CBN and the economy … GUARDIAN

emefiele

ONE common trend that runs through Nigeria’s successive administrations is the expressed objective to promote national economic prosperity.

However, the objective has proved unattainable for over four decades despite five National Development Plans, a Structural Adjustment Programme and a series of three-year rolling plans.

In the present democratic dispensation, the rolling plans gave way to the medium term expenditure framework and fiscal strategy paper, which also spans three years, upon which have been superimposed the National Economic Empowerment and Development Programmes I&II and the Economic Transformation Agenda or the Vision 20-2020 Economic Blueprint.

But the economic bane has turned out to be unchanging faulty fiscal and monetary practices. Buffeted for six years by a campaign for the correction of the flawed practices, the CBN announced on August 14, 2007 under its Naira Reform Agenda Phase Two the “intention to give greater emphasis to the most important function of central banks everywhere in the world, namely, to issue legal tender currency and to defend its value (domestically by ensuring low inflation, and externally, by ensuring appropriate and stable exchange rate regime).”

Nonetheless, shielding the successive political leaderships from blame openly for preventing the carrying out of its statutory functions in tune with best practices, the CBN timidly attempted to possess its responsibilities piecemeal thus: “Given the structure and development of the financial system, the underdeveloped nature of the forex market as well as the restrictions on foreign exchange transactions, the CBN has traditionally fully monetised the foreign currency receipts in the Federation Account to be shared by the three tiers of government…

Consequently, the Monetary Policy Committee (MPC) of the CBN has approved the sharing of part of the Federation Account allocation to the Federal Government and the State Governments in U.S. dollars…

For the Central Bank, this could also provide additional instrument for effective liquidity management as we migrate to inflation-targeting framework.” The excerpt provokes several comments.

Firstly, the alibi of seemingly unending absence of the necessary structure and development of the financial system betrays an expectation by the interfering political leadership and the pliant CBN that the required structure would come into being without initial practical trials. That was an unrealisable expectation that amounted to a self-serving dereliction of responsibility by the CBN.

Secondly, far from properly monetizing Federation Account (FA) foreign currency receipts, the CBN by its action literally withholds the FA dollar allocations and wrongly substitutes in their place CBN deficit financing in proportion to FA dollar receipts in the annual budgets. To be sure, even the World Bank has adjudged the CBN approach improper.

In effect, because forex receipts have since 1974 accounted for over 50 per cent of the annual budgets on paper, the economy has been illegally subjected to long-drawn-out substituted excessive fiscal deficits. Therein lies the economic bane.

Thirdly, in light of the fortnight notice given by the CBN to have the FA dollars correctly transacted beginning from September 1, 2007, the excuse that the forex markets had remained underdeveloped for over four decades reinforces the case against the CBN for willfully and unprofessionally shirking its responsibility down the years.

Fourthly, the continued non-implementation of a proper forex market since September 2007 following its abortion by misdirection of President Umaru Yar’Adua on the advice of then Attorney-General, exposed the fecklessness of particularly then Central Bank governor and MPC members along with their successors, who have totally forsaken professionalism and failed to patriotically uphold and re-submit for adoption the course of action that best serves the national interest, while they merely hold down their appointments as gold diggers.

The faulty handling of FA dollar receipts swamps the system with persistent excess liquidity whether forex earnings from the petroleum sector soar or decline. Faced unrelentingly with the ensuing high inflation and an ever-sliding domestic currency, the MPC has chosen unwavering tight monetary policy stance thereby providing the basis for banks to set very high lending rates.

Such a state of affairs stimulates economic contraction the manifestations of which include the fast-growing non-investable national domestic debt, mass unemployment evidenced by the steadily rising incidence of poverty and a blighted real sector of the economy. The foregoing casts doubts on the robust GDP growth rates being bandied annually.

Aware of the emptiness of its policy measures, the CBN has resigned to playing the role of a fawning lap dog to the know-it-all federal political leadership.

The crash of crude oil price has deprived the apex bank of any room for monetary management pretensions. Through recent MPC communiqués, the CBN has indicated that monetary policy options have approached their limit.

In a well-run financial system, BDCs are required to source forex from non-bank holders and to set selling rates within a specified spread tied to the currency rate determined in an open forex market operated by deposit money banks (DMBs).

In any case, cognizant of the capacity of the DMBs to transact available forex in the economy with legitimate end-users, why does the CBN sell forex to BDCs, which promote activities that are detrimental to the real sector of the economy?

In his inaugural speech, President Muhammadu Buhari was right when he observed that “the Nigerian economy is in deep trouble” but wrong when he cited the power situation as the single cause of the country’s poor economic performance over the years: the falling economic fortunes had become noticeable even before Buhari’s first coming in 1984 while public power supply was fairly adequate.

As a matter of fact, the single factor responsible for the under-performance of the economy is the improper management of the naira.

As a result, for instance, ample bank credit capacity topping N70 trillion that could have been invested in the various sectors of the economy including the power sector has been priced beyond the reach of prospective investors, streams of economy-boosting investments had been similarly undermined before now.

Pertinently, MPC communiqués routinely highlight the stable low inflation and interest rates which prevail in the world’s leading economies.   These conducive production factors will quickly evolve in Nigeria when all inflows of forex for domestic business are correctly converted to naira funds.

That process will make the FG to accumulate into the bargain appropriable internally generated revenue in foreign exchange as part and parcel of external reserves.

The exclusive ownership by the Federal Government of external reserves is unassailable: in some countries the external reserves are partly hived in sovereign wealth funds.

Yet, whereas the proper forex market will induce forex in private safes and domiciliary bank accounts to be sold via the DMBs to the CBN and thereby swell FG external reserves (part of which could be appropriated for federal projects), the CBN today in one breath discourages further lodgement of dollars in domiciliary accounts and in another breath hankers after the puny amounts of forex made available by predatory foreign portfolio investors on condition that the naira be devalued again and again. These acts of economic mismanagement should stop.

While successive Heads of State/Presidents have held the CBN on a tight leash away from its core mandate, Buhari should realise that our one-time economic peers such as Malaysia and Singapore, which individually have much lower populations and generate far much larger export earnings than Nigeria, are not hobbled by forex-induced excess liquidity.

Owing to proper management of those economies, their GDP per capita by 2012 was 2.5 times and 12.6 times Nigeria’s average of US$2,689 respectively.

For Nigeria to begin to close the gap by facilitating extensive investments that create jobs, Buhari should urgently stop both the politically dictated wrongful withholding by CBN of FA dollar allocations and their simultaneous substitution with freshly printed naira amounts by not only directing the country’s public sector and autonomous forex to be transacted appropriately but also allowing the apex bank the leeway to professionally carry out its statutory mandate.