The new administration of President Muhammadu Buhari will certainly need to manage the economy not just better, but very differently, once it is inaugurated on May 29.
And one issue it should immediately tackle is the Central Bank of Nigeria’s management of the nation’s monetary policy. For instance, following its meeting of March 23-24, 2015, the CBN Monetary Policy Committee issued communiqué No.100 in which it expressed satisfaction with the effects of its previous decisions and subsequent actions.
Accordingly, it retained those decisions so that the effects would fully permeate the economy. Among the subsequent steps taken by the CBN was the closure of the Retail/Wholesale Dutch Auction Systems (RDAS/WDAS) forex window in favour of the interbank foreign exchange market.
It is remarkable that the CBN has adopted, rested and re-adopted both versions of DAS on at least three previous occasions without cleansing the forex market of the noticeable shortcomings that precipitated the latest closure.
Upon the closure, the apex bank indicated that the interbank forex market rate would represent a unified foreign exchange market rate. Along with the RDAS/WDAS closure, the naira exchange rate was devalued from N168/US$1 to N198/$1. There is need to correct the CBN’s warped idea of a unified forex market rate.
Public sector foreign exchange earnings are not directly traded in the interbank market. For that reason, the interbank forex market rate is incomprehensive, distorted and defective. Despite expressing satisfaction with the steps taken by the apex bank, the MPC in the very same breath juxtaposed their effects (which cannot be deemed satisfactory) as follows: “The Committee, however, expressed concern about the wide divergence between the interbank and the bureau-de-change exchange rate which provides an avenue for arbitrage and speculative activities in the market.
The Committee noted with concern the phenomenon of currency substitution and partial dollarisation in the economy, a development which may have significantly fuelled the high demand for foreign exchange.
The Committee, therefore, reiterated that the naira remained the currency of transaction in the economy and advised the bank to take all possible measures to address this development”.
Two points are noteworthy in the excerpts. Firstly, it contradicted the CBN’s claim to a unified forex market rate and acknowledged the existence of a freewheeling bureau-de-change forex market rate. In effect, the door was, as always officially and deliberately, left ajar for speculative trading in foreign exchange.
The apex bank cannot be unaware that in a unified forex market system operated by deposit money banks, the bureau-de-change exchange rate should be tied to the market-determined unified rate within a specific spread. Also, forex transacted by BDCs, should be sourced exclusively from non-bank small forex holders.
Secondly, the MPC disapproved what it termed currency substitution or partial dollarisation. But sadly, the MPC did not spell out any specific course of action for addressing it.
Hence, we should be wary because the last time the lingering dollarisation came under public censure, the CBN sought to tackle it with a plan to introduce a N5000 note. That diversionary proposal was roundly rejected by the public.
Therefore, what is required is a fundamental solution to dollarisation among many other negative cumulative effects of CBN’s past actions relating to the naira. Whilst its occurrence has become very visible of late, dollarization began to wax stronger because of the predictable depreciation and periodic devaluation of the naira since the 1980s.
It involves foreign (usually U.S. dollar) funds that are acquired from whatever sources for use in domestic transactions, including speculative currency activities. To pay dividends in dollars, as an oil company now insists on doing, is to wittingly expand, and infact, its Nigerian shareholders with the disease of dollarisation.
It is unacceptable. The MPC should note the fact that the mismanagement of the domestic currency together with the numerous plagues afflicting the economy springs from an initial wholesale currency substitution which gave rise to high inflation, constant depreciation and periodic devaluation, thereby eroding the quality of the naira as a dependable store of wealth (a critical function of money).
Also the MPC should note that the parent or initial currency substitution is ongoing and has been in place since 1971 and involves illegally printed deficit-financing naira funds that the CBN substitutes for withheld Federation Account oil receipts.
Consequently, the preoccupation of the CBN over the years has shifted from actualization of its statutory mandate to unavailing combat against the excess liquidity and accompanying economic plagues which characterize excessive fiscal deficits. There is no better way to drive home the point than to point to the inherent fact that the Nigerian economy does not exhibit the economic-boom features of an oil-dependent country.
Yet, oil receipts on paper have accounted for over 50 per cent of the annual budgets since 1974. It bears repeating for the sake of emphasis that in place of oil boom features, the economy wears the hostile conditions and hallmarks of an economy steeped in unbroken excessive fiscal deficits for a long period of time.
On the other hand, Nigeria’s withheld oil wealth has been simply looted and wasted in the name of defending the value of the naira in the sham forex market.
In the process, the country has only managed to stave off excessive fiscal deficit-induced Zimbabwean-like meltdown of the domestic currency. In order to stop dollarisation and the various economic plagues, therefore, the fiscal and monetary authorities should end the inappropriate parent currency substitution and infuse available public and autonomous foreign exchange into the economy by means of the managed float system.
In spite of the reduced level of oil receipts, the correct infusion of available oil-derived and autonomous forex would produce truly positive results where up till now, as already shown, great economic damage is being wreaked by the substituted excessive fiscal deficits that are proportional to the contribution of over 50 per cent by oil earnings on paper to the country’s annual budget.
