Thursday, 9 June 2016

Recession and a realistic naira exchange rate


Written by the Editorial board of The Guardian Newspaper

Government policy-makers are wont to point to the steep fall in Federation Account (FA) oil receipts for the economic downturn and failure by some FA beneficiaries to pay workers’ salaries over a lengthening period of time, growing indebtedness to contractors and the looming national economic recession. However, to the unbiased economic analyst, the low oil accruals have succeeded in robbing policy-makers of the means to continuously deceive the country through rounds of economic window dressing despite the manifest poor state of the economy since the 1980s.

Contrary to the economic objectives enshrined in the Constitution, policy-makers have rendered oil receipts, regardless of the volume, incapable of impacting the economy positively. Proof? For instance, for over 10 years up to September 2014, the benchmark Brent crude average price ranged from US$31 barrel in January 2004 to $125/barrel in March 2012. The so-called CBN external reserves, which peaked at $62 billion in September 2008, dropped to $27 billion last May.

By implication, the difference of $35 billion plus all oil receipts from September 2008 to last May had been dissipated to, firstly, unsuccessfully defend the value of the naira (which stood at N119/$1 in 2008 versus the government endorsed second-tier exchange rate of N285/$1 last May); secondly, ineffectively mop up excess liquidity by piling up the non-investable national domestic debt which the FG services at double digit interest rate and over which this year alone government will lose more than N1.2 trillion or over 20 per cent of the 2016 budget; thirdly, reward foreign portfolio investors who invest over short periods and crash our stock market at will; fourthly, fund bureau de change (BDCs) to finance anti-economic activities; fifthly, facilitate dollarization and currency speculation; sixthly, help treasury looters cart away forex for stashing in foreign bank accounts; seventhly, operate outbound money transfer service; eighthly, support high visible and invisible import dependence; etc, all to the neglect of domestic production.

Policy-makers steadily erected over time the above structure for egesting the country’s ample forex inflows upon the cessation of the Bretton Wood system of fixed exchange rates in 1971. Hindsight has conclusively indicted the successive policy-makers for the more self-serving than patriotic squandering of the country’s forex earnings no thanks to the continued insistence that the CBN both withhold FA dollar allocations and substitute purported naira equivalent to the FA beneficiaries. In times of considerable oil receipts, policy-makers deceptively hide the underlying faulty and wasteful fiscal and monetary structure behind a fa├žade of sham (cooked) robust economic growth rates, which are not inclusive. No wonder the economy is today in a tailspin and hurtling into recession following less than two years of falling oil prices. To wit, crude oil price slipped below $100/barrel only in September 2014, bottomed at $31/barrel in January 2016 and now hovers about $45/barrel.

How is recession tackled? Communiques of CBN’s Monetary Policy Committee show that when American and European Union economies are on the verge of or do slip into recession with inflation dropping to zero or close-by, the respective central banks set refinancing rates at 0.0-0.5 per cent in order to encourage borrowing for investment to boost output. Japan is experiencing deflation at present and has adopted negative interest rate to stimulate economic activity. By contrast, in Nigeria, with the economy on the brink of recession, inflation rages at 13.7 per cent, CBN Standing Lending Facility is 14 per cent, the prime lending rate averages 16 per cent and maximum lending rate averages 28 per cent. Prime and maximum interest rates, which settled in that band since 1989, reflect the apex bank’s business-unfriendly tight monetary policy stance that discourages borrowing by the real sector and constricts economic output. In effect, the CBN seeks to entrench economic recession!

It has been shown repeatedly that these permanent hostile features result from excessive fiscal deficit regime caused by substitution of CBN deficit financing in place of FA dollar allocations as earlier noted. So, come end-June, this economy will be dubbed overheated but in recession, an oxymoron-like condition. The CBN’s plans to combat the recession by relaxing its tight monetary policy stance is a vacuous prescription in an inflationary situation dictated by the numerous unrealistic naira exchange rates produced in competing forex market segments while the delinquent apex bank abettingly watches.

If policy-makers desire a genuine solution, the content of the long-waited CBN comprehensive reform of the foreign exchange market hold the key to evolving the realistic exchange rate for turning around the economy. But some issues have cropped up. Firstly, the CBN says, “Details of operation of the market would be released at an appropriate time.” The right time is long overdue: indeed, that time should have been 1978, the year the manage float system (which should form the core of the reportedly ready framework) was widely adopted internationally. Under the managed float system (MFS), an economy ingests its forex inflows to produce its needs and surplus for export.

Secondly, in its framework, the CBN has assured domiciliary account holders unfettered access to funds in their accounts. On the contrary, under the MFS, the naira assumes exclusively unfettered national currency status. Domiciliary accounts merely represent a transitory stop (of one to six months) before any foreign currencies therein flow smoothly and undirectionally to the country’s single forex market for conversion to naira legal tender amounts. Thirdly, the CBN seeks to retain a small window for funding critical transactions. That is an aberration and a ploy by self-serving policy-makers to continue to milk the system.

It has no place under the MFS and it is unacceptable. Just like an individual household head decides the proportion of the family’s income to consume leaving the rest as savings, the FG should draw up and closely monitor an eligible import list including so-called critical transactions for the country as a whole. That forex demand list of the country’s needs should leave a surplus that flows as savings into FG-owned external reserves. From the external reserves may be appropriated transparently funds for any additional projects or commitments not provided for in the regular budgets.

Illustrative clincher? From NBS data, visible imports averaged $2.5 billion per month in the first quarter of 2016. So forex supply in the system last May comprising external reserves ($26.6 billion) and domiciliary account balances $20 billion) alone represented 19 months’ import cover (excluding invisibles). Under the MFS, the so-called CBN external reserves revert to the Federal Government.

There are additional forex inflows such as Diaspora remittances ($21 billion in 2015), recovered and repatriated loot, external loans and grants for domestic transactions, non-oil export proceeds and FA forex accruals. Thus the economy cannot but post a much stronger realistic naira exchange rate than N197/$1. That outcome will moderate inflation, bring down interest rates in due course as well as revive and boost domestic production among other positive developments.

Under a patriotically implemented MFS, Nigeria would not experience scarcity of forex in any guise. The FG should therefore stop pretending to be less knowledgeable than the citizenry, desist from continued foisting of a false forex scarcity, brace up and properly manage the available resources.

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