CBN and rapid inclusive growth

The 2018 Appropriation Act fixed the naira exchange rate (AAR) of N305/US$1 (the same as in 2017) and raised the benchmark oil price to $50.50/barrel from the initially proposed $45/barrel. Other things being equal, the revised benchmark would trim the fiscal deficit below the indicated 1.77 per cent of GDP based on the discarded benchmark price. Hence the 2018 inflation expectation is about 1.77 per cent. In 2017, actual fiscal deficit was 1.9 per cent. Suppose total state governments’ deficit amounted to one-quarter of the federal level thereby bringing the overall fiscal deficit to some 2.4 per cent of GDP. The attendant inflation expectation of 2.4 per cent fell within the safe 0-3 per cent inflation range.

Ordinarily, such level of inflation permits accommodative monetary policy stance and positive real lending interest rates of 4-7 per cent. Low lending rates within that range (signifying prevailing conducive production environment) are investment-friendly, foster extensive borrowing for productive activities, facilitate emergence of a private sector-led throbbing economy, engender inclusive rapid growth and development and vice versa in emerging economies. However, contrary to the 2017 low inflation expectation, estimated inflation by NBS stood at between 18.7 per cent in January and 15.4 per cent in December. The lingering impact of 2016 naira devaluation is not adducible to fully explain the high inflation outturn. It has been shown elsewhere that annual inflation expectation deducible from budget expenditure and realised revenue has been consistently exceeded because CBN repudiates the economy-wide application of the relevant AAR, subjects the economy to excessive fiscal deficits by disbursing for government (all tiers) budgetary spending substituted pro-rata apex bank funds in lieu of withheld (by CBN) Federation Account dollar allocations and operates artificial devalued exchange rates that unsettle the productive sectors of the economy while enriching interlopers.

Besides the numerous macroeconomic difficulties arising from the unlegislated excessive deficits and their attendant excess liquidity, in the guise of controlling the ensuing inflation, some excess liquidity funds have since 2003 been mopped or withdrawn from circulation for sterilisation (not to be spent) by means of treasury bills to pile up a fake national domestic debt (NDD) that attracts double digit interest cost. In 2017 part of the NDD was refinanced in dollars at 7.0 per cent interest charge.

Instead of directing CBN to adhere to relevant laws in order to simultaneously prevent government revenue from being sucked and lower lending rates to 4-7 per cent range to attract the private sector to contribute maximally to economic growth and development, the Muhammadu Buhari administration chose to treat a symptom of the economic cancer by proposing in the 2017 budget (also in 2018) to finance about 50 per cent of the capital (infrastructure) budget, which approximates the fiscal deficit level, with external loans at 7.0 per cent interest charge and fund the remaining 50 per cent with domestic borrowings at 13 per cent. It proceeded hurriedly to issue Eurobonds at over 6.0 per cent and agreed to $3.5 billion refinancing of the fake NDD, which did not yield any spare funds for building infrastructure as a prelude to refinancing the entire NDD. Disturbingly, there is no indication in the ERGP how the resurging external debt commitments would be repaid.

Again economic rationality dictates prompt adoption of measures which would result in procuring domestically 100 per cent of subsequent loans at 4.0 per cent interest rate instead of concluding the fifty-fifty split of domestic and external debt arrangements with both halves attracting much higher interest rates all the more because the economy, barring mismanagement, generates ample forex to meet national needs. Unfortunately, the CBN’s 2018/19 Monetary, Credit, Foreign Trade and Exchange Policy Guidelines (a.k.a. Monetary Policy Circular No. 42) evidences the apex bank’s contempt for provisions of the 2018 Appropriation Act and CBN Act 2007 that undergird sound economic management and guarantee realisation of conducive economic conditions.

Therefore, the real reason for CBN’s disregard for the laws of the land and the rush to saddle the country with unneeded foreign loans needs to be well understood. On CBN’s watch over the years, national development matters received lip service yielding place to dollar currency trading. Thus deposit money banks (DMBs) forsook their primary duty as they became notoriously averse to lending to the productive sector. Having deprived DMBs, the banks of first instance, of the intermediary responsibility of brokering FA dollar allocations between beneficiaries and eligible forex end-users, CBN over-compensatorily turned banks to vampiric suckers of the economy as forex dealers. DMBs therefore drain the country’s export earnings rather than provide cheap credit to promote productive activities which could bring increased forex to the economy.

For example, as contained in the above Circular No. 42, (a) repatriated export proceeds would continue to be kept in permanent domiciliary accounts with DMBs for own use by holders or sale via the Importer and Exporter forex window (where the CBN has currently devalued the naira by 18 per cent against the AAR); (b) international oil companies would continue to sell forex holdings to DMBs when they elect to; (c) remittances from Nigerians in the Diaspora would be sold to DMBs; (d) DMBs by September 2013 had become the largest importers of US dollar cash. Unlike other commodity imports, dollar currency as a commodity, is being imported sans requieite tariff, and so on.

DMBs as forex dealers proceed to profiteeringly trade forex acquired in various ways at devalued/depreciated naira exchange rates in the several naira segment markets as well as under the table. The end result, which is entirely to the detriment of the economy, includes, (i) intensified dollarisation; (ii) provision of forex backbone for naira denominated debit cards which may be cashed in dollars around the globe; (iii) whetting of appetite for foreign goods and services while the country’s agricultural production, industries, educational and medical institutions suffer neglect; (iv) encouraging smuggling, stashing away of forex in private vaults and in foreign bank accounts; (v) hidden prompting of foreign portfolio forex flows that momentarily buoy up the stock market only to massively induce sell-off of stocks for short-term gains thereby destabilising the capital market; (vi) granting dollar loans locally thereby entrenching multiple currency practices; (vii) orchestrating naira depreciation and subsequent devaluation; (viii) reducing central banking to solely forex trading and dissipation of withheld FA oil proceeds to futilely feed insatiable demand for dollars to the advantage of foreign economies; (ix) foreign-suborned goading of the Federal Government to issue Eurobonds and refinance the NDD in dollars as secure avenues for dollarized Nigerians and their foreign collaborators to recycle looted oil wealth and directly drain government forex receipts. So CBN’s Circular No. 42 has room for neither infrastructure development (the pretext for wholesale external debt procurement) nor pretensions to improving economic growth: it merely unpatriotically opens the economy to be raped unceasingly.

On the other hand, given the CBN Act and the exchange rate set in the Appropriation Act, the CBN is required to operate an open single forex market. DMBs, the banks of first instance, should act as minimal commission-earning brokers. The naira should be allowed to float flexibly within a stability band bounded by AAR+/-3 percent (being a managed float system) as outlined in The Guardian editorial of 23/10/17. Broadly, all economic transactions including bank loans to all businesses/individuals should be carried out using the naira.

There will be guaranteed steady forex supply as all forex holdings (public and private sectors as governments’ CBN forex account balance statements inclusive) should within a period not exceeding 30 days be converted via the forex market to naira funds. But forex demand should be controlled based on clearly defined eligible transactions which, depending on national priority needs, should attract discriminatory forex access tax (FAT) surcharge. This revenue source will substantially improve the government revenue/GDP ratio. DMBs would sell surplus forex to CBN to pool genuine external reserves.

Implementation of the single forex market as outlined (a) channels the country’s ample forex inflows seamlessly to genuine end-users and to the external reserves pool with the incorporated FAT reinforcing measures to grow government revenue and protect domestic production; and (b) aborts distortive elevation of the fiscal deficit level by the apex bank thereby making the budgeted low inflation expectation rate to become a reality. In the resulting conducive environment, private sector investments would blossom with bank credit to the economy (public and private sectors as government does not crowd out private sector borrowing) as a proportion of GDP rising steadily from the recently recorded level of between 17 per cent and 22 per cent of GDP to 100 per cent and upward in a year.

Government functionaries should realise that provision of various types of infrastructure is not government monopoly. The empowered and unhindered private sector would routinely access cheap bank credit and profitably undertake some infrastructure projects as business ventures to quickly break economic bottlenecks and so move Nigeria onward to double digit inclusive growth rate and rapid development.