Nigerians generally believe that large foreign reserves are useful for defending the exchange rate of the naira. However, our total foreign reserves actually comprise two primary income streams; the first is the Excess Crude Account (ECA), which consists of all crude oil revenue that is in excess of budget projections.
In the recent past, over $10bn accrued annually into the ECA. Surprisingly, however, government always managed to consume the proceeds in this account in addition to hundreds of billions of naira, borrowed by government, at costs usually above 12 per cent, to fund earlier projected ghost deficits, which were largely induced by the misguided conservative price and output benchmarks adopted for crude oil revenue in annual budgets.
The inherent contradiction in our federal budgets, which inexplicably accommodate deficits as well as actual revenue surplus, is regrettably generally lost on our people and our illustrious Economic Management Team.
The second major component of our foreign exchange reserves, which is currently about $40bn, is what the Central Bank of Nigeria (CBN) describes as its “own reserves”. CBN’s claim to sole ownership of these reserves is founded on the principle that the federation cannot lay claim to this fund since government was already the beneficiary of the naira ‘equivalent’, which the apex bank unilaterally created and substituted as allocations for constitutionally distributable dollar revenue. For this reason, CBN’s $40bn reserves can neither be appropriated for defraying deficits in our budgets, nor for redressing some of our serious infrastructural deprivations.
For example, some Nigerians will recall that Mr. President was in China last year, partly to raise funds for infrastructural enhancement, and indeed, apparently raised about $1.5bn with an interest rate that may not be far short of the seven per cent rate on our existing Eurobonds. Interestingly, however, the CBN Governor was also in China to assess investment opportunities for CBN’s dollar reserves! However, it is unlikely that Sanusi found any investment opportunity that would ultimately produce a yield of more than four per cent; in such an event, there is nothing stopping Chinese investors from borrowing directly from CBN at a cheaper cost for onward lending to the Nigerian government at a higher rate of interest!
Sadly, the above illustration is indeed also mirrored in the process of domestic debt accumulation. To substantiate this observation, we quote Sanusi’s revelation in Thisday Newspaper’s issue of 24/07/2013. “…First of all, you have got liquidity (naira) surplus in the banking industry; … there is over N1.3tr or so sitting in banks and belonging to government agencies. Now basically, they (these funds) are at zero per cent interest and the banks are lending about N2tn to the government and charging 13 to 14 per cent! Now, that is a very good business model, isn’t it? Give me your money for free and I lend it to you at 14 per cent; so why would I go and lend to anyone?” Worse still, the funds mopped up (borrowed) by the CBN are simply sterilised or kept idle, despite prevailing significant budget shortfalls, which are funded with additional borrowing!
Thus, both the reserves from the ECA and the “CBN’s own” reserves are, in fact, consolidated from controversial sources, as the ECA surplus, untenably exists alongside budget deficits, while CBN’s forex reserves accrue primarily from dollar revenue captured by CBN, after it has created and substituted fresh naira values for constitutionally distributable dollar revenue.
Thus, as CBN’s reserves grow, so also will the extent of naira surplus in the system expand to inadvertently instigate a general price rise, and lower exchange rate as CBN’s obtuse and patently unconstitutional payments strategy constantly induces a market mix of systemic surplus naira chasing relatively few ‘goods’ and rationed dollar supply from the CBN every month.
Consequently, the flipside of increasing CBN dollar reserves is actually the constant threat of inflation as well as increased domestic borrowing, as the CBN ‘posthumously’ embarks on a borrowing spree at double-digit interest rate in order to reduce the burden of surplus naira that becomes increasingly worrisome, with the apex bank’s unceasing monthly substitution of naira allocations for distributable dollar revenue. A significant part of Nigeria’s estimated N8tn domestic debt was actually accumulated with this suicidal monetary strategy while service charges on such “useless” debts probably exceeded $3 trillion in the last six years.
Furthermore, the government as well as CBN’s forced appetite to borrow hundreds of billions of naira at such high cost, inevitably also crowds out the real sector from accessing cheap funds. The scarcity of cheap funds to SMEs ultimately contracts the domestic economy, thus, inducing an increasing level of unemployment as collateral. Consequently, we become poorer for CBN’s reserves to grow, as indeed evident in the uneasy reality of deepening poverty nationwide despite the increase in our dollar reserves and imports cover from $4bn and four months respectively, in 1996, to $40bn and 12 months imports cover in 2014!
In the current failed attempt to stem naira depreciation, Sanusi wrongly identified abnormal dollar demand as the prime villain for increasing market pressure. The CBN, therefore, reduced its weekly forex allocations to Bureau De Change (BDC) from $1m to $250,000. Expectedly, however, rather than douse demand, the vibrant forex market experienced dollar supply shortage, which invariably intensified the pressure on the naira exchange rate. Consequently, less than 60 days later, the suspended CBN Governor, in another characteristic policy somersault, summarily lifted the limit on sales of dollars to BDC, despite the recognition of the BDC’s role in facilitating money laundering, capital flight and the ignoble smuggling enterprise, which kills our industries.
Invariably, Sanusi’s incongruous policy flip-flop could not reduce pressure on the naira, because he probably failed to appreciate that the problem was not only dollar supply, but significantly also the unceasing deliberate creation of excess naira supply by the same CBN. For example, the apex bank’s ill-advised injection of over N1tn to settle AMCON’s non-CBN debts in addition to disbursement of 100 per cent naira allocations every month, in the last quarter of 2013, inadvertently also added more than N10tn more of naira liquidity into an already naira-suffocated money market to further worsen the plight of the naira against the dollar.
Thus, it becomes a farcical expression of concern, when the same agency that consciously created the disenabling naira surfeit, which weakens the naira turns round to sell rations of dollar revenue it earlier captured, in a sadly futile bid to defend the naira rate of exchange. Nevertheless, these unforced contradictions in the product of monetary strategy will become successfully resolved with the adoption of dollar certificates for the disbursement of the dollar component of distributable revenue.
SAVE THE NAIRA, SAVE NIGERIANS!!
Les Leba
