Normalised national currency as growth elixir

Naira notes

Reactions ranging from hand-wringing to fatalistic acceptance have trailed the downward review by International Monetary Fund (IMF) of Nigeria’s 2019 growth rate from 2.3 per cent (which the IMF itself had soothsaid in October 2018) to 2.0 per cent last month on account of softening crude oil prices in the intervening period. Expectedly, the IMF release was sweet music to the CBN which proceeded in the January 2019 meeting of its Monetary Policy Committee to parade as working well the nonstandard fiscal and monetary practices which have underdeveloped the country since the 1980s. Thus unconcerned about the economic challenges posed by Nigeria’s population growth rate of 2.6 per cent, the CBN welcomed the prospects of continuing increase in the over 70 per cent absolute poverty level by proclaiming in the MPC communiqué that “The economy (in 2019) is projected to grow by 2.0 per cent by the IMF, 2.2 per cent by the World Bank and 2.28 per cent by the CBN.”

It is characteristic for crude oil prices to rise and fall. Thus softening crude oil prices should not necessarily lead to economic slowdown. Indeed, in Nigeria’s case today, correct conversion of crude oil receipts to naira amounts alone (regardless of the dollar amount earned) would bring about desirable economic effects and high growth rate. In this regard, the longstanding missed economic opportunities deserve a historical and comparative glance. Since the 1970s the country’s budgets have been based on crude oil output and exports that averaged between 1.6 million and 2.5 million barrels per day. Over the period, crude oil prices ranged from US$3.60 per barrel in April 1973 to $124.93 per barrel in March 2012 while crude oil receipts accounted for over 50 per cent of the annual budgets on paper. Such budgetary profile for over four decades not only evidences a stunted and largely primary economy but also bespeaks improper management of the available resources.

Energy consumption levels mirror the nature of economic activity in a country. Analysis of 2018 BP World Energy Statistics shows that Nigeria’s share of world oil production in 2017 was 2.1 per cent, but her share of world petroleum consumption was negligible (less than 0.05 per cent). Concretely, given the 2017 population of 190 million (which represented world share of 2.6 per cent), Nigeria’s static domestic oil consumption allocation of 400,000 barrels per day beginning in 2000 or so translated to consumption of 0.7 barrel per capita in 2017. The implicit steady decline of petroleum consumption per capita as the country’s population rose since 2000 reflects the practically stagnated economy marked by limping and dying industries. By comparison, in USA (the world’s leading economy with a population of 324 million) petroleum consumption stood at 22.3 barrels per capita in 2017 or 20.2 per cent share of total world consumption.

It is instructive to note, for example, that petroleum consumption in Nigeria’s erstwhile economic peer of Malaysia (its 2017 population of 32 million represented 0.42 per cent of world total) stood at 9.2 barrels per capita in 2017. Petroleum consumption rose by 0.5 per cent in 2017 but grew at an average of 1.9 per cent annually during 2006-16 in tandem with waxing industrialisation. Malaysia’s 2017 world share of oil production was 0.8 per cent, the same level as its oil consumption, which was supplemented by imports.

The upshot is to urgently abandon the nonstandard fiscal and monetary practices responsible for stunting Nigeria’s economy for so long by normalising the naira exchange rate to bring about conducive conditions for ravenous consumption of local petroleum and other energy endowments (supplemented by imports where necessary) for self-sustained rapid growth and development. As always, the MPC betrayed the misconceptions and inappropriateness of the nonstandard fiscal and monetary methods in several assertions contained in the latest communiqué. For instance, firstly, the MPC noted “possible threats to accretion to the external reserves due to softening crude oil prices”. In this regard, the CBN self-servingly construes Federation Account (FA) dollar allocations as the sole source of external reserves.

Hence, the apex bank improperly withholds and seizes FA dollar allocations from the constitutional beneficiaries as so-called CBN’s external reserves by offering in their place fiat printed naira funds. Defence (possibly apocryphal)? Every naira in the economy comes from the CBN: so it causes no harm if CBN gives the tiers of government naira sums for their dollar allocations and thereby prevents the states from forex abuse. Sadly, such unreason has kept Nigeria sleeping economically. Reason? Fiscally, the wrong step represents proportionate CBN deficit financing of the budgets of the tiers of government. Monetarily, the inappropriate procedure amounts to official discrimination against the naira as second-class currency. Although that technical monetary (currency) apartheid system was initiated in the 1970s by then military leadership, the successive political leadership along with top fiscal and monetary functionaries, has retained the nonstandard practice as an avenue for latent corrupt self-enrichment via cronies to the utter neglect of building a national economy that otherwise would have been ranking among the world’s top ten by now.

No thanks to the monetary apartheid and also in contempt of provisions of the CBN Act, the apex bank leadership does as it pleases with the so-called CBN’s external reserves. The seized FA dollar allocations are routinely deployed improperly to reduce excess liquidity (which is caused by the withholding of the dollar allocations). The CBN’s external reserves are also extensively traded with the aid of all manner of interlopers in the several forex market segments at great loss of government revenue. In the nonstandard practice of multiple currency trading which runs contrary to the CBN Act, portions of the CBN’s external reserves end up in individual and corporate forex domiciliary accounts. As a result, residents of the country use forex obtained locally to subscribe to Eurobonds among other purposes. In effect, the Federal Government borrows back part of the FA dollar allocations being dissipated by CBN. Needless to state, private sector forex kept in domiciliary accounts (when it should ordinarily accrete to the country’s genuine external reserves) is openly and flagrantly abused. All kinds of smuggled items ranging from rice to cars as well as foreign bank accounts are funded with forex dishonestly managed by CBN.

Worse still, the fiat printed naira funds substituted for the seized FA dollar allocations, as earlier indicated fleetingly, raise the fiscal deficit/GDP ratio beyond the safety limit thereby causing the endemic macroeconomic instability by the way of excess liquidity, tight monetary policy stance (“a loosening option is very remote” according to the latest MPC communique), high lending rates, avoidable mopped and sterilised excess liquidity-fed treasury bills which transmute to high interest-bearing heavy national domestic debt, low level bank financing of the economy which impedes economic diversification, and so on. All the familiar economic difficulties have proved uncontrollable because of the subsisting seizure of FA dollar allocations by the apex bank.

Secondly, amid several false claims of exchange rate stability, the MPC stated pointedly and dishonestly that, “the managed float foreign exchange regime of the CBN has delivered the most optimal results…” Contrarily and as previously noted, there exist ruinous multiple exchange rate segments and a multiple currency system evidenced by the operation of domiciliary forex accounts in a brazen non-recognition of the primacy of the national currency as enshrined in the constitution of the country and the CBN Act. Exploiting the undiscerning and unquestioning nature of the public, the CBN has foisted a confused naira exchange market where it actually devalues the naira in contravention of the Appropriation Act while claiming to be defending the value (of the naira) in the process. For example, in the Investors’ and Exporters’ forex window (which has been in operation since April 2017) the naira has suffered not less than 18 percent devaluation (dishonestly dubbed premium) relative to the effective managed float rate set in the 2017 and 2018 Appropriation Acts as well as in the proposed 2019 federal budget. In any case, contrary to what CBN/MPC would like the public to believe, it is axiomatic that any currency which is embedded in such a hefty margin of devaluation or even premium is adjudged unstable.

Now, the normalised naira currency exchange rate should float in a single forex market within a stability band centered on the Appropriation Act exchange rate. Forex demand should be moderated by incorporating a forex access tax for the purpose of achieving necessary economic objectives as outlined in previous editorials of this newspaper. Also under the normalised national currency, genuine external reserves (which should be domiciled in the CBN) would be made up of unutilised or surplus balance of the country’s total (public and private sector including remittances) forex inflows after their conversion in the single forex market for the purpose of acquiring naira funds for domestic use and settling eligible external commitments. Accordingly, no part of the country’s forex receipts should be held indefinitely in individual or corporate forex domiciliary accounts. Consequently, with over $20 billion currently being kept in domiciliary accounts, the country should ordinarily have over $60 billion as genuine external reserves today. Indeed, but for collusive mismanagement, at any given time, Nigeria would be a forex-surplus economy.

And so, given the normalised national currency, there would be macroeconomic stability, low 0-3 per cent range inflation, internationally competitive lending rates and stable naira exchange rate. In the circumstances, the various impediments to successful management of the economy would not be encountered. There upon the country would focus on attaining self-sustained rapid growth (double digit GDP growth rate is within reach) and development on the strength of her ample human and natural endowments while spontaneous foreign direct investment would merely play a supplementary role.

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