News Column

Ojomaikre - CBN Off Course Despite 239 MPC Meetings (2)

September 2, 2014

Adaighofua Ojomaikre

- Continued from yesterday

WHY should the far much higher public sector earnings of forex depreciate the naira exchange rate and make the CBN to spring to its defence upon the allocation of federal revenue while little inflows of forex from abroad cause the naira to appreciate? That is analogous to the commonplace occurrence of, say, Product X manufactured to international standard in Nigeria being adjudged inferior to an imported product similar to Product X, even where the imported item is visibly substandard. Call it a child of inferiority complex or colonial mentality or corruption-oiling device and you cannot be faulted.

Now, take Federation Account gross revenue allocation data based on the currencies earned from mid-May through mid-July. The accruals totaled US$7.97 billion (56% of total) from oil proceeds and N997 billion (44%) from non-oil sources. Being realised tax revenue obtained from the existing money supply volume (MSV), the non-oil portion (economics teaches) is non-inflationary and therefore poses no liquidity problem. In any case, revenue allocations regardless of currency should be wholly kept in the beneficiaries' CBN accounts. The apex bank is the depository or banker to government (but do not stretch the function to include direct primary forex transactions) and there are apex bank branches in virtually all state capitals. As and when government debt commitments mature, FA beneficiaries issue CBN cheques to public employees, contractors, etc, for lodgment in DMB accounts thereby returning to the MSV what was previously taken away. It is self-defeating, for the sake of sound monetary management purposes, to allow the public sector to operate interest-yielding accounts with DMBs. So the liquidity problem is preventable. Hence the MPC decision to retain public sector cash reserve ratio at 75 per cent instead of 100 per cent is an aberration that must be corrected.

The bulk of the allocations amounting to $7.97 billion was withheld at the instance (according to a CBN Press Release) of FAAC and the Accountant-General of the Federation. In place of the withheld dollar funds, the CBN printed N1.3 trillion in illegally substituted deficit financing of the budget expenditure of all tiers of government. Add such illegally substituted deficit financing to budgeted deficits in the course of the fiscal year and you have an economy deliberately condemned to struggle under actual fiscal deficit level of about 9.0 per cent of rebased GDP. That explains the persistent liquidity problems and elevated negative indices which have defied repetitive MPC counter-measures. Had MPC decisions been open to the scientific method, the CBN long ago would have rethought the forced wrong home-grown contra-economic handling of public sector oil proceeds.

Under the MFER and consistent with the CBN Act, the apex bank should be vigorously protective of the naira legal tender and leave the dollar to find its level unaided in the forex market based on supply and demand forces. Therefore, FA dollar accruals should be shared as earned. However, because of decades of fealty to the dollar, concrete steps should be taken to check possible diversion and looting of physical dollar allocations by ensuring transparent documentation of the end-use of the funds. Hence, FA dollar allocations should be credited to the domiciliary dollar accounts of the beneficiaries. The tiers of government would then be free to convert as and when desired part or the entire holding in their own domiciliary dollar accounts through, as secondary school economics teaches, the DMBs which are the banks of first resort. Naira amounts realized from FA dollar sales (which must be obtained from the existing MSV to the maximum limit are non-inflationary) should be subject to the 100 per cent public sector cash reserve ratio and credited to the CBN naira accounts of client beneficiaries for subsequent deployment as indicated earlier.

The direction of the market forces can be gauged. Both public and autonomous suppliers of forex to the open forex market are in great haste and under pressure to sell off their forex holdings in order to obtain naira legal tender funds for urgent domestic transactions. On the other hand, demand for forex is subject to constraints including eligible transactions requirement, the need to maintain favourable balance of payments and the desire to maximize profits by investors whose businesses are better off the cheaper the dollar is. In the circumstances, the dollar will tend to genuflect to the legal tender with the naira appreciating (recall the BusinessDay headlines). Given the FAA average exchange rate of N160/$1, suppose the CBN decides to let the naira float within the band of $1 = N160 +/- 3.0 per cent. The naira, as it appreciates, will assume possible values ranging from N155.20 to N160/$1.

The process will produce interesting results including, one, the operation of a single forex market as against the current multiple rDAS market, inter-bank market, BDC market and black/parallel market. Two, the substantially higher proportion of dollar accruals than naira receipts in the FA and the market supply/demand configuration will make forex flow undirectionally into the vaults of the apex bank to swell external reserves. The CBN purchases surplus forex from DMBs thereby generating external reserves as a last resort at the market-determined exchange rate. It is, therefore, inconceivable for the CBN to intervene in the forex market twice every week as currently in defence of the value of the waxing naira that is pummeling the dollar. Consequently, the interbank rates of N162.20 - N162.95/$1 for June (MPC Communique No. 96) will not occur under the MFER. Three, the weighted average of total forex transactions by DMBs on a given day represents the official ruling rate (ORR). For instance, because BDCs are exchange rate takers that must not set rent-yielding and independent exchange rates, the ORR on a particular date becomes the rate which BDCs use on the next transactions date to fix their allowable spread of 2.0 per cent between buying and selling rates of forex procured strictly from non-bank small-scale forex transactors. In effect, the BDC rates of N167.80 - N168.00/$1 in the said Communique representing mark-ups of 3.6 per cent and 6.8 per cent on forex procured through the interbank and rDAS windows respectively are anathema under MFER. These rates should attract necessary sanctions under the BDC guidelines.

Four, under the MFER, imports are paid for through official banking channels including where importers use own forex. Therefore, imports of contraband, diversion of imported goods to ports in neighbouring countries and attendant loss of applicable customs duty (as in the BusinessDay headline) will disappear.

Five, in the unlikely event that last resort purchase of surplus forex by CBN from DMBs for naira funds that increase MSV occasions some degree of high liquidity, appropriately set liquidity ratio or mop-up with treasury bills that earn nominal interest rate below 1.0 per cent will restore the desired liquidity level. Hence, portfolio investors (who actually do not qualify as foreign direct investors and are "not employment generating" as Communique No 96 recognises) will be thrown out of business by the nominal interest rates paid on treasury bills. Also the mop-up of excess liquidity to pile up non-investable national domestic debt will cease.

Six, with the MFER in place, it will be goodbye to dollarization, carting abroad of billions of dollars in raw cash with suitcases and high import dependency; welcome to repatriation of national wealth illegally stashed abroad; and happy homecoming to fellow citizens who were forced to check out owing to the mismanagement of the economy.

Seven, the MFER will have tremendous positive impact on the economy with the MPC in the near to medium term reverting to setting minimum rediscount rates dictated by inflation rates that are below 3.0 per cent. (End of Personal Statement.)

Come its 240th meeting, the MPC will issue a Communique announcing, predictably, a unanimous decision to intensify the 43-year-long wandering off course. The happy people of Nigeria should welcome such great favour and accord the MPC members a 240-second-long standing ovation.

- Concluded.

The author is a visiting member of The Guardian Editorial Board.

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Source: AllAfrica

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