GUESS WHO IS DOLLARISING THE ECONOMY!
BY HENRY BOYO
“….The committee observed that its previous decisions needed time for their
effects to fully permeate the economy and therefore “all eleven members
unanimously” voted to maintain the current position!!
The above is a summary of the conclusion reached by the Central Bank of
Nigeria’s Monetary Policy Committee (MPC) at its latest meeting held between
23-24th March, 2015. Incidentally, the MPC has the critical statutory responsibility
for advising the CBN on appropriate strategies for managing the supply of money
at the optimal level that would progressively grow the economy. Curiously, there
are few countries who are more abundantly blessed than Nigeria, yet relatively
less endowed nations in Europe and Asia, boast superior social infrastructure
while their citizens enjoy consumer lifestyles that entice our people to
desperately seek the perceived “greener pastures” abroad and sadly join the
brain drain.
Evidently, good leadership should galvanise human and material resources to the
benefit of the greater good in a progressive nation; however, the recognition of
the critical central role of money in running a modern economy makes it
imperative that a responsible government should be circumspect and embrace
discipline in how it creates or increases the supply of money. Clearly, if a
government pursues a flash in the pan populist agenda and prints so much money
so that everyone can have a surplus ultimately, there would be so much more
money than goods to buy, and you may need to pay N100, 000 or more for a
mere loaf of bread!
Thus, abundant natural endowments will not save the economy of any nation if
there is always surplus cash or excess liquidity in the system as inflation will spiral
to make the local currency eventually worthless, such that, patriotism
notwithstanding, everyone will sensibly seek to conserve their income or wealth
in any other currency or instrument that is perceived to be relatively more secure
and stable. For example, the unyielding Naira Depreciation from stronger than
N1=$1 to the current rate of N200=$1 has led to preference for dollar holdings;
consequently, more commercial transactions are now concluded in dollars, thus
enthroning the “phenomenon of currency substitution and partial dollarization in
the economy”; a development which the MPC Communiqué decries and sadly
recognizes to "have also significantly fuelled the unusually high demand for
forex."
The Committee, consequently reaffirmed that “the Naira remained the currency
of transaction in the economy and therefore advised the CBN to take all possible
measures to address the development”.
Clearly, the threat of dollarisation has been decried by all former CBN Governors,
particularly, since the return to civil rule in 1999. Curiously, Nigerian preferred to
hold the Naira when the exchange rate was much stronger than the dollar;
incidentally, the Naira was widely accepted internationally, and some commercial
outlets which enjoyed huge Nigerian patronage in London and elsewhere actually
priced their products in Naira; you might say that we Nairaised the business in
such locations!
Nevertheless, in order to reverse the increasing present flight from the Naira, the
Committee enjoined the CBN “to continue to fine tune demand management
measures as well as implement appropriate supply enhancing strategies to ensure
effective demand and utilization of foreign exchange in the country”.
Clearly, from the preceding, the Committee obviously believes that the run on the
Naira is the result of excessive demand for the dollar because of reduced dollar
supply. The MPC is probably right, but the question that clearly begs for an
answer is where do all the seemingly boundless supply of Naira come from to buy
up all the dollars offered for sale every time? Surely, the more the supply of
available Naira values against centrally rationed dollar supplies, the weaker will be
the Naira, and such depreciation will further induce public adoption of other safer
currencies as a store of value for their income.
Indeed, in recognition of the serious consequences of excess Naira supply, the
committee unanimously voted to sustain those measures that should make much
of the bloated systemic Naira surplus inaccessible to potential borrowers, so as to
curtail spending and restrain inflation and avert the discomforting possibility of
ultimately having to pay N100,000 or more for a loaf of bread, if inflation goes out
of control. Furthermore untamed inflation will steadily erode consumer demand
with serious consequences for industrial capacity utilisation and ultimately
employment.
Consequently, the committee recommended that CBN should maintain the
deterrent/punitive 13 percent current interest rate on those loans which
commercial banks seek from the Apex Bank to meet their urgent cash
requirements. Thus, the banks are in turn ‘forced’ to charge higher interest rates
of 20 percent plus on loans to borrowers which include the critical operators who
can provide employment opportunities in the real sector.
Ironically, higher cost of funds also promote higher production costs and
ultimately increase prices of goods and services to fuel the rate of inflation, and
thwart the efforts of the CBN to establish price stability in the market.
Conversely, in the absence of the traditional suffocating Naira surplus, and the
attendant threat of inflation, CBN could, irrespective of the level of crude
price/revenue, effortlessly reduce the cost of its loans to banks to below 2
percent as robust and more successful economies elsewhere do to encourage
production and economic growth. Thus, with a low policy rate, interest on bank
loans would correspondingly fall below 10 percent without any need for CBN’s
unheeded ‘hypocritical’ sermons to banks to reduce interest rates. Similarly,
projects in the agricultural value chain would also attract below 3 percent interest
rates; better still, a more level playing field would be created for all sectors to
grow and create increasingly more jobs.
Clearly, the committee’s reiteration of their standing recommendations for the
sustenance of the current mandatory sequestering of, or requirement to keep
significant percentages of bank deposits as idle funds, have clearly failed as a
strategy to bring down inflation to international best practice levels below 2
percent
and
sustain
consumer
demand.
Ironically,
the
committee’s
recommendations clearly also go against the grain of an apparent shortage of
cheap loanable funds to jump-start the real sector, particularly the small and
medium Enterprise subsector. Clearly, after about a year’s practice, indications
are that the strategy of high monetary policy rate of 13 percent and equally
abnormally high cash reserve ratios have also failed, as cost of funds remain well
in excess of 20 percent while inflation inches steadily towards the oppressive level
of 9 percent! Thus, the MPC’s recommendations are therefore clearly antisocial
and antagonistic to industrial and economic growth and should therefore be
urgently jettisoned.
A continuously weakening Naira (even when reserves exceeded $50bn dollars)
and the current wide gap of N20 per dollar between interbank and bureau de
change rates is an unmistakable indication of an unyielding trust deficit in the
Naira as a store of value. Clearly, the CBN and MPC have continued to
tackle symptoms rather than the actual cause of the systemic surplus Naira which
is obviously induced whenever CBN deliberately substitutes fresh Naira creations
as allocations for monthly distributable dollar revenue. Sadly, the Naira will
undoubtedly continue to depreciate with systemic excess liquidity induced by
CBN and MPC's misguided strategy and the economy will inevitably become
increasingly dollarized if this payments system subsists.
SAVE THE NAIRA, SAVE NIGERIA!!