It is scandalous and unacceptable that even after JPMorgan expelled Nigeria’s sovereign debt from its Emerging Market Bond Index (EMBI) early this month, neither the government nor the Central Bank of Nigeria (CBN) seem to have any clue on halting the slide into economic suicide. Citing tough controls imposed by the CBN to prevent the collapse of the naira, JP Morgan said it would eject Nigeria’s bond listings at the end of October, throwing Africa’s biggest economy into reverse and raising the country’s borrowing costs. The CBN’s self-righteous indignation against JPMorgan is hypocrisy, given that JP Morgan issued a negative watch in January; and Standard & Poor’s and Moody’s & Fitch downgraded Nigeria’s credit rating. Despite these red flags, the CBN remained belligerent. The President requires no reminding that he is constitutionally mandated to pursue sound economic policy options at all times.
Given that Nigeria will be ineligible for index re-entry for at least a year, the ripple effects on the naira and the economy will be far-reaching and long-lasting. This, undoubtedly, is a blow for President Buhari, who has promised to diversify Nigeria’s oil-dependent economy hit by a slump in global crude prices. Nigeria’s inclusion in the GBI-EM index three years ago was significant, as it boosted its international profile and attracted new flows of foreign direct investments. But uncertainty has left foreign investors wondering about government policies and struggling to sell shares and bonds after the CBN adopted tough currency restrictions to halt a slide in the value of the naira.
The situation raises two paradoxical issues which must be addressed in the interest of the nation’s economy. Primo, the CBN’s monetary policy of “defending” the naira by choking off foreign exchange transactions via capital controls, and secondo, is the federal government’s fiscal policy of importing vast quantities of refined fuel subsidized from virtually empty coffers. The CBN has adopted several currency restrictions to defend the naira after the use of dollar reserves failed to halt a slide – freezing inter-bank liquidity by putting a 0% limit on foreign-exchange held by commercial banks; imposing baffling import restrictions and counter-productive capital controls; which, combined with schizophrenic monetary policy, is a recipe for disaster and economic chaos.
Besides incentivizing corruption, CBN policies have undermined local manufacturing, eroded consumer and investor confidence, damaged the stock market, and impaired the country’s sovereign rating. Since 2013, Nigeria has become the largest importer of US dollars due largely to importation of cash by deposit money banks (DMBs). That did not happen overnight, but evolved with the active support or benign neglect of the CBN. The DMBs did not import foreign cash in order to play any direct or indirect role of foreign direct investors by acquiring management interest (10% or more of voting stock) in local enterprises. Rather the foreign cash was imported to domestically offset dollar portfolio investments in equities, currency speculation and bonds for near and short-term profit at the expense of the economy.
If there is one policy that has undermined the Nigerian economy, it is the pig-headed dollarization of the Nigerian economy by the CBN; which pays out naira equivalents of oil proceeds derived from the Federation Account (FA) meant for allocation. Because the affected oil proceeds remain unshared and intact in the FG treasury, the naira funds so printed and distributed are illegal and impeachable deficit financing by CBN of the budget spending of the tiers of government up to the proportion of oil proceeds in the volume of FA accruals slated for allocation. The resulting governments’ heavy reliance on unlegislated fiscal deficits is ruinous and prevents the actualization of the economic objectives set forth in the Constitution.
By way of proof, firstly, down the years, the illegal deficits have provided the pretext for the country’s forex supply including the oil proceeds being fobbed off beneficiaries to be thrown on the streets like stolen goods to be sold without any documentation for easy siphoning abroad by corrupt politicians and bureaucrats. Secondly, the CBN cannot deny that the nation’s economy has been reeling under persistent excessive fiscal deficits. Thirdly, among the numerous dismal indicators is the current poverty incidence level of over 70%, which is double the rate in the early 1970s. The increased poverty incidence highly correlates to the dominant share of oil proceeds in the national budget.
The country’s economic ills have been linked to mismanagement of the oil proceeds by way of CBN-financed excessive fiscal deficits that are substituted for oil export receipts against economic best practice and the annual Appropriation Act. The fiscal and monetary authorities appear to signify their guilt through deafening silence on the illegal and unintended deficits. The resultant deficit financing of more than 50% of the annual budgets forms the taproot of the tree of macroeconomic instability whose main branches include excess liquidity, heavy non-investable national domestic debt, high inflation, high lending rates and the ever-sliding domestic currency. The pruning process over the years focused on chopping off some small branches only for new twisting twigs to emerge in repetitive cycles, which may be likened to a revolving door of inconsistent economic policies.
As a matter of fact, the real sector of the economy has continued to decline despite the fact that the value of the naira dropped by over 99% from its peak value of N0.5464/$1 in 1980. In the wake of the present oil price slump, the naira was devalued by 7.7% to N168/$1 last November. But the Bankers’ Committee subsequently prescribed further devaluation of the naira. The CBN proceeded artfully to close the RDAS/WDAS window on February 18, 2015 and simultaneously adopted the interbank forex rate of N198/$1, which represented another devaluation of the Naira by 15.2%. The DMBs and bureaux-de-change (BDCs) have over the years profiteered at the expense of the productive sectors from the varying margins of the multiple exchange rate systems that did and do exist. As a result, there prevail undesirable practices such as round-tripping, speculative demand for forex, rent-seeking, spurious demand and inefficient use of foreign exchange.
While some are wont to campaign for a weak domestic currency for the sake of a vibrant export sector, the persistent weakening of the naira in the last 35 years neither stemmed the decline of manufacturing nor increased exports of agricultural products. A national revenue profile in which forex forms the major segment, offers the ultimate tool for successful management of the economy. Therefore, the President should change tack by directing the CBN and the fiscal and monetary agencies to immediately begin to allocate FA dollar proceeds to beneficiaries for conversion to realize naira revenue through DMBs in the open forex market. In the process, only verifiably eligible transactions and productive use would and should have access to the funds. That constitutes the essential first step toward evolving the well-managed naira currency required for sustainable rapid economic development and accelerated growth.
