CBN’s defence of naira with $26.6bn in 2013: True or false?

The PUNCH recently carried a report titled, “CBN defended naira with $26.6bn in 2013.”  The report, apparently obtained from the Central Bank of Nigeria’s website, indicated that this amount was sold to currency dealers in 94 foreign exchange Dutch Auctions between January and December 2013.

Indeed, in consonance with the apex bank’s boss, Lamido Sanusi’s promise to maintain stability, the official naira rate of exchange against the dollar has ironically remained stagnant between N153 and N156, despite our increased foreign reserve base.  Regrettably, however, the unofficial (street market) rate has gradually moved from a deviation of N1 or N2 to about N20 per dollar. Thus, an “ingenious” bank or Bureau de Change could easily make a monthly profit of about N20m by simply buying $1m directly from the CBN’s allocations and selling the same dollars elsewhere!

The resultant abuse of the CBN’s wholesale forex auction inevitably induced unbridled capital flight, characterised by huge bulk movements of hard currency through our airports and other land and sea borders.  The CBN’s recent reintroduction of the earlier discredited Retail Forex Auction, has once more restricted direct sales of foreign exchange specifically to end users, in place of the former speculative hoarding by banks, under the Wholesale Auction System.

Furthermore, the CBN also reduced its weekly dollar allocations to the BDCs from $1m to $250,000. Regrettably, however, despite (or maybe, we should say because of) these measures, the apparent shortfall in dollar supply to the open market has instigated a widening gap between official and BDC rates.

Although the CBN has assured bona fide manufacturers and traders of unhindered access to foreign exchange at the lower official price, historical evidence of forex market dynamics suggest that even when the black market comprises a smaller fraction of the total foreign exchange market, official rates of exchange have over the years been predicated by increasingly wide divergence from the black market exchange rate!

Consequently, the naira exchange rate mechanism has always been a clear case of the tail wagging the dog!

The naira exchange rate is further characterised by the paradox of depreciation despite significant increases in dollar revenue and imports cover.  For example, the naira exchanged consistently at N80/$1 between 1994 and 1998, despite barely $4bn total reserves, but has unexpectedly, officially, fallen below N150/$1 despite buoyant reserves above $40bn with more than 10 month’s demand cover in recent years!

Inexplicably, however, in 2012, the International Monetary Fund recommended a formal further naira devaluation, in order to reduce the size of government spending and also reduce budget deficit, and hopefully also restrain spiralling inflation, fuelled by stifling systemic surplus naira.

Nevertheless, with heavy unemployment (over 25 per cent) particularly amongst youths, and an inflation-ravaged economy, discerning critics and observers might see the IMF’s prescription to reduce government spending as ironically socially antagonistic.

Undoubtedly, the universal antidote for low consumer demand and high unemployment is to increase government spending, to create jobs and stimulate demand.  Consequently, the IMF’s recommendation and the CBN’s inappropriate tight monetary policy instruments, which also fuel inflation, and trigger cost of funds in excess of 20 per cent to SMEs, will inevitably only deepen poverty nationwide.

Nonetheless, some observers blame our parlous economy and weak naira on our “inability” to diversify our economy.  However, these observers have never satisfactorily explained how our economy can be diversified when the SMEs, our economic growth engine, are challenged by high cost of funds, and low consumer demand caused by dwindling job opportunities plus increasingly low-income values, induced by oppressive inflation.

Conversely, however, I have consistently, rightly in retrospect, observed for several years, that our economy will remain distressed and unable to satisfactorily diversify because of the economic damage caused by the CBN’s unconstitutional capture of our export dollar revenue and the substitution of exclusively naira payments for monthly allocations to constitutional beneficiaries.

Thankfully, the CBN has belatedly recognised the poisonous impact of commercial banks’ ability to leverage on the monthly heavy inflow of naira allocations, which precipitate the unending spectre of excess cash, and the attendant absurd necessity for the apex bank to reduce such surplus naira  and contain inflation by borrowing from the same banks at oppressive rates of interest, only for the CBN to inexplicably, thereafter, sequester these loans as idle funds, which cannot be applied for infrastructural enhancement or appropriation.

Indeed, it is also instructive that the CBN’s cache of self-styled “own dollar” reserves accumulated from substitution of naira allocations increases in tandem with increasing naira surplus in the economy and deepening poverty nationwide.  Incidentally, the CBN’s current “own reserves” of over $40bn is not also available for reduction of our heavy debt  burden. Curiously, however,  the apex bank still consciously seeks opportunities to invest “its idle dollar reserves” in foreign economies, despite the relatively paltry yields associated with such investments!

Nonetheless, Sanusi confirmed in his controversial letter of September 25, 2013 on the “$49.9bn unremitted oil revenue” to President Goodluck Jonathan, that the treasury had received about $22bn as of July 2013 from oil exports.  Consequently, since oil prices remained consistently over $100/barrel, cumulative oil earnings should exceed $40bn in 2013.  However, with the CBN’s usual practice of substitution of naira allocations for dollar revenue, naira cash supply would increase by over N6tn (i.e. N155/$1), while commercial banks could also leverage almost tenfold on the fresh naira inflow to create systemic naira liquidity of about N60tn.  Consequently, the total available spendable naira in the system would be adequate to purchase ten times over (i.e. over $400bn) the initial actual $40bn earned from crude oil sales in 2013!

Thus, the CBN’s substitution of naira allocations actually weakens the naira exchange rate!  Worse still, its confirmation that it only auctioned $26.6bn (i.e. 65 per cent) out of the total $40bn revenue collected, suggests that the naira exchange rate would be under greater pressure because of the short supply of $14bn (i.e. 35 per cent of forex revenue), and the earlier provision of full naira cover for the total actual revenue of $40bn!  It is not rocket science to deduce that systemic surplus naira and rationed dollar supply will deliberately artificially skew the exchange rate mechanism in favour of the dollar!

So, while it is true that the CBN sold $26.6bn in foreign exchange auctions in 2013, it is not true that the sales process realistically defended the naira exchange rate. If anything, the CBN’s monopolistic rationed dollar auctions, after consciously flooding the system with naira allocations, should more appropriately be recognised as a contrived mechanism to continuously depreciate the naira, especially more so, whenever we earn increasingly more dollars!  Fortunately, however, the adoption of dollar certificates for the payment of allocations of dollar revenue will favourably resolve our economic dilemma quickly