Should one fail to aspire to greatness because it’s too tough? Do you halt preparations for your Bar Finals exams at Law School because the pressure is overly exacting? Did the Asian Tiger economies of Hong Kong, Taiwan, Singapore and South Korea outperform the old guard by cake-walking? These posers must roundly be answered negatively.
The inferential nexus therein, establishes that foresight, diligence and perseverance are non-negotiable elements in the quest for success, irrespective of contextual settings. That proposition applies in monetary policy, especially foreign exchange rate convergence, the focus of this piece, as it appertains to Nigeria.
There are no bells and whistles in monetary policy. It’s simply agovernment’s approach to advance economic growth by regulating money supply that is executed by its reserve bank, in this case, the Central Bank of Nigeria (CBN), with statutory and geostrategicunderpinnings. This point is reinforced by the provisions of section 16 of the 1999 Constitution of the Federal Republic of Nigerian (as amended), which provides inter alia that the State “shall harness the resources of the nation and promote national prosperity and an efficient, dynamic and self-reliant economy…and the State shall direct its policy towards ensuring the promotion of a planned and balanced economic development…”
This also accords with the provisions of section 2 of the Central Bank of Nigeria Act 2007 (as may be amended from time to time), which specifies the objectives of the bank, viz: (a) ensuring monetary and price stability; (b) issuing legal tender currency in Nigeria; (c) maintaining external reserves to safeguard the international value of the legal tender currency; (d) promoting a sound financial system in Nigeria; and (e) acting as banker and provide economic and financial advice to the Federal Government.
Typical monetary policy instruments include the dynamic regulation of interest rates on bonds and lending, bank reserve rates, discount rates on short-term interbank lending pursuant to the bank’s exercise of its banker of last resort function and, importantly, currency devaluation, ditto foreign exchange rates.
Subject to the prevailing economic strategy, monetary policy could either be contractionary or expansionary. As the name implies, a contractionary monetary policy would typically aim to heighten interest rates, reducing money supply, thereby decreasing spending and inflation. Essentially, it aims to prevent an economy from overheating. To illustrate, the CBN’s Monetary Policy Committee (MPC) has steadily increased interest rates from 11 per cent in July 2022, to 14 per cent in July 2022 and, to 18.75 per cent in July 2023. The premise of these hikes is not far-fetched: to curb headline inflation which has been steadily accelerating. In May 2023 for instance, it rose from 22.41per cent to 22.79 per cent in June 2023.
Expansionary monetary policy, on the other hand, does the opposite, albeit equally focusing on economic growth and stability. This would typically entail boosting monetary supply, lowering interest rates and increasing consumer spending and borrowing. A classic example of an expansionary monetary policy is Quantitative Easing (QE) – an increase in money supply to enhance the reactivation of economic activities in underperforming markets.
QE often entails large-scale asset purchases, open acquisition of equities, government bonds, mortgaged-backed and other financial instruments, the net effect of which is an enhancement of money supply, that’s financed by the creation of central bank reserves. The corollary is to afford banks greater liquidity, which in turn stimulates on-lending to private and commercial consumers and investments ditto spending propensity. QEs were in vogue in the aftermath of the COVID-19 across developed and developed economies to help mitigate the virulent after shocks of the pandemic globally.
As at mid-2021, the US had spent close to $13 trillion in QE (NASDAQ). In response to systemic economic shocks notably the Eurozone sovereign debt crisis, the referendum vote to exit Europe and COVID-19, the Bank of England’s QE regime peaked at £895 billion in the decade to 2021.
In December 2021, the Federal Government in a rather curious utilisation of “QE” borrowed N17.46 trillion from the CBN. This borrowing was increased to N23.77 trillion in October 2022. Interestingly, although section 36 of the CBN Act supra, provides that the CBN “may grant temporary advances to the Federal Government with regard to temporary deficiency of budget revenue at such rate as the bank may determine” scholarly opinion is sharply divided as to whether this “QE” borrowing phenomenon accords with the constitutional objectives outlined in section 16 of the aforementioned Nigerian Constitution. Indeed, the CBN at the time, observed that “the direct consequence of central banks’ financing of deficits are distortions or surges in the monetary base leading to adverse effects on domestic prices and exchange rates i.e., macroeconomic instability because of excess liquidity that has been injected into the economy”
Thus, monetary policy, of which foreign exchangerate guidance is a subset, is a vital barometer of economic performance, market confidence and political popularity in developed and emerging economies.In part, because in an import dependent country like Nigeria, with a population of approximately 223.8 million (UN Population Fund), forex is essential for paying for goods and services coming into the country and servicing international loan obligations to development finance institutions. To put this into some context, the CBN’s own analysis showed that approximately $4.66 billion was spent on foreign air travels between Q1 and 2022 and Q2 2023.
Ironically, on the lucrative Lagos/London; and Lagos/New York routes, despite the subsistence of Bilateral Air Services Agreement (BASA), which is predicted on equal market access and reciprocity, foreign airlines, still have a complete monopoly of those routes to the detriment of Nigerian passengers and, of course, the local economy. Is this a case of closed competition? International aviation politics? Lack of political will by Nigerian aviation authorities to meaningfully secure a fair(er) deal for domestic operators? And irrespective of the merits or the demerits to the responses therein, the optics are just terrible from the perspective of foreign exchange reserves!
According to the Debt Management Office, as at March 31, 2023, the country was owing the combination of the International Monetary Fund, the World Bank Group, the African Development Bank Group; Exim Bank, China; Agence FranceDevelopment; Japan International Cooperation Agence; Exim Bank India, and Kreditanstalt Fur Wiederaufbua (Germany) a total of $42.67 billion. Within the same period, the country’s forex reserves were $35.57 billion, a deficit of $7.1 billion.
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