CBN’s vicious grip on the economy

CBN’s vicious grip on the economy

The other day, the Central Bank of Nigeria, in a two-page advertorial, laboured to corroborate the Ministry of Finance’s earlier clarifications on “the meaning, structure and management of the nation’s foreign reserves”.

The apex bank appropriately defined external reserves as external assets held in foreign currencies by a country’s Central Bank for the “primary purpose of safeguarding the international value of the legal tender currency (i.e. the naira)”.

In an article titled, “Between the truth and government clarifications”, http://www.lesleba.com/yahoo_site_admin/assets/docs/04032013-P.6235524.doc published on this page last week, we discussed the Finance Minister’s tripartite classification of our external reserves into Federation, Federal Government and CBN Reserves.  We observed that the accumulation of the component of federation reserves otherwise known as Excess Crude Account remains unconstitutional until the enactment of the relevant law.  The National Assembly’s acquiescence to this illegality may be seen by critics as an indication of conscious complicity in constitutional violation with shared culpability for deliberate economic mismanagement.  How else does one explain why the lawmakers continuously condoned annual budget deficits, which were curiously funded by borrowing with oppressive costs, when, in fact, there was revenue surplus?  Inexcusably, nothing on the ground so far justifies the resultant indebtedness of over N10tn (AMCON bonds inclusive).

It is mischievous to have accumulated over $10bn ‘surplus’ crude revenue by January 2013, while government borrowed over N1 trillion, with oppressive costs, in order to supplement deliberately understated revenue projections in 2012 budget.

Indeed, if crude prices remain at an average of $100/barrel instead of the budget crude benchmark of $79/barrel, any Federal Government borrowing for the purpose of deficit financing in the 2013 budget may be a confirmation that the Executive and Legislature show no remorse on any charge of complicity for such a fiscal rascality.

In contrast to the declared objective of “safeguarding the legal tender of the nation’s currency,” the process of consolidating the CBN’s reserve component inevitably pitches humongous naira ‘tsunami’, which dwarfs the relatively austere bi-weekly forex auctions to banks.  The resultant huge imbalance in favour of the dollar poses a constant threat to naira exchange rate and price stability.

Paradoxically, the accumulation of CBN’s lion share of about $32bn out of Nigeria’s total external reserves of about $45bn has instigated adverse ripples on interest, inflation, and exchange rates and ultimately also, on fuel subsidy. Consequently, increasing the CBN reserves actually translates into deepening poverty nationwide.

Thus, the CBN’s core mandate of price stability is similarly adversely impacted by its management of external reserves in line with the three declared objectives of stability of principal sum, adequate liquidity and maximisation of return on principal.  In reality, possibly over 80 per cent of Nigeria’s total reserves are held as convertible US dollars; consequently, it follows that since the American currency has lost over 25 per cent of its value in the last decade or so against the euro, Nigeria’s average reserve base of $40bn  would have also lost about $8bn in relative purchasing power.  Consequently, the CBN’s reserves management strategy may have, inadvertently, failed to protect the principal sum as envisaged.

Any claim of success in achieving the second objective of maintaining adequate forex liquidity “to safeguard the international value of the naira” is equally contentious. For example, in 1996, the naira was N80=$1, with Nigeria’s external reserves of $4bn and four month’s imports cover. Inexplicably, however, in spite of exceptional dollar liquidity with $60bn reserves and over 30 months’ imports cover in 2006, the naira rate fell to over N120=$1!  Similarly, Nigeria’s current total external reserves of over $45bn paradoxically also threatens the naira exchange rate.

Furthermore, the achievement of the apex bank’s third objective of maximisation of returns on our reserves appears equally controversial in the light of actual reality. It is inexplicable that government pays up to seven per cent interest on foreign borrowings such as the $500m Eurobonds, while the CBN would be challenged to report a four per cent yield on Nigeria’s external reserves domiciled with the same international merchant bankers, who incidentally, also midwife our more expensive external loans!

However, we will briefly examine the CBN’s justification of the process by which it consolidates its lion’s share of reserves!

The following is an excerpt from the apex bank’s Press Release in this regard:”…when the monthly Federation Accounts Allocation Committee has decided on the distribution amongst the three tiers of government, the foreign currency is then SURRENDERED to the CBN, which MONETISES this amount into naira for the accounts of the respective tiers of government….”, thus, “having surrendered the dollars and obtained ‘equivalent’ naira values, whenever government officials and individuals need to make foreign payments, they approach the CBN with the naira equivalent of their needs and obtain the corresponding foreign currency”.

Let us comment on two key words; i.e. ‘surrender’ and ‘monetise’ in the above passage.  Firstly, the FAAC, as a mere allocation committee, is not constitutionally empowered to surrender public sector dollar revenue to anyone.  In fact, Section 162 of the Constitution does not distinguish the currency denomination of distributable revenue.  In any case, if the general public and private corporations are legally entitled to own foreign exchange domiciliary accounts, such rights cannot be denied the three tiers of government!  It is patently mischievous and a deliberate misrepresentation of the constitution for the CBN to claim to derive the rights to acquire federation dollars from FAAC. It is probably more appropriate to see the CBN’s acquisition as uncontested capture of distributable forex!  It is inexplicable that the legislature has silently embraced the CBN’s illegality.

The word ‘monetise’ is an exotic euphemism for the disenabling and economically poisoning process in which the CBN prints or creates naira balances as substitution for distributable dollar revenue. The adverse impact of this process instigates high lending cost, inflation, increasing debt accumulation and a weak currency. Ultimately also, a weaker naira will increase fuel prices and related subsidies.

This obtuse process of determining N/$ exchange rate is, regrettably, not fully market-determined, but is rather consciously or inadvertently contrived in favour of the dollar by the CBN’s unholy monopoly of the forex  market.

With reference to its ownership of $32bn reserves, the Press Release vainly concludes that, “It is erroneous to expect that the CBN should make available this same portion of the reserves again for expenditure after it has been spent when it was monetised to naira”.

Ultimately, however, since a slave’s wealth belongs to his master, the CBN may have successfully achieved the magical feat of anyone having their cake and eating it.  Sadly, Nigerians are the unknowing victims of this sleight of hand!