commercial bank or any such approved outlet. This arrangement would change our fortunes rapidly and reconcile the contradictions between policy objectives and results as the absence of huge naira cash injections into the banking system every month (when allocations are paid to the bank accounts of the three tiers of government) will ensure that the CBN would not have to mop up and borrow over N300bn of money it does not need at double digit interest rates monthly through treasury bills! Furthermore, the CBN control rate for commercial interest rates (Minimum Rediscount Rate – MRR) will fall below 5% from the current 14.5% and stimulate industrial growth and reduce unemployment. The naira would appreciate quickly as more dollars chase limited naira, and salary and all naira income earners will receive more value for their money as they will be able to buy more goods and services with the same amount of money.
“The above reality notwithstanding, the CBN Governor announced a different brand of liberalization of the forex market at a press briefing last Monday. The Guardian of (Tuesday, pg 3) reported that “…they (CBN) are liberalizing the DEMAND SIDE of the forex market to promote greater efficiency.” (Note that this column has advocated for the liberalization of the dollar supply side of the market”)! Meanwhile, the Punch (Tuesday, 28/3/06) reported that “…the CBN announced major strategic initiatives to address the increasing divergence between the official and parallel foreign exchange markets …and maintained that the divergence between the official and parallel market rates where a 10% premium now exists was unacceptable”. The reality, of course, is that the naira has depreciated to about N150=$1 at the black market, while the ‘official rate’ is about N129=$1 i.e. a margin of about N21/$1 or 17% profit for each dollar that you can buy from the official market and sell at the black market! The CBN itself acknowledges that the foundation of the meteoric expansion of banking in Nigeria in the last two decades was the illegal gains which accrued to banks from foreign exchange round tripping and the handsome interest rates paid on government’s treasury bills, while the real sector – i.e. industry and agriculture continued to be starved of low interest funds for growth. Large differences between the black market and the official rates create distortions in the economy as the official rate continuously struggles to catch up with an upwardly mobile rate in the smaller but ‘powerful’ black market – a case of the tail wagging the dog, you might say!
“In order to put an end to this destructive relationship between the two rates, the CBN, according to Soludo, has resolved to cater for perceived patrons of the black market by making officially priced foreign exchange readily available in all banks and other such designated outlets including the lowly bureau de change and also remove the red tape and documentation requirements that presumably attract customers to the black market. To this end, the CBN has now ‘simplified’ forex procurement documentation for overseas medical treatment, payment of school fees and also increased basic and personal travel allowance from $2,500 – $5,000 and $2,000 to $4,000 per quarter respectively. Furthermore, “commercial banks and other authorized dealers would henceforth be allowed to import forex subject to soon to be released guidelines”
“On the surface, the above measures seem quite attractive, but closer evaluation may admonish caution; in the first place, it seems odd that we are trying to unify and stabilize the price of a commodity by expanding its demand base. Secondly, even countries with stronger industrial and economic structures than ours do not knowingly throw open, not only windows, but also doors and highways to facilitate the remittance of their national dollars earnings abroad! Genuine applicants for forex for education or health purposes should have no difficulty providing supporting documents to save themselves up to N20 for each dollar requirement, but the relaxation of the requirement for forex purchases opens a gateway for spurious forex demands by looters of government treasury and other such economic saboteurs.
“The menace of the patronage of smugglers of contraband and corrupt civil servants (such as Alamieyeseigha) of the black market is much more devastating to the economy than the genuine demands for education and health purposes. A liberalization and facilitation of the demand base of forex will not only engender capital flight in droves, but also constitute a threat to the already wobbling domestic industries, which would have to compete with smuggled equivalents brought in with cheaper official rate dollars! Talk about cutting your nose to spite your face! But wait a minute, the CBN Governor also indicated that banks can also import forex; Nigerians may wonder where these banks and designated outlets will get the dollars they will import if not from round tripped officially sourced dollars; in other words, this maybe our CBN’s formal endorsement of currency trafficking and speculative trade in dollars ahead of the placement of up to $7,000m of the nation’s reserves in the care of some Nigerian banks shortly. Nigerians beware! The destabilizing impact of this scenario when it becomes a reality will prolong the agony of poverty for most Nigerians!
“The more you look at Prof Soludo’s expectations as expressed in Monday press briefing, the less you see! In spite of the touted convergence of the official and interbank rates as a sign of progress, what we actually have is still a multiplicity of exchange rates, as follows: (1) budget exchange rate, i.e. rate at which CBN changes monthly dollar allocation before sharing; (2) CBN commercial rate, i.e. rate at which CBN sells forex to the banks; (3) trading rate; rate at which banks sell forex to their customers; (4) commercial bank/bureau de change rate; (5) bureau de change/customer rate and finally, of course, (6) the unofficial black market rate! It is interesting that the CBN refuses to countenance this multiplicity of rates but would rather make us believe that a little more patience and it will be El Dorado, but we know better, don’t we? Convergence of rates is not possible with our current monetary framework and in any event, convergence will not bring down interest rates, inflation or unemployment but Soludo’s legalization of capital flight will be warmly embraced by the banks, treasury looters and a speculative international business community!”
I will close this week’s essay with the concluding paragraph from another article titled “Cheaper Black Market Dollars” (published 17/07/2006) in which I surmised that “We are fortunate to have “excess” dollar reserves to support the dollar profligacy to BDC (Bureau de Change) for now, but what happens when the dollar income from crude oil is depleted? Presumably, we may need to borrow from our international friends, who have just fleeced $13bn from our tattered pockets to continue funding our BDCs” (check our above website for referenced articles).
SAVE THE NAIRA, SAVE NIGERIANS!