Can CBN save the naira and save Nigerians?

 
Henry Boyo

The naira exchange rate has suffered a severe battering in recent times and fallen from about N160 to the present N197=$. Consequently, since our national experience suggests a close correlation between deepening poverty and weakening naira exchange rates, Nigerians should, advisedly, be concerned if the naira further slides.

Evidently, the unyielding youth exodus and the mass migration of skilled teachers and professionals to more prosperous economies, certainly took root as the naira rate plummeted from 50 kobo to N200=$, ironically, despite the Central Bank of Nigeria’s custody over, often celebrated, bountiful export reserves. Furthermore, more than 100 million Nigerians, reportedly, now also live below the poverty benchmark of $2/day (N12,000/month). Regrettably also, our rapidly expanding industrial landscape gradually shrunk and became uncompetitive as production costs skyrocketed with serial naira devaluations.

Interestingly, however, the gradual collapse of the manufacturing subsector and the consequent explosion in unemployment, clearly do not support the popular belief that weaker naira exchange rates would instigate economic diversification and promote export of Made-in-Nigeria goods. Consequently, Nigerians must be wary of any persuasion that prescribes further naira devaluation as the antidote to our beleaguered economy.

Historically, the CBN compulsively devalued the naira to bridge widening gaps between official and parallel exchange rates, even when these gaps were caused by the obtusely contrived monopolistic market dynamics of demand and supply. Thus, if unrestrained dollar demand further pushes parallel market rates well above the present N300=$1, the CBN may again unwittingly, jerk up the official rate above N300 to remove the embedded “subsidy” in the official naira exchange rate so as to raise the dollar price and discourage demand and hopefully also minimise the inherent bountiful rent-seeking market opportunities.


Regrettably, however, naira/dollar exchange rates will still remain unstable thereafter, because, a 50 per cent naira devaluation will severely deplete all naira income values and induce panic amongst naira income holders, who will quickly seek to protect their income from another round of devaluation. Sadly, this rational response will simply instigate more dollar demand. Ultimately, if the CBN is incapable of restoring public confidence in the naira, as a safe store of value, another widening gap will once again evolve between official and parallel market exchange rates to make further serial naira devaluation inevitable.

Incidentally, the Ghanaian currency, the CEDI, followed a similar trajectory from 1Cedi=$1 to eventually exchange for 10,000 Cedis before redenomination of that currency in 2007. Regrettably, however, the Ghanaian authorities have failed abysmally to control market supply of excess CEDI and it was therefore inevitable that the New Ghana Cedi presently trades at about 40,000 old Cedis (i.e. four new Ghana Cedis) to a dollar. Consequently in 2015, the International Monetary Fund, sadly, provided over $900m emergency loan, so that Ghana could reduce the huge market deficit in dollar supply and hopefully protect the Cedi exchange rate. Regrettably, the end of the travails of the Ghanaian currency is still out of sight.

Clearly, the Governor of the CBN, Godwin Emefiele, must also be concerned that the naira does not mirror the fortunes of the CEDI. Indeed, the forex controls that the CBN announced in January 2016 are clearly foraging attempts to protect the naira value and thereby save more Nigerians from falling below the poverty benchmark. The million naira question, however, is whether or not the CBN’s policy control measures can effectively reduce dollar demand pressure and stabilise or indeed improve the naira exchange rate?

Curiously, in his defence of the ban of almost 3,000 Bureaux de Change from official forex allocations, Emefiele expressed grave concern that the “BDC operators had abandoned the original objective to serve retail end users who need $5000 or less.” Conversely, according to Emefiele, “the currency dealers became wholesale dealers in foreign exchange to the tune of millions of dollars per transaction” and then “criminally, thereafter, used fake documentations, such as passports, etc to render weekly returns to the CBN.” It is not clear how much tax was generated from these heavily subsidised mega transactions.

Inexplicably, however, no known BDC operator has so far been successfully prosecuted for any wrongdoing! It is bewildering, nonetheless, that inspite of the host of eminent intellects and considerable IMF’s regular oversight, the apex bank, ONLY LATELY recognised, in Emefiele’s words, that “Nigeria is the only country in the world where a Central Bank sells dollars directly to the BDCs!” It is equally baffling that for almost 10 years, no one wondered, not even the equally star-studded Monetary Policy Committee and our well-travelled and exposed media practitioners, questioned this strategic aberration or, why the number of registered operators rose steadily from “a mere 74 in 2005 to 2,786, since the CBN began to sell forex directly to the BDCs”.

Equally worrisome, also, is the CBN’s incredibly belated realisation, despite several articles by this writer and related discussions in various public media platforms that the BDCs provide a ready conduit for money laundering, round tripping, as well as the funding of unauthorised imports which challenge the competitiveness of local industries. See article entitled, “Funding smuggling and money laundering from BDCs” published September 2008 et al at www.lesleba.com. That article contains the following observations: “We are fortunate to have ‘excess’ dollar reserves to support the dollar profligacy to the BDCs for now, but what happens when the dollar income from crude oil is depleted? Presumably, we may need to borrow from our international friends, who have just fleeced $18bn from our tattered pockets in order to continue funding the BDCs”!

Understandably, however, the financial burden placed on our limited foreign exchange by forex allocations to the BDCs is certainly “more disturbing” according to Emefiele, who also revealed that before the recent forex controls, the CBN “gleefully” sustained this self-destructive unforced error and “sold $60,000 to each BDC weekly” making a total of $8.6bn per year. This stupendous allocation of over a quarter of total forex to the parallel market does not include the equally suspiciously liberal facility for every Nigerian tourist to access up to $150,000 per annum, at official rates, with their Nigerian debit cards from the ATMs abroad, notwithstanding the fact that this facility would predictably, and inevitably too, become widely abused by prolific rent seekers.

Incidentally, an earlier ban on forex allocations to some real sector operators cannot be justified against the liberal access to forex to those, inexplicably pampered rent seekers, in the grey areas of the economy. These unpatriotic policy directions are provocative and retrogressive and deliberately supportive of corruption and economic sabotage.

Similarly, in another policy directive, designed to stabilise the forex market, the CBN also lifted its ban on foreign currency cash deposits in commercial banks. However, the ban of forex sale to the BDCs should invariably, significantly dampen any expectation of substantial dollar inflow from other autonomous sources. Consequently, surging dollar demand will persist and sooner, rather than later, the gap between the rate of officially sourced and open market dollar sales will further expand to once more make devaluation inevitable. However, an official naira exchange rate of N300, will invariably spur the parallel rate, until the gap again widens to automatically precipitate further devaluation and weaker naira rates which will inadvertently instigate higher fuel prices that would make subsidy inevitable, despite the collateral complement of oppressive economic and social consequences.

Instructively, however, the release of the CBN’s stranglehold monopoly on the forex market will invariably strengthen the naira by reducing the persistent self-induced challenge of excess naira liquidity which clearly overwhelms the apex bank’s regular monopolistic auctions of dollar rations. Consequently, if the Senate Committee on Finance and Public Accounts believed Emefiele’s recent (behind closed doors) cock and bull explanation for naira devaluation, then our economic and social agony will continue for much longer. .