By: Sir Henry Olujimi Boyo (Les Leba) first published in August 2013
INTRO:
Last week this column republished “Naira: Redesign, Redenomination or Revaluation.” The article argues that redesigning the naira is ineffective without addressing inflation and dollar substitution, advocating instead for redenomination, coin use, and dollar certificates to stabilize the economy.
(See www.betternigerianow. com for this series and more articles by the Late Sir Henry Boyo)
This republication revisits a 2002 policy paper that warned Nigeria’s monetary framework, particularly the conversion of dollar revenues into excess naira, would drive inflation, weaken the currency, and raise borrowing costs. Despite being widely shared with key stakeholders, the paper was largely ignored, yet its predictions of stalled growth and deepening poverty remain relevant today.
As you read through the below article taking note of previous events or rates, keep in mind its year of publication (2013), a clear indication that Nigeria’s economic situation is yet to improve even after all this time.
In August 2002, a paper titled “A Liberalised Foreign Exchange Market; a proposal for a liberalized forex market in Nigeria, and its economic benefits” by Boyo/Ojomaikre (www. lesleba.com/olp.pdf), was presented to the National Economic Intelligence Committee (NEIC), then headed by Prof. Ibrahim Ayagi, an economist, and one time managing director of a now defunct commercial bank.
When no feedback came from NEIC several months thereafter on our paper, we alerted the Committee that we had forwarded the same paper by courier mail, to critical stakeholders, including President Olusegun Obasanjo, his Minister of Finance and CBN Governor at that time.
Ultimately, the following came as response from NEIC in their mail of March 25, 2003; “The NEIC notes that you have already contacted Mr. President and the Governor of the Central Bank on the same subject matter. This development forecloses further consideration of your proposal by the Committee until Mr. President concludes his consultation on the matter.”
Subsequently, copies of our paper were distributed by courier to about 12 State Governors and Heads of Departments of Economics in selected Universities, as well as critical stakeholders in the private sector.
Sadly, after listening to us, the Economic Officer sent to discuss our paper by the Manufacturers’ Association of Nigeria (MAN), concluded that in view of the existing structure of MAN Council, “In 20 or 30 years hence, our paper may ultimately be discovered on a dusty shelf as the evasive solution to our economic challenges”. Well, eleven years thereafter, the MAN Economic Officer’s statement is apparently prophetic, as successive economic management teams have adamantly pursued monetary and fiscal strategies, which evidently make us poorer, especially when we earn increasing dollar revenue!
Curiously, there has been no serious contention to the validity of our advocacy in any serious media since 2002! I concede that there are occasional obtuse comments like why anyone should think that there can be a one-cure solution to our economic problems; in reality, however, our advocacy for a reformed payments system targets the enhancement of the quality and volume of the required ‘oxygen’ for upgrading our economic and social welfare. In the same manner that the complex interrelated organs of our human bodies are useless without the oxygen we breathe, so also is the fate of our complex economy related to the quality of our monetary policy strategy, particularly its policy instrument of interest rate.
Indeed, some experts, including the CBN Governor, have argued that inadequate power and other infrastructure, as well as corruption are critical reasons for our comatose economy; superficially, this may seem so, but you cannot diminish the significance of cost and availability of funds as the universal driver of any economy.
Thus, a quarter of 1% movement in a country’s Monetary Policy Rate would sympathetically instigate expansion or contraction of economic activities across the board in successful economies. Consequently, the interest rate provides a critical competitive edge in both domestic and international trade. For example, it may still be cheaper to bring agricultural exports from ‘faraway’ Japan with its prevailing below 1% interest rate for agriculture, than to produce similar items locally in a country like Nigeria, where cost of funds to agriculture, when available, would cumulatively exceed double digit, plus the additional cost of provision of own infrastructure i.e. power, water, roads, etc., which also have to be funded with commercial cost of funds above 20%!
Consequently, a high monetary policy control rate of 12% compared to one to 2% in successful economies has led to contraction in economic activities and consumer demand, and ultimately on available job opportunities.
However, our advocacy recognizes that the constant cause of high cost of funds is the surplus naira unleashed into the market whenever CBN’s captures our nation’s dollar revenue and substitutes naira as monthly allocations to beneficiaries.
The obnoxious impact of this practice was recently corroborated by Lamido Sanusi, when he also confirmed that the constant spectre of excess cash in the system makes it possible for government to keep billions of free naira in the banks, only to turn back and borrow part of the money at between 13 – 14%; worse still, this high cost borrowed funds, have for decades, been simply kept idle in CBN vaults and account records.
This odious practice has enriched our banking moguls over the years, and also simultaneously crowded out the real sector from access to credit at enabling rates of interest; in addition, it exerts negative pressure on naira value. Consequently, the more dollars we earn as a country, the greater is the money supply in the system, the greater also will be government debts and repayment charges; ultimately, the weaker also is the naira, as increasing naira sums chase rationed dollar supplies, to reduce the purchasing power of income earners; surprisingly, however, in this event, the higher will be CBN’s dollar reserves, which are inexplicably ultimately invested in other countries’ economies for minimal returns!
Evidently, a weaker naira increases fuel subsidy, thus, instead of the prospect of additional revenue of a per litre sales tax on fuel, as in some oil producing countries like UK and US, we will continue to waste trillions of naira on the unnecessary payment of fuel subsidy annually, if the CBN continues with its perverse payment system!
Ultimately, a weak exchange rate will also inevitably accommodate rising subsidy values in fixing power sector tariffs and this factor will definitely threaten or delay the success of the sector’s privatisation. Besides, double-digit inflation rates, particularly in our food basket, will continue to contract consumer demand and purchasing power, and ultimately deepen poverty nationwide, as high unemployment persists.
If the MAN Economic Officer’s above ‘prophetic’ observation that it would take 20 to 30 years for our advocacy for a restructured payment system to be admitted as correct, then, we may, painfully, recognize that a minimum of another 10 years may pass before our economy will be liberated from its self-fabricated shackles! Heaven help us!
