Economic Renaissance by Henry Boyo email@example.com 08052201997
The actual ownership of Nigeria’s foreign reserves has always been hazy in public consciousness. However, at the 58th Nigerian Bar Association Annual Conference in Abuja in August 2018, President Muhammadu Buhari commended his government’s consolidation of about $47bn foreign reserves. Nevertheless, Finance Minister Kemi Adeosun had explained to journalists after the Federal Executive Council meeting in June 2018 that only $1.9bn in the Excess Crude Account is owned by government, while presumably, over 90 per cent of the $47bn reserves belong to the Central Bank of Nigeria. This reality is probably why government still anxiously seeks relatively modest dollar/Euro loans when, conversely, a chattel of the same government broods over a nest of almost $50bn, which it liberally auctions against its own naira.
Hereafter, the question of ownership and the economic impact of increasing reserves will be examined, in a summary of the above title, which was first published in July 2014. Please read on.
“In apparent response, to the opposition party’s ‘alarm’ that Nigeria’s economy was ‘gradually grinding to a halt’, the Coordinating Minister for the Economy, Ngozi Okonjo-Iweala, conversely painted a brighter picture, and sought to also clarify popular misconceptions between Nigeria’s external reserves balance of about $45bn and alleged discrepancies between Excess Crude Account balances of the Ministry of Finance and the Central Bank of Nigeria’s foreign reserves.
Regrettably, however, the minister’s canvassed positive projection of six per cent growth in Gross Domestic Product and her claim of fiscal prudence are clearly not corroborated by the ugly reality of a bourgeoning national debt, from almost N1tn to almost N10tn since 2007, with rising unemployment, near double-digit inflation rates with an inexplicable huge fiscal deficit.
The finance minister’s response to concerns on high cost of governance was also equally unconvincing. Notably, neither privatisation of wasteful drainpipes of public enterprises nor the elimination of hundreds of thousands of ‘ghost workers’ from public service, nor the touted reforms in the public procurement process have so far fulfilled popular expectations for leaner, more transparent and efficient resource application in public service.
The minister’s resolve to reduce clearly bloated recurrent expenditure below 70 per cent of budget, in steps of just two per cent annually, also compromises any serious commitment to rapidly redress the unhealthy fiscal imbalance!
Arguably, the impact of increasing consolidation of both Excess Crude Account and the CBN’s component of foreign reserves still remains hazy in public consciousness. For example, the reserves accumulated in the ECA actually have the unnecessary collateral of increasing budget deficit and national debt.
Consequently, the question is, why idle, surplus forex reserves in the ECA exist side-by-side with increasing budget deficits, which are ironically financed with very high borrowing, at rates which are inappropriate for such risk-free sovereign debts?
Indeed, this inexplicable faux pas will remain so long as government deliberately understates crude oil price benchmark in annual budgets. Thus, for example, if crude prices remained at an average of $100/barrel when the adopted budget benchmark is barely $70/barrel, this would translate to a surplus of about $30/barrel or a consolidated ‘surplus’ of almost $30bn annually, if average output remains at 2.5m barrels/day.
Do not ask why the idle surplus reserves are not used to plug any projected deficit rather than the questionable resort to high cost borrowing, despite the simultaneous allocations from the ECA without appropriation!
Similarly, the consolidation of the CBN’s lion’s share of over $32bn, out of total external reserves of about $40bn, is equally bizarre. It is often suggested that the bigger the share of the CBN’s external reserves, the stronger will be the economy and the apex bank’s capacity to defend the naira. Conversely, however, increasing the CBN reserves has actually threatened naira exchange rate and instigated a seriously destabilising anti-social economic ripple.
The dysfunctional impact of the framework for consolidating the CBN’s reserves may be better explained with an example of $1bn revenue allocation to constitutional beneficiaries, in eight related steps and consequences. In Step-1, the CBN independently captures $1bn distributable revenue to increase its own reserves, and then, turns round to print/create (read as monetise) a fresh supply of N160bn ($=N160) as statutory allocations, which are deposited in beneficiaries’ bank accounts.
Step-2, if prevailing Cash Reserve Ratio is, say 10 per cent, for example, banks would enjoy almost ten-fold leverage on the fresh naira inflow to freely expand credit, and spur increasing consumer spending, which will drive higher inflation rates!
Step-3, in response to the inflationary threat, the CBN would ‘altruistically’ step in and sell treasury bills to borrow from banks hundreds of billions of naira, that it actually does not need, in order to reduce the cash volume in the system. Inexplicably, however, these borrowed funds are deliberately sterilised from use by the CBN, despite the attendant high interest rates and the related industrial contraction and adverse impact on job opportunities!
Step-4, furthermore, in order to prevent liberal access to the cheap, excess disposable funds which it had unleashed, in the money market, the CBN would also increase its Monetary Policy ‘Control’ Rate to compel banks to raise their own lending rates to customers. Consequently, interest rates to businesses may rise well above 20 per cent to ultimately challenge industrial growth, export competitiveness and employment, while irrepressible inflation and contracting consumer demand will prevail.
Step-5, meanwhile, ministries and state governments, which require imports, are constrained to buy back dollars from banks and the BDCs to whom the CBN auctions the dollars earlier impounded, in Step-1 above.
Step-6, the less dollar auctions by the CBN, the larger are its reserves, but the weaker also will be the naira rate and consequently the higher also would be the value of fuel subsidies, as rations of dollars become pitched against the excess naira consciously created by the CBN whenever it monetises billions of dollars. Invariably, the market dynamics of demand and supply would, ultimately, become, unfavourably skewed against naira, particularly more so, whenever the CBN’s total monthly forex auctions fall well below the $1bn, it had earlier, unconstitutionally captured in Step-1! Thus, with the CBN’s contrived short dollar supply, the gap between official and black market naira rates would expectedly widen.
Step-7; in order to reduce the gap between parallel market and the official rates of exchange, the CBN would commit the unforced error of allocating dollars to the BDCs, who in turn, significantly, fund the transactions of treasury looters and smugglers of contraband, not minding the adverse impacts of such misguided dollar supply on the economy.
Step-8; despite a gasping manufacturing sector, increasing unemployment, and deepening poverty nationwide, banks and other speculative foreign investors will still celebrate another bumper year!
Instructively, therefore, if substitution of naira allocations for $1bn revenue wreaks such economic havoc, one can imagine what would happen if distributable public sector dollar-revenue ‘fortuitously’ grows to $5bn, which the CBN would equally hoard, after substituting bloated naira allocations, that would drive higher inflation rates, to government beneficiaries. Consequently, for the CBN reserves to grow under the current monetary framework, inflation must remain high, cost of funds must continue to rise, and unemployment and poverty will consequently deepen nationwide. You don’t have to believe me, but recent history confirms that our national misery index has risen, curiously, simultaneously with rising CBN reserves!”
POSTSCRIPT: SEPTEMBER 2018: Regrettably, Nigeria’s economy has since suffered a massive devaluation which shaved off almost 50 per cent from a celebrated GDP which trended above $450bn. Sadly, in place of Okonjo-Iweala’s GDP growth target of six per cent in 2014, government may eagerly celebrate a two per cent GDP growth this year. Furthermore, in place of inflation rates below six per cent in 2014, inflation has hovered between 11 and 16 per cent in recent years.
Furthermore, the naira’s collapse was largely attributed to lower crude prices; however, crude price has inexplicably remained steady above $70/barrel for several weeks now, and yet naira rate still remains above N350/$, while debt level is well over N22tn, with youth unemployment at all time high. Sadly, Nigeria is now the world’s greatest producer of poor people and, yet the worst is yet to come!
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