In apparent response to the Action Congress’ (ACN) admonition that the nation’s economy was “gradually grinding to a halt”, the Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, unexpectedly painted a brighter economic picture, and sought to clarify popular misconceptions on the issue of our external reserves balance of about $45bn and the alleged discrepancies between the reported Excess Crude Account balances of the Finance Ministry and the Central Bank of Nigeria (CBN).
Regrettably, however, the Minister’s canvassed positive indices of Gross Domestic Product (GDP) growth and claims of fiscal prudence are not corroborated by the ugly reality on ground. For example, the bourgeoning national debt of almost N10tn since 2007 (AMCON bonds inclusive), the unending rise in unemployment and the double-digit inflation rate and inexplicable fiscal deficits, which have become characteristics of our economy over the years, are all out of sync with the reported impressive GDP growth of six percent! This point is perhaps better amplified by the relatively minimal rate of unemployment in more successful economies, where a mere one percent growth in GDP is a celebrated achievement!
The Finance Minister’s response to the ACN observation on high cost of governance is probably also equally unconvincing. Inexplicably, neither privatization of the wasteful drainpipes of public enterprises nor the elimination of hundreds of thousands of ghost workers from the public service, nor innovations in the public procurement process have so far fulfilled popular expectation for leaner, more transparent and efficient resource application in public service. In the light of the apparent depraved level of wastages and corruption in the management of public funds, remedial fiscal surgery would require an amputative scalpel rather than a fine and delicate surgical blade!
Consequently, Dr. Okonjo-Iweala’s resolve to reduce the usual bloated recurrent expenditure below 70 percent of budget in annual steps of two percent compromises any serious commitment to rapidly effect meaningful change in the present unhealthy fiscal imbalance!
Despite the Honourable Minister’s tripartite classification of reserves, the process of consolidating both the excess crude and CBN’s component of reserves remains hazy in public consciousness. For example, accumulation of Excess Crude Account (ECA) has, as negative collateral, the unnecessary accommodation of increasing budget deficits and national debt! Paradoxically, such avoidable deficits are ultimately funded by borrowing at costs, which are widely at variance for such risk-free sovereign debts elsewhere!
Nonetheless, the nagging question must be how ‘surplus revenue’ with minimal yield in a designated ECA can exist side by side with increasing budget deficits, which are ironically financed by borrowing at rates often above 15 percent!
Indeed, such inexplicable faux pas will become inevitable so long as government deliberately understates the crude oil price benchmark in the computation of each year’s budget. Thus, for example, if crude prices remain at an average of $100/barrel when adopted budget benchmark is only $70/barrel, this would mean a surplus of $30/barrel or a consolidated ‘surplus’ of almost $30bn annually from average output of 2.5m barrels/day.
Do not ask the question why the surplus of $30bn idle reserves cannot be used to plug the deficit rather than the questionable resort to borrowing at atrocious rates of interest!
Incidentally, a centrally managed surplus revenue account (whatever the source) has no constitutional backing, even in our pseudo-democratic federal constitution!
Furthermore, the process of consolidating CBN’s lion share of over $32bn out of Nigeria’s total external reserves of about $45bn is equally bizarre; it is often suggested that the bigger the CBN’s share of external reserves, the stronger will be the naira, and ultimately also the economy! On scrutiny, however, rising CBN reserves, within the prevailing monetary policy framework, actually threaten naira value and instigates a destabilizing ripple in the economy.
Let us explain the dysfunctional impact of this framework with an example of $1bn revenue allocation to constitutional beneficiaries in eight related stepwise scenarios/consequences. In scene-1, the CBN unconstitutionally captures the distributable $1bn revenue and prints/creates (read as monetizes) N160bn as statutory allocations, which are domiciled in the bank accounts of beneficiaries.
Scene-2; the banks enjoy almost ten-fold leverage on the fresh naira inflow, with an enhanced credit capacity, which could suffocate the money market with excess spending power (excess liquidity)!
Scene-3; in response to the threat of too much naira chasing too few goods (rapid inflation), the CBN ‘altruistically’ steps in with treasury bills to borrow money it does not need at over 10 percent from the banks in order to reduce the volume of cash in the market; since the borrowed funds are not intended for use, they are consequently deliberately kept idle despite the oppressive cost of funds!
Scene-4; in order to further prevent liberal access to excess cheap funds in the market, CBN increases its Monetary Policy Control Rate to instigate the banks to increase their own lending rates, and thereby restrain the motivation for customers to borrow, with the existing crushing cost of funds!
Consequently, interest rates, often above 20 percent, reduce the prospects of industrial growth and the creation of increasing job opportunities while irrepressible inflation and contracting consumer demand prevail nationwide.
Scene-5, ministries and state governments, who require imports, are constrained to buy back dollars from banks who are the prime beneficiaries of CBN dollar auctions.
Ultimately, naira exchange rate comes under threat as increasingly surplus naira in the market chase the rationed dollars auctioned weekly by the CBN! The market dynamics of demand and supply consequently become unfavourably skewed against the naira, particularly more so, whenever CBN’s total monthly forex auction falls below the $1bn earlier unconstitutionally captured in Scene-1!
Scene-6, the less dollars sold by CBN, the larger are CBN’s reserves, but the weaker also will be the naira, as less and less dollars become pitched against excess naira in the market. The gap between official and black market naira rates consequently widens.
Scene-7; in order to reduce the gap between the black market and the official rates of exchange, the CBN commits the unforced error of allocating dollars to Bureau de Change, who in turn fund the requirements of treasury looters and smugglers of contrabands, not minding the adverse impacts of such misguided dollar supply on the economy. Indeed, such monetary policy management must be far from international best practice!
Scene-8, despite a gasping manufacturing sector and deepening poverty nationwide, the banks and other speculative foreign investors celebrate another bumper year!!
Congratulations to the two Nigerian banks that recently posted annual profit figures of over N300bn!!!
SAVE THE NAIRA, SAVE NIGERIANS!!
BY HENRY BOYO
