By: Sir Henry Olujimi Boyo (Les Leba) first published in September 2014

Intro:

Last week, this column repub­lished ‘Economic Contradictions and Mute Victims’. The article discussed the contradictions set up by government propaganda that have made it difficult for Ni­gerians to identify the root cause of the issues they have continued to face for decades.

(See www.betternaijanow. com for this series and more articles by the Late Sir Henry Boyo)

This week’s republication pro­vides an in-depth perspective on the workings of monetary strategy and the effect it has on economic prosperity. The article discusses strategies still in place today, and provides analysis that explains why Nigeria’s economic situation has not improved for years before this article was published in 2014, and is worse off a decade since.

As you read through the below article taking note of previous events or rates, keep in mind its year of publication (2014), a clear indication that Nigeria’s economic situation is yet to improve even after all this time.

“Dealing with the excess liquidity challenge re­quires innovative approaches in view of the source of the problem. One potentially enduring solution, which would avoid the creation of new mon­ey and boost the naira value in the foreign exchange market, relates to the allocation of for­eign exchange earned from oil to the three tiers of government rather than monetizing it. But this may be a recipe for capital flight. Therefore, the Central Bank would need to develop capacity for liquidity forecast­ing and programming”. Vision 20:2020 ‘Monetary Policy Thrust’

In reality, the success or failure of any economy is generally predi­cated on its monetary strategy, thus, abundant endowment of mineral and agricultural resources alone will not necessarily deliver inclu­sive economic growth. Consequent­ly, the success of Vision 20:2020 may well rest on the strength of its mon­etary policy thrust.

Indeed, the monetary policy thrust statement quoted above can be translated into simple English for better understanding as follows:

“We have failed to combat the unusual challenge of systemic surplus Naira which fuels infla­tion and instigates a weak Naira and very high cost of funds; fur­thermore, we recognise that Naira surplus, also sustains the reckless strategy of placing government deposits at zero percent while gov­ernment simultaneously, borrows with double digit interest rates and crowd out the real sector from ac­cess to cheap loanable funds.

“Thus, the failure of our econ­omy is rooted in our reluctance to tackle the source of unyielding Nai­ra surplus which results when CBN monetizes, read as, creates/prints fresh Naira supply as substitute for distributable dollar revenue. Nonetheless, we recognise that if we stopped such monthly creation of additional Naira supply, the Nai­ra value would be boosted in the foreign exchange market”.

We the 20:2020 Visioners also rec­ognise that if dollar revenue is al­located in its pristine form instead of substituting Naira, this will stop the creation of the economically disenabling Naira surplus, but it may inadvertently also facilitate money laundering and speculative repatriation of Nigeria’s dollar re­serves. Consequently, in order to avert such “illegal” forex outflow, the substitution of fresh Naira sup­ply, for dollar derived revenue will continue!”

However, “if we must continue to increase money supply with Nai­ra substitution, the CBN will need to develop its capacity to predict the extent of Naira surplus that is desirable in order to minimise an inflationary spiral!” (End of translation)

In reality, we can confidently conclude that CBN’s preferred strategy of liquidity forecasting and programming has failed, be­cause six years after the launch of the Vision, inflation still remains untamed, and cost of funds re­mains over 20%, and government continues to borrow money it intends to keep idle at over 10%, while the Naira exchange rate also continues to depreciate in spite of increasingly buoyant reserves.

Nonetheless, our regular read­ers will notice that the monetary policy thrust statement clearly agrees with our prescription for economic remediation of the list­ed economic contradictions; not­withstanding, the 20:2020 Vision­ers regrettably concluded that the payment of dollar allocations will lead to capital flight!

Truthfully, in view of the abys­mal level of greed, lack of patri­otism, and ineffective sanctions for indicted treasury looters, it is indeed likely, that raw dollar allocations may truly worsen the outflow of our export dollar reve­nue. Nonetheless, it is not true that capital flight will increase if dollar certificates rather than actual dol­lar cash served as instruments for allocations of dollar revenue.

In the rest of this article, we shall examine whether the process of Naira substitution for dollar rev­enue as currently practised serves as better protection of the federa­tion’s dollar reserves than an allo­cation process that adopts dollar certificates which can only be avail­able as legal tender (for domestic spending) after beneficiaries have exchanged their certificates for Naira sums at prevailing market exchange rates from commercial banks.

The comparison is as follows:

Under the current system, the CBN captures the dollars and cre­ates new Naira supply as alloca­tions, while, the dollar values re­main temporarily domiciled with CBN.

The constitutional beneficiaries lodge their hundreds of billions of Naira allocations in banks and thereby provide banks with the leverage to instigate systemic sur­plus Naira to expand their capacity to create credit and fuel inflation.

The CBN, with its monopolistic ‘good fortune’ as suppliers of over 80% of the dollar market, auc­tions only part of its dollar cache to banks and Bureau De Change; thus, with available surplus Naira chasing relatively limited dollars, the Naira exchange rate weakens as banks and Bureau De Change speculatively purchase dollars from CBN auctions. Ultimately, despite the 20:2020 Visioners’ anxi­ety on capital flight, CBN ironically immediately transfers the dollars sold into the direct custody of ben­eficiary banks and BDCs; conse­quently, the CBN’s dollar balances are reduced accordingly.

The banks and BDCs in turn add their profit margins, which may exceed the current N7/dollar before selling to their customers, who may be importers or indeed government parastatals and minis­tries, who were the original owners from whom the auctioned dollars were earlier captured by CBN for fear of capital flight!

The BDC allocations become the primary source of funding the ne­farious activities of treasury loot­ers, currency traffickers and smug­glers, despite their obvious threat to Nigeria’s economic and industri­al growth and security; similarly, the banks can also roundtrip or speculatively hoard their dollar purchases to create disenabling market distortions.

Conversely, with dollar certifi­cate for allocations, the CBN does not need to create new Naira sup­ply, with the attendant destabilis­ing economic consequences; fur­thermore, the dollar cash remains domiciled in the CBN instead of the usual direct liberal dispersal to the custody of banks and BDCs.

Government beneficiaries of dollar certificates approach banks to convert their dollars to Naira in a market where more dollars chase relatively static Naira balances, as no additional Naira supply has been freshly created by CBN; consequently, the Naira exchange rate becomes stronger while the dollar reserves still remain stable in CBN’s custody.

The banks would also domicile the dollars bought from govern­ment Agencies in domiciliary ac­counts with CBN, thus preventing liberal access to dollars for round tripping and money laundering. The unforced error of dollar allo­cations to Bureau De Change will become unnecessary.

In case governments or its agen­cies require imports, they simply surrender their dollar certificates through banks to CBN so that the government Agency’s domiciliary accounts with CBN can be debited with the dollar value of their im­ports. Ultimately, payment for such imports will be made directly by CBN to overseas suppliers on sight of documentary confirmation of satisfactory shipment of such or­ders.

Private sector importers would buy dollars at open market ex­change rates from banks to cover their invoice values. The banks would simply instruct CBN to pay the respective overseas suppliers by debiting their (Commercial banks’) domiciliary accounts with the Apex bank as soon as the CBN receives documentary confirma­tion from the banks that shipment of imports has been satisfactorily effected.

Obviously, under this arrange­ment, there is minimum tolerance for unsubstantiated forex outflow or capital flight.