The above is the title of a two-part article by Franklin Nnaemeka Ngwu, who holds a doctorate in Law & Economics, Banking and Financial Services Regulation and is also an Assistant Professor of Finance in a UK university. The following summary and excerpts from his article hopefully capture the essentials in the recommendation for an urgent payment reform to resolve our current severe economic predicament. Please, read on:
“The several calls and demand for further devaluation of the naira especially by our so-called erudite economists, obviously ‘neo-liberal text book economists’ are very surprising. If a currency that is officially exchanging at N199 to the $1 (the global currency) is not (already) devalued, I am at a loss on what further devaluation will achieve in a mono-cultural economy such as ours. If we cannot achieve a higher export at this rate, even a further 100 per cent devaluation will not create the ‘miracle.’ The USA, the UK and Germany with the most valued currencies have continued to maintain their global export competiveness.
In the 2016 World Bank Ease of Doing Business Report, Nigeria was ranked 169th out of 189 countries surveyed while Mauritius was 32nd, Rwanda 62nd and South Africa 73rd. This was not caused by a fall in oil prices or by the Central Bank of Nigeria governor. Neither was it responsible for our very high interest rates above 20 per cent while only seven per cent of Nigerian adults and five per cent of firms have loans with the banks and access to credit remains a major problem to over 80 per cent of Small and Medium Scale Enterprises. With all the banking reforms over these years, only about 40 million people have accounts with the formal banking sector in a country of about 180 million people. Instead of lending to the real economy, our banks prefer to generate profits through all kinds of nefarious and irreconcilable charges. How can we be talking of further devaluation when inflation is above 11 per cent and unemployment above 20 per cent and these problems have remained a major challenge for both the CBN and fiscal policy providers for the last 45 years.
In the UK with the most valued currency and whose policies we often adopt, inflation is below two per cent, the unemployment rate is 4.8 per cent and interest rate is 0.5 per cent from the Bank of England and below five per cent from the UK commercial banks.
While the fall in oil prices has contributed to our foreign exchange problems, the more significant issue is the way the CBN (not started by Godwin Emefiele) has managed our foreign exchange earnings. In the current federal allocation approach, the CBN substitutes the accrued dollars with printed naira which are then allocated to states and other beneficiaries in line with the agreed sharing formula.
As the naira-substituted dollars then form our so-called external reserves. This approach is inherently faulty and counter-productive as it contributes significantly to our exchange rate problems. Given our high import dependence and other factors such as corruption, this approach creates and sustains a kind of internal pressure on the naira due to the exchange of most of the allocated naira back to foreign currencies (dollars) by the initial beneficiaries. It is this internally-created problem that the CBN then tries to address by selling back some of the withheld dollars (foreign reserves). Through this flawed process, the CBN therefore creates an economy that will continuously under-perform with persistent excessive fiscal deficits and inflation. We are, therefore, more or less creating and sustaining our problems.
One of the real solutions to our foreign exchange management is the need to adopt and quickly implement the Managed Float Naira Exchange System through which the dollar-bearing Federation Account will be better managed. It is more proactive and more appropriate to our situation. This will help address another major monetary problem of the CBN which is the persistent excess liquidity in the system. It will stimulate the banks to rightly intermediate the economy rather than their current rent-seeking and dis-intermediation contribution.
Both inflation and interest rates will reduce while the banking sector credit to the private sector will increase. There will be no need for the CBN’s regular manipulation of interest rates especially the Cash Reserve Ratio and Monetary Policy Rate which it recently increased. Interestingly, this MFS, which has been advocated by many, is contained in the Federal Appropriation Act but for reasons not properly explained, it has yet to be properly implemented.
Although I appreciate that the CBN’s main mandate is to protect and defend our legal tender, the naira, our exchange rate and economic situation require some innovation which sometimes may sound unpopular. To address the problem, it may be better for the CBN through a carefully managed system to allocate dollars directly to the concerned beneficiaries (federal, state and local governments) through their special accounts either with the CBN or banks. While some may argue that this will be illegal as it will amount to the dollarisation of the economy, the truth is that our economy is already dollarised, and possibly “poundanised” and “euronised.”
It is a matter of being practical or merging theory with reality to achieve a better and sustainable outcome. If legislation is required, it should be sought and received to effectively jump-start the process. As they say, special situations require special solutions. To test its workability, it can be agreed that all beneficiaries of the Federation Account should get their allocations 50 per cent in dollars and 50 per cent in naira for at least one year for a start. Moreover, if we are truly practising a federal system of government, I do not think that the states will not be allowed to generate foreign exchange through the export of their products.
The pressure on the naira will be reduced through which a more stable exchange rate that is market determined can be achieved. It will reduce or eliminate the persistent excess liquidity in the system through which the banks have continuously made unmerited profits. Further cost reduction and elimination of waste will be achieved through the limited use or lack of the need to issue Treasury Bills that are normally used by the CBN to mop up excess liquidity. As some of the TBs are sometimes turned into treasury bonds, the government and the economy will benefit from the saved interest payments and debts. With Nigeria paying a high Treasury bill rate of about 15 per cent, participation is expectedly high especially from foreigners. This is why a majority of the 36.7 per cent of the Federal Government domestic debt at 2012 held by the non-bank public were mainly by foreigners. As about N721bn was used in servicing the Federal Domestic Debt, adopting this MFS would have saved the CBN and the economy about N265bn paid mainly to foreign portfolio investors for debt servicing in 2012.
Furthermore, Nigerians in the Diaspora remitted about $21bn in 2015, without any incentive. Thus, an incentivised dollar denominated savings account and a structured export of local food products to an estimated 15 million Nigerians in the Diaspora will generate a significant pool of over $50bn that can be consolidated annually to shore up the naira.
In the long term, it is important to start thinking of how to create a better and more effective economic/monetary policy framework or model that will ensure a better coordination and integration of our monetary, fiscal and supply side policies to create a sustainable economy with annual growth of over 10 per cent.”