At its March 21-22, 2016 meeting, the Monetary Policy Committee (MPC) “charged the apex bank to speed up the comprehensive reform of the foreign exchange market which is currently being undertaken” with a view to stemming speculative demand, maintaining a stable naira exchange rate, dousing inflation induced by exchange rate pass through and tackling bank aversion to financing the real sector, among other negative economic features. Although the contents of the awaited reform were still unknown and while the Central Bank of Nigeria (CBN) continues to observe a naira exchange rate of N197/US$1, the Vice President and Chairman of the National Economic Council, Prof. Yemi Osinbajo, on May 13, 2016 issued a statement which read in part, “We realised that we were left with only one option. This was to allow independent marketers and any Nigerian entity to source their own foreign exchange and import fuel. We expect that foreign exchange will be sourced at an average of about N285 to the dollar (current interbank rate).”
Neither the CBN rate nor the interbank rate is a realistic naira exchange rate that will bring about macroeconomic stability to catalyse productivity and inclusive economic growth. And contrary to Osinbajo’s standpoint, the interbank rate was not the only option open to the Federal Government. Indeed, it was the worst option. In any case, it is doubtful if the MPC, which may conclude another meeting today will consider the vice president’s option to be the outcome of the anticipated comprehensive reform of the forex market, which will help deal with the monetary and economic issues at hand. Also the VP’s option does not signify the flexible naira exchange rate being demanded by the organised private sector. Rather, the option betrays a refusal by the Federal Government to learn from history because it marks a return to the tried but discarded Second-tier Foreign Exchange Market (SFEM).
And as happened under SFEM, existing forex holdings, which were speculatively amassed in the past at cheap rates, and any forex procured from CBN at its present rate will be sold to end-users usury-like at N285/$1. But after a short spell, government would formally devalue the naira to N285/$1 under the spurious pretext of stopping forex abuse, which was inbuilt in the first place. Thus, the VP’s option, which is actually a two-step or crawling devaluation, will only enrich the banks and private forex speculators at the expense of the economy. For the ensuing hyperinflation will wilt the real sector and impoverish the generality of the people. Even if the Federal Government gets the CBN to sell withheld Federal Account dollar accruals at the so-called interbank rate in order to rake in naira sums to meet budgetary provisions (the Information Minister said government is broke), the impact would be deepened fiscal deficits that would further worsen the economic distortions.
To pursue the welfare of the people that is constitutionally mandated, the beneficial option is for government to find and maintain a realistic naira exchange rate that will simultaneously leave inflation within the safe range of 0-3 per cent. This is achievable when government budgetary spending is limited to realised revenue plus borrowing (deficit) not exceeding three per cent of GDP. When fiscal deficit breaches that limit, government should deliver a matching actual (not cooked) GDP growth rate to tether inflation within the safe bracket. That way, internationally competitive bank lending interest rates of 4-5 per cent, which are positive in real terms, will become available domestically.
It takes such low-interest rates to put to work investors, who help push the reach of government budgets well beyond the projects contained in the budgets. In fact, a humongous bank credit potential topping 70 per cent of GDP (over 11 times the size of the 2016 FG budget) currently has been rendered inaccessible to prospective investors by the prevailing high-interest rates with prime lending rates and maximum lending rates averaging 16 per cent and 28 per cent respectively.
However, when government is content to implement its budgets in a manner that facilitates globally competitive lending rates, the bulk and even the entire idle bank credit offering would be accessed and utilised by investors to finance viable projects in the various sectors of the economy including projects that break the infrastructure bottlenecks often wrongly cited to justify the harmful high lending rates. Therein lies the surest road to economic diversification, massive job creation, enhanced tax revenue and inclusive economic growth, the very objectives government has set its eyes upon to reduce dependence on oil.
Now, Osinbajo meant that the CBN exchange rate of N197/$1 was not realistic by opting for the interbank rate of N285/$1. But, as earlier noted, neither rate is realistic. The country’s unrealistic exchange rate, high inflation and high-interest rates are traceable to the persistent excess liquidity in the system, which is the characteristic of excessive fiscal deficits. The excessive fiscal deficits result from implementing over 50 per cent of the yearly budgets of the tiers of government with implicitly borrowed freshly printed naira funds, which the CBN inappropriately substitutes for withheld dollar allocations. So the antidote to the gamut of negative economic conditions created by the excessive fiscal deficits is to stop withholding Federation Account dollar allocations by allowing the beneficiaries to properly convert respective dollar allocations to realised naira revenue, which is not only non-inflationary but also ends the excess liquidity occasioned by substituted CBN deficit financing. That can be done through a simple and corruption-free process.
To arrive at the realistic naira exchange rate, there should be a single foreign exchange market for the public and private sectors as both of them operate in one and the same economy. Technically, all foreign exchange in the system may be termed the country’s visible and invisible export earnings. Apart from government forex holdings which may be retained in the CBN for as long as desired, export earnings broadly defined as above, which are repatriated by individuals and firms, should be converted to the legal tender naira amounts. Similarly, portions of government forex for domestic use should be converted to naira amounts through the single forex market. Transactions in the forex market should be channeled through deposit money banks. The DMBs should earn commission (which may be split with the apex bank) while the CBN plays its role of bank of last resort.
The pooled public and private sectors’ supply of forex guarantees regular and ample availability of hard currency. Demand for forex should be controlled and the volume demanded should be dictated by the country’s duly specified import needs from time to time. Without fail, forex demand should be controlled below supply to facilitate sale of surplus forex by DMBs to the CBN as a last resort which enables the CBN to build up external reserves. Given the available supply of forex in the system today, in the single forex market, the market-determined naira exchange rate will be stronger than the CBN rate of N197/$1. Under the managed float system, there will be a realistic naira exchange rate that is flexible within a stable range. Osinbajo should, therefore, always consult widely.
Surely, with proper management of the country’s ample forex resources, needed imports like fuel will not experience scarcity of foreign exchange.
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