The Wrong Way to Defend the Naira

Lately, I stumbled on TV broadcast of Lamido Sanusi’s acceptance speech on occasion of his award as Silverbird TV’s 2010 ‘Man of the Year’. The overt import of the CBN Governor’s patriotic fervor and passionate love for Nigeria would hardly be lost on the audience, or indeed, on other Nigerians, who watched on TV.

The awardee dispelled any doubts on his recognition of his primary role as ultimate arbiter of Nigeria’s monetary policy, but insisted that this burden should not preclude him from dabbling in other areas outside his primary assignment.

Indeed, his finger pointing at perceived ‘saboteurs’ of a better Nigeria has persisted since he became CBN Governor almost two years ago! It is likely that his Silverbird award was promoted by public perception of Sanusi as a social crusader, who is passionate and restless to turn around our fortunes as a country. Accolades have rained on this amiable gentleman from all sides including the stable of the respected London Financial Times, who also selected him as Global Central Bank Governor for his intermediation in restoring sanity to our blighted banking sub-sector! It does not matter that the economies of less favoured Governors of Central Banks elsewhere have since successfully rebounded from the throes of the 2008 global recession, while the Nigerian banking system is still to shape up, even after trillions of naira support from government’s multifaceted bailout packages; The banks are yet to open their clenched fists to the real sector, and it is confounding that deposit rates attract 2 – 3%, while commercial lending rates exceed 20%.

It seems also inexplicable that our monetary authorities are consciously promoting a tight money policy and fuelling inflation rate beyond the already oppressive 10%+ with a major hike in CBN’s monetary policy rate to 7.5%! It is self-evident that increasing unemployment rate and the collapsing industrial space cannot be halted under the ambience of CBN’s current monetary framework! In other words, in spite of having a self-proclaimed patriot and ‘friend of the poor’ at the commanding height of monetary policy formulation and implementation, our people may actually become poorer!

Sanusi glosses over these failures and contradictions in his acceptance speech for Silverbird’s award, but, quickly diverts our attention to his ‘patriotism and courage’ at resisting ‘IMF’ advice to devalue the naira. The Governor ‘blasted’ IMF for inducing inappropriate policies that distort and repress our economy with little or no opposition in the past from Nigeria’s economy managers, who did not have the ‘balls’ to look the IMF in ‘the face’ and reject their poisonous pills! The import of such allegations are clear; i.e. IMF has always featured in the corridors of policymaking, and Nigerian policy makers at the highest levels have acquiesced timidly to IMF’s debilitating prescriptions. If this is true and Sanusi, as current CBN Governor is certainly well-placed to know, then, we mustwonder at the ultimate damage caused our economy and our people’s social welfare whenever we embrace IMF’s substantive staff, seconded as Ministers or turnaround experts to redeem our economy, even when such agents’ emoluments are seemingly charitably under-written by the World body!

Specifically, Sanusi referred to the recommendation for a devalued naira as one of such ‘bad’ or anti-Nigeria recommendations. The implication also, is that if Nigeria had another IMF stooge as CBN Governor, naira devaluation would already be a done deal! Consequently, he has correctly refused to play along with IMF, as there are no observable benefits in a weaker naira, which would increase industrial production costs, fuel inflation, increase fuel prices and subsidies and increase our national debt burden. In effect, we should thank God for having a patriot, who can see through IMF’s wily overtures as CBN Governor!

Lamido has vowed to defend the naira at the current rate or at worst within a band of plus or minus 3%! In other words, the naira will not fall below about N155=$1 under his watch! This may be cheerful news to industrialists, who largely depend on imported raw materials and also for the purchasing power of all naira income earners; however, discerning analysts must wonder why the talk is about the possibility of a weaker naira at a time that crude oil prices (contributor of over 80% of national revenue) have approached $120 as against the $75/barrel projected in the 2011 budget!

On their part, the IMF, through their local manager, one Ohno Rhule, have since insisted that their recommendation for devaluation has been misunderstood, and clarified that their concern was that increased government spending in the face of dwindling dollar reserves would make naira devaluation inevitable! In other words, government should cut spending! Two issues jump to mind from the above IMF explanatory notes; the first is that although the illegally constituted excess crude may be severely depleted while dollar reserves hover around a relatively comfortable imports cover of over 20 months, a significant fall in overall dollar revenue is unlikely with current upward trajectory of crude prices, and crude production well above 2.6 million barrels per day against the 2.3m projected in the 2011 budget!

Secondly, in view of the huge pool of unemployment and a near comatose industrial sector and low consumer demand, how appropriate is it to recommend reduced government spending (even when such is not predominantly investment spending)? Reduced government spending will, of course, further reduce consumer demand and aggravate the already stressed industrial subsector! So, admittedly, without a doubt, Sanusi’s argument appears more plausible than the IMF with regard to need for a stable naira value; but the real question is whether or not the CBN Governor can keep the naira below N155/$1 within the context of the present framework that explodes money supply whenever distributable dollar revenue is substituted with naira in monthly allocations to government. I have consistently maintained that naira substitution for dollar revenue is the poison in our economy, as it engenders a system that makes our economy and people poorer when we earn increasing dollar revenue, a veritable paradox if there was one!

Interestingly, both IMF and our Central Bank are in accord with regard to the cross of ‘too much’ money in our system; both parties, in spite of Sanusi’s observations on IMF ‘manipulation’ regard increased government spending or what they describe as expansionary fiscal tendencies of government as major cause of inflation and weaker naira. However, as earlier discussed, it would be inappropriate to restrain government spending of any sort, for that matter, with over 20% (about 30 million) unemployed Nigerians and an industrial sector that is awaiting revival!

I never cease to be baffled why both our government’s economic managers and also IMF choose to put the blame for the poor state of our economy on expansionary government spending! If the truth must be told, the contradictions of our economy derive from the perennial albatross of too much money, otherwise called excess liquidity in our system. A cynical observer might ask the questions, “how can you say there is excess money in the system and yet the banks do not seem to have adequate funds to lend to the real sector; and how come that same cash-strapped banks always have N200bn or more that they currently lend to government every month?

My answer is that these are contradictions and paradoxes that evolve from a fundamentally faulty monetary policy framework!! In reality, IMF and our own Economic Management Team refuse to recognize that inflationary pressure and a weaker naira, with their adverse consequences for social welfare are not the result of too much government spending, but t
he product of excess liquidity, which in turn is caused by banks’ traditional ability to expand their credit capacity by leveraging on the hundreds of billions of naira deposited with them every month, through government allocations. So, the culprit is not the level of government spending but the extended credit capacity of banks, with increasing monthly allocations! Thus, the higher crude oil prices, the greater is the distributable dollar revenue, the greater also is the naira sum deposited with the banks, and the greater their credit capacity; the increased excess liquidity, invokes the need for higher CBN monetary policy rates to restrain expansion in bank credit, this induces higher commercial lending rates, which instigate inflation. Ultimately, industries suffer and the level of unemployment further rises.

So, in the context of the above prevailing monetary framework, can Sanusi succeed in defending the naira value from falling as he vowed? An honest answer would be that ‘this is highly UNLIKELY’!!

Our confidence in making this observation is explained in the light of the following reality: crude oil prices above $100/barrel should potentially be good for an economy with severe revenue deprivations, but CBN’s substitution of increasing dollar revenue with unilaterally determined naira equivalents will mean bigger monthly naira allocations and invariably bigger cash lodgements with commercial banks. Banks would leverage on the bigger lodgements to extend their credit capacity consequently inducing the spectre of too much cash in the system; increasing naira availability will in turn confront limited dollar sums auctioned by CBN every week; in such a process, there will inevitably always be too much naira chasing relatively few dollars, with grave implications for naira value!

Of course, CBN can throw more and more dollars into its forex auctions every week, as it is currently doing to stabilize the naira, but this will never be adequate to ‘mop up’ expanded naira liquidity in the hands of the banks! Although CBN has indicated that current increasing dollar demand is the result of the electioneering climate, this false premise will be exposed in coming months, as speculations already triggered by IMF’s recommendation for naira devaluation continue to hold sway and become self-fulfilling. Furthermore, government at all levels will find scanty funds in their treasuries after the elections and demand increasing disbursement from the excess crude account which when paid, will swell monthly naira allocations with disastrous consequence of excess liquidity, which will ultimately jeopardize naira value!

But, the self-inflicted plague of excess liquidity can be lifted if our Economic Management Team recognize the above market analysis and adopt the sensible path of paying dollar component of monthly distributable revenue with the instrument of XXdollar certificatesXX rather than its substitution with humongous naira values with its train of adverse consequences! The naira will effortlessly become stronger without any grandstanding, with this approach, while interest rates and inflation will fall to single lower digits, industrial costs will also fall, while consumer demand will expand with significant rise in level of employment. If Sanusi and his team refuse to tow this path, then, they will fight a losing battle against the grain of market reality and IMF will most certainly have the last laugh, as naira devaluation will become inevitable with dire consequences for industries, employment and price stability with deepening poverty as a product!!

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