There is no doubt that with the continuous drop in the country’s reserve, based on the present current rate of exchange the federal government would embark on external borrowing which may further impact negatively on the economy
Last week, media reports revealed that Nigeria’s external reserve dropped below $30 billion indicating three months import bill. International standard for strong reserve is 6 month’s import cover, which in the case of the country should be about $48 billion.
This situation is worrisome, although the Central Bank of Nigeria (CBN) had attributed the pressure on external reserve to unscrupulous demands for foreign exchange. Only last month, the Apex monitoring bank scrapped the Dutch Auction system as a way of addressing the situation.
But a careful analysis of the process of infusion of the country’s export earnings into the economy indicates that this low reserve is made inevitable by the apex bank’s practice of capturing export dollar revenue and substituting naira at its determined rate of exchange before payment of consolidated naira allocations to the three tiers of government. This process creates excess liquidity in the system, which is the poison in the country’s economy.
Indeed over the years a school of thought has advocated for the adoption of dollar certificates in place of naira warrants for the payment of allocations of dollar denominated revenue as a way of strengthening the Naira. It is believed that this arrangement could improve the exchange rate of naira and subsequently increase the country’s reserve. Sadly this recommendation, which has been canvassed at various fora of critical stakeholders, has not received the listening ears of the country’s monetary authorities. The question is, with the government’s efforts over the years to strengthen the naira failing woefully, is it not time for the monetary authorities to try a new method?
There is no doubt that with the continuous drop in the country’s reserve, based on the present current rate of exchange the federal government would embark on external borrowing which may further impact negatively on the economy. Indeed we are concerned that the current situation does not trigger a call from International Monetary Fund (IMF) and World Bank offering financial assistance to the federal government to manage the challenges. The present situation in Ghana should serve as a lesson for Nigeria’s monetary authorities. The Ghanaian government had sought financial assistance from IMF in a bid to arrest a deepening currency crisis that was worsened by mismanagement of oil revenues.
But the Ghanaian Cedi dropped up to 40percent against the US dollar, making it the world’s worst- performing currency. Today oil wealth has dried up as the country descends into inflation while the citizens struggled for food.
The in-coming government in Nigeria should note that addressing the free falling Naira is the only way to a sustainable economic growth of the country and this should be the priority of the CBN. Certainly the country needs a new formula to end this cancer.
