Time To Review CBN Act (2) By Lekan Sote
This second look at the urgent need to review the Central Bank of Nigeria Act will not end on a sarcastic note as the previous one concluded: “In the absence of a productive real sector, the National Assembly should designate Nigeria as a ‘financial district’ of America, adopt the dollar as national currency, and appoint America’s Federal Reserve Bank as clearing house for the CBN’s monetarist policies.”
The ill-fitting CBN Decree No. 24 of 1991 that started its journey in 1958, and incorporates amendments up to 2007, requires the CBN to “maintain external reserves to safeguard the international value of the legal currency.”
After crude oil was found in commercial quantity at Oloibiri, Bayelsa State, the reluctantly departing British colonialists inserted a clause in the 1958 CBN Act to make Nigeria maintain a foreign reserve– to ensure that funds needed to finance importation of finished consumer goods from Britain were available.
A victorious, but overpopulated, Britain emerged from the World War II with an economy that could not produce enough food and cash crops to feed its people and industries. And as a debtor nation, Britain didn’t also have ready funds to pay for the raw materials desperately needed by its industries.
Britain then introduced the “comparative advantage” concept to retain Nigeria as an exporter of unprocessed cash crops (like cocoa), and minerals (like crude oil), and assigned to itself the manufacture of finished goods from Nigeria’s primary commodities. Nigeria’s foreign reserves, derived from the commodities sale were retained in England to fund Nigeria’s import of finished goods.
Because processed goods attract higher profit, Britain larded up profits from trading in Nigeria’s primary commodities. Nigeria’s best economists unwittingly keyed into the “comparative advantage” red herring. Lawyers have said, “violenti not fit injuria,” you cannot claim damages, or complain, after consenting to an action that did you injury!
The law of “comparative advantage” assumes that one country has “natural’ capacity to produce a commodity more efficiently than another. Were this to be an indisputable truism, Nigeria shouldn’t have yielded its “natural” lead as the highest producer of palm oil to Malaysia. And South Sudan, with the world’s most fertile soil, should have been the world’s food basket. It boils down to will and technology.
Western consultants subtly ensured that local production of consumer goods never adequately met local needs. Visit any market, and you will see that there are more foreign brands of most consumer goods, like butter, jam, cornflakes, baby formulas, rice, sugar, vegetable oil, clothing, electronics, than there are local brands.
Whereas the installed processing capacity of Nigeria’s three and one half petroleum refineries is 445,000 barrels, or about 12 million litres of petrol, per day, unconfirmed reports claim that daily need for petrol in Nigeria is between 45 and 65 million litres a day. Even if it was 30 to 35 million litres that some argue, the refineries cannot meet the local demand even if they worked at full capacity.
China avoided the artificial scarcity bind, and a need for dollars to import petroleum products, by setting up refineries that can process about 10 million barrels of crude oil per day. Nigerians,who invested in foreign refineries, and those who routinely divert dollar from the CBN window to the black market, just love the filthy lucre derived from the subsidy scam induced by the institutionalised fuel scarcity.
The 30 modular refineries that Vice-President Yemi Osinbajo announced had been licensed will be their nemesis. Those so-called illegal refineries in the Niger Delta should be consolidated into consortia or cooperatives, to increase the quantity of petroleum products in the national supply chain.Economists argue that when basic commodities become scarce, the resulting price inflation causes people to lose confidence in their national currency.
Liberal economic theorists, who correctly argue that increased domestic spending can expand the domestic market, unfortunately lost the moral argument to more truthful (?) Marxist theoreticians who contend that capitalist societies typically cast about for markets and investment opportunities in other climes.
They seek to exploit, or enslave (through colonialism or neocolonialism) weaker nations for wider markets. Denizens of the metropolitan economies think up subtle or bared-faced schemes, like gunboat diplomacy, the World Trade Organisation, “preferred nation status,” the British Commonwealth, and the magic “globalisation,” to expand their markets.
After America subverted the International Gold Standards, the strength of the currencies of other nations abated into fiduciary or confidence game. With the substitution of gold with the US dollar, the demand for the dollar, which became the main currency for international trade, ramped up. And its price, or exchange rate, naturally spiked.
The CBN has served the interest of the international monopoly capital long enough. It is time for a team of economic, banking, financial, investments, and legal experts to interrogate the CBN Act as amended, assess its thrusts, limitations, and strengths, and recommend a new direction. The new thinking must align the CBN to the reality of 21st century Nigeria, and not to some expired era.
The focus of the CBN foreign exchange policy should shift from simply accumulating foreign exchange just to finance import of consumer goods from the metropolitan economies. It should concentrate on acquiring infrastructure, industrial production plants, and industrial raw materials as a matter of urgency.
The unutilised foreign reserves should not sit idle in the vaults of the JP. Morgans of this world, but should be invested in the vibrant bourses of the West, and other Sovereign National Wealth schemes, ahead of the time that petrodollar will stop flowing.
The new CBN Act should deliberately make cheap funds available to the domestic real sector. Lending policies should be realigned such that those who provide basic infrastructure, like roads, railways, electricity, water, housing, and refineries, will have a first shot at loans, to be followed by importers of industrial plants, supplies, and raw materials.
With sufficient inventory of infrastructure and industrial plants, the lending scale should be increasingly tilted towards industrial raw materials, industrial plants, spares, and retrofitting of ageing infrastructure, in that order. Ultimately however, most industrial raw materials, especially agricultural produce, must be sourced locally.
The new lending template should encourage local production of food and other consumer items, finance innovations, and fund new startups. Those who formulate and run the fiscal – or taxation, public debt, budget and public spending – aspects of public finance must also weigh in.
They must engender a missionary zeal to produce Nigeria’s staple foods – rice, beans, palm oil, fish, poultry, and cattle. The savings to be derived from eliminating, or at least, reducing, the importation of these commodities will reduce the need for foreign reserves to determine the strength of the naira.
The CBN must use cheap loans to encourage private sector research and investments into innovative technologies, production of manufacturing plants and machinery, and large scale production of agricultural commodities for the agro-allied industries.
A reader sent this SMS: “Nigeria cannot be slave to any so-called foreign portfolio investor, when it could breed millions of its population to own SMEs through low interest and efficient local refining of petrol, regular electricity, etc… Nigeria needs commercial farmers.” The resulting vibrant economy could make a stronger naira the de facto convertible currency of West Africa.