Tag: GOVT

Renowned Economist Henry Boyo has advocated the liberalisation of the foreign exchange market and advised the Central Bank of Nigeria (CBN) to stop substituting naira allocations for dollar derived revenue. Boyo, who spoke with LEKE SALAUDEEN, says that is how to revive the economy and diversify it.

What is wrong with the economy?

Our monetary framework is faulty. There is urgent need for a fundamental restructuring of our country’s monetary framework so that our economy can be rapidly transformed to induce vast expansion in industrial activity with single digit lending rates, increase employment opportunities, lower single digit of inflation and a market determined exchange rate mechanism.The government’s efforts to achieve these parameters, reduce poverty and enhance the social welfare of our people in the last 30 years have evidently failed woefully.

Indeed, our economy appears trapped in a paradox of deepening poverty with increasing export revenue. It is inexplicable, for example, that Nigeria became listed amongst the poorest nations in the world. A careful analysis of the process of infusion of our export earnings into the economy will show that this anomaly was made inevitable by the Central Bank’s practice of capturing export dollar revenue and substituting naira at its unilaterally determined rate of exchange before payment of consolidated naira allocations to the three tiers of government.

Can you explain further the dangers inherent in the CBN’s practice of substituting dollar earned revenue with naira allocation to the three tiers of government?

I will narrate it this way. Buyers of Nigeria’s crude oil pay millions of dollars into the account of CBN for crude oil lifted from Nigeria. For example, $1 billion is paid to CBN account. The CBN unilaterally adopts an exchange rate for conversion of the $1 billion received from buyers of Nigeria’s crude. Consequently, the apex bank unconstitutionally prints N150 billion in place of the $1 billion crude oil revenue. CBN now pays the three tiers of government with over N150 billion—an exchange rate of N150 to a dollar. The three tiers of government now deposit the billions of naira into their respective commercial bank accounts, for custody even when deposit rates attract less than two per cent.

The additional deposits of billions of naira supplement the existing cash position of the banks and enhance their ability to embark on additional liberal credit expansion. Thus, the credit creation capacity, i.e. the money available for lending becomes multiple times the actual cash available in the vaults of commercial banks as the banks leverage on the hundreds of billions of cash inflow from CBN per standard banking practice; this is what the CBN decries as excess liquidity cash in the system.

Consequently, CBN and the Debt Management Office (DMO) approach the banks to reduce the amount of naira cash and the credit capacity of the banks. Thus, CBN decides to borrow money from the banks by selling treasury bills with relatively mouth-watering interest rates. The DMO also enters into the market to borrow from the banks for intangible and inconsequential purposes. As a consequence, CBN, the erstwhile cash provider becomes a major borrower. The result is the widespread incidence of factory closures and rising unemployment as industrialists, service providers and small and medium businesses are faced with excruciating credit crunch, high interest rates and avalanche of cheap smuggled imports.

What would you recommend in place of the present system whereby the Central Bank dominates foreign exchange market?

The sensible thing for the government to do is to liberalise the foreign exchange market. It is very crucial to Nigeria’s economic growth. CBN should adopt the instrument of dollar certificates strictly not cash (i.e. dollar denominated warrants in place of the usual Naira denominated warrants for dollar derived revenue) for the payment of monthly allocations to the three tiers of government for all dollar revenue. This arrangement replaces the present destructive system where CBN unilaterally determines the exchange rate and creates more naira in substitution for dollar revenue only to decry excess liquidity in the system. Under the new arrangement, the three-tier system would present their dollar certificates to their respective banks for exchange to naira, as the dollar certificates are not legal tender, and so cannot be used for every day transactions. If this system is adopted, there will be no excess cash in the bank system, as we would no longer be inundated with the huge naira allocations usually paid into the bank accounts of the three tiers of government every month by the CBN. The result is that we would have more dollar certificates chasing a limited supply of naira. The stronger naira notes would translate into cheaper petrol prices. Indeed, a petrol sales tax of 10 per cent or more can be levied on the price of each litre of fuel sold. In spite of the cheaper petrol price, the fuel will sell in a fully deregulated market. The government can collect up to N100 billion from petrol tax every year from the 30 million litres sold daily.

The absence of subsidy on petrol prices will also save the government about N600 billion a year; this amount can be used to build up our infrastructure, such as schools, hospitals, power and roads instead of paying the same sum as subsidies to fuel marketers. The government will also save another N600 billion or more, as the CBN and DMO will no longer have to borrow from the commercial banks to reduce the scourge of excess liquidity that has always plagued the system, when CBN substitutes naira for dollar derived revenue. The CBN will remain the custodian of our dollar earnings, as the weekly auctions of dollar reserves and its attendant round-tripping and dispersal into foreign accounts will no longer be possible.Our foreign reserve base will consequently remain buoyant and less vulnerable to speculative dollar demand. Smugglers and money launderers will have little or no access to easy government dollar funding for their nefarious enterprise and the level of corruption will be reduced.

The stronger naira exchange will bring down the cost of imported raw materials and machinery, and this, together with low interest rates will energise the industrial and services subsector, and reduce unemployment and insecurity. More operating factories will mean increasing employment and greater consumer demand. The local manufacturers will also be protected by a discriminatory tariff regime to favour patronage of locally produced goods in place of imports. Increased commercial and industrial activities will provide a huge revenue base for government taxes. More workers will inevitably mean more income tax revenue for both state and federal government agencies. The stronger naira will not only bring down the cost of production, but will also reduce annual inflation to not more than two per cent, and consequently increase the purchasing power of lower income group. The increasing job opportunities will increase employment and engender a conducive environment that will reduce strikes and other work stoppages. The enhanced economic growth and improvement in social welfare with increased purchasing power brought about by a stronger naira will begin to reverse the deadly infection of brain drain, as Nigerians in the Diaspora will return home to make valuable contributions and enjoy better life in their fatherland.

What is the solution to the recurring excess liquidity in the economy?

The dollars earned from crude oil export belong to the people of Nigeria and disbursement is facilitated by the issue of naira warrants to the accounts of statutory beneficiaries by the CBN. However, the beneficiaries—Federal, state, local governments and corporate bodies—do not currently have the same direct access to their portions of this export revenue as independent private exporters.The dollar revenue is first exchanged into a quantum naira value at a rate unilaterally determined by the CBN without any pretensions to the open market forces of demand and supply before the resultant naira equivalent are paid to statutory beneficiaries who would return to the same CBN to re-exchange their naira for the same dollars if they required foreign exchange for their corporate import needs. A week later the CBN will go to commercial banks to mop up excess liquidity in circulation at a rate determined by the commercial banks. The commercial banks take dollars from CBN in exchange for naira. That is why the banks are making huge profits that they didn’t work for. Henceforth, CBN should stop substituting naira allocation for dollar derived revenue. All beneficiaries—Federal, State, Local Governments and corporate agencies should get their allocation in dollars. There will be no excess liquidity. The bank will start begging the real sector to come and take loan and a stronger exchange rate between naira and dollar will emerge. That is the way to revive the economy and diversify it. With that, subsidy will disappear on its own and fuel smuggling will dry up because it will be too expensive for the smugglers.This is what Zimbabwe did when its economy was in a crisis. At a stage, one Zimbabwe billion dollar was equal to US$1. What the government did was paying workers in dollars. Prices of essential commodities are also paid in equivalent of US dollars. That was how Zimbabwe was able to get out of its economic crisis and stem the spiral inflation.

What are the likely dividends of the liberalised foreign exchange market you are advocating?

The main dividends to be derived from the adoption of a liberalised foreign exchange market is the quick evolution of a realistically priced naira that will infuse the positive multiplier effects inherent in a free market economy dictated by the dynamics of demand and supply. Indeed, the defects of the current system —lack of transparency, parasitic chain, price distortion and economic dislocation— would be cleansed by a liberalised market. The inherent features and desirable benefits include a new improved CBN. The CBN would emerge unencumbered by the distraction of foreign exchange hawking and intrigues and assume its role as a patriotic custodian of the naira and a nimble and effective policeman of the money market in line with national aspirations.

The mirage of excess liquidity whenever the federal pool is disbursed and the regressive reflex of mop-up activity inherent in the current system will disappear forever. In other words, the CBN would not have to plead with beneficiaries of the federation pool to desist from spending their income even when the economy is crying for a dose of public expenditure to stimulate demand and investment.

The bulk of all foreign exchange earnings will be expended in its original form for the nation’s total import needs, that is, industrial goods, finished goods, contractors’ imports and services. This insulates the economy from a deluge of naira with extensive money creation possibilities by banks as at present. Foreign exchange not it is required for domestic transactions by the governments, public agencies and private sector operators will remain in the owner-establishments’ domiciliary accounts with the CBN and will not be regarded as part of commercial banks’ liquidity base. A substantial proportion of foreign exchange converted into naira for domestic transactions is likely to be taken up by economic operators utilising the naira already in the system. Thus only a small portion of foreign exchange earnings would translate into injection of fresh money.

Last year, President Jonathan promised that the pains of subsidy removal will disappear within few weeks or months. What can you make out of the president’s pledge?

President Jonathan made a political statement to assuage anxiety in the land. If we are not careful, subsidy value will exceed 60 per cent of total expenditure in 2013. In 2011, there were underhand dealings in the subsidy arrangement; about N2 trillion was paid off. The government has indicated that approved audited claims exceeded one trillion naira in July 2012. By December 2012 audited subsidy claims would be two to three trillion naira leaving two trillion for both capital and expenditure. There is no way you can resolve fuel subsidy imbroglio unless you re-arrange payment in the country and confront the factors responsible for depreciation of naira.

The problem of subsidy is not caused by crude oil price, but the exchange of naira. If you spend N3 trillion on subsidy and debt services, where will you get money to improve on the living standard of the people?

Mr President would have made that promise with the belief of his advisers. Blame the economists in the team for not properly advising him. Reducing capital expenditure by one or two per cent is nothing to celebrate in an economy where corruption consume 30 to 45 per cent of the total value. Increasing Internally Generated Revenue (IGR) to N5 trillion and evolving a mechanism that would plug loopholes are worthy of celebration.

The President also promised that the economy will be repositioned within a short time. What is your take on this?

Jonathan is not an economist. Because of his inadequacy, he hired world class economists to advise him. If they don’t tell Mr President that the problem in the economy is excess liquidity, what do you expect of him? If the experts failed to tell the President the truth, he should ask what causes excess liquidity. The total money for spending by the government is N5 trillion. It is not a lot of money. The excess is the result of subsisting naira allocation for dollar derived revenue. The government spends money to encourage increase in investment and payment. It makes it possible for people to buy more and create demands for goods. Excess liquidity is counter-productive. We can’t get out of the problem unless the President says enough is enough.

Government officials say the economy is growing at seven per cent. Do you agree?

Yes, it is possible for the economy to grow at seven per cent. Crude oil provides 80 per cent or more of the national revenue. If the price of crude continues to rise and production increases, the gross domestic product (GDP) will also increase. But when it is infused into the economy in obtuse manner, it becomes destructive to the real sector. Our income is dollar derived. There is growth in external reserve and ability to pay. When dollar increases, it creates more excesses in liquidity.