2022-24 MTFF/FSP and Nigeria’s dithering economy – Part 2
Continued from yesterday
Towards savouring an outline showing how to determine the market-reflective naira exchange rate to rescue the economy, wistfully, if not tearfully, go through a brief but elucidatory historical account of missed opportunities surrounding the entrenched heterodox fiscal and monetary measures. Nigeria began commercial production and export of petroleum crude oil 63 years ago in 1958.
The Central Bank of Nigeria was established contemporaneously in 1959. Its monetary policy committee has held 280 meetings as of the sitting on 26-27 July 2021. The momentum of the Bretton Woods system of fixed exchange rates (which ended in 1971) sustained the oil boom decade in 1970-79 thereby signalling the shape of what could have ensued. Since 1974 crude oil and gas proceeds have on paper accounted for over 50 percent of the annual budget of the tiers of government.
The forex bounty extends additionally to forex inflows from international oil companies, other foreign direct investors, non-oil merchandise exports, invisible export earnings by way of remittances by Nigerians in the Diaspora and forex inflows from foreign visitors. There does not exist any basis for a weak naira, and there is no reason for a sick national economy.
Yet the FMFBNP and CBN have for half a century collusively refused to adopt the correct and widely successful conventional and best practice method to fix the exchange rate with the view solely to engendering national economic prosperity.
Wearing superpatriotic airs and impatient with the laid-down methods in the fiscal and monetary laws which it met, the erstwhile military regime initiated the heterodox joint-twin fiscal and monetary procedures which it showcased then as home-grown. But the procedures were deceptively not set down in any known decree.
Simply, CBN withholds Federation Account dollar allocations to form CBN’s external reserves. It disburses in their place to the tiers of government for budgetary spending fiat printed naira funds at arbitrary or artificial naira exchange rates. That action not only breaches section 2(b) of the CBN Act which makes the naira the legal tender currency but also economically renders the naira inferior to the alien dollar. FG has no control over any alien currency. Such substituted deficit financing or deficit monetisation of FA dollar accruals distorts and proportionately overshoots the approved budget fiscal deficit limit.
The wrong procedure adversely impacts macroeconomic stability, the level of inflation and so on. The draft MTFF on page 16 shows the fiscal deficit level being incurred has grown further as it seems that ways and means funding is not being liquidated in the same fiscal year even though budgets take off on schedule.
Ordinarily, for sound results, withheld Federation Account dollars (WFAD) should be released to the FA beneficiaries for sale in a single forex market (SFM) to determine the naira exchange rate in accordance with section 16 of the CBN Act.
But self-contradictorily, while FA beneficiaries are refused direct access to WFAD even in the form of abuse-proof CBN dollar account balance statements or certificates for transparent transaction in the SFM under the false pretext that to do so amounted to dollarisation, CBN releases part of WFAD in dollar cash to BDCs to be traded on the streets. That is dollarisation. Also the operation of domiciliary forex accounts, the legacy of the Abacha regime which similarly breaches section 2(b) of the apex bank enabling law, represents practical dollarisation. Worse still, to operate a domiciliary forex account implies not only non-recognition of Nigerian sovereignty but also engaging in the active economic war against the naira economy and the Nigerian state. Yet the CBN governor last August assured domiciliary account holders that their forex funds would not be converted to naira funds thereby elevating the interest of a few avowed economic enemies with impunity over and above a principal object of the CBN Act, the struggling economy and the national interest. Domiciliary forex accounts should go. Furthermore, among other economy destroying abuses such as facilitating carting dollars physically abroad, part of the WFAD released to BDCs wends its way into domiciliary forex accounts and into subscriptions to Eurobond loans to FG, which attract dollar interest.
Generally, despite being barred from currency trading, the CBN releases WFAD funds through selected forex market segments at different or artificial naira exchange rates which do not represent premium or profit (as being wrongly construed by the disobediently currency-trading apex bank because the dollar is not the national currency) but ultra vires naira devaluation rates which hurt the forex end-user, raise the cost of domestic production, fuel inflation and rob FG of revenue.
A member of the presidential economic advisory council recently claimed that the latest external borrowings of $3.35 billion SDR from IMF and $3 billion Eurobond would strengthen and stabilise the naira. But that is incorrect. As earlier indicated, given $33 billion in foreign reserves and $16 billion in domiciliary forex accounts among other dollar streams flowing into the system, the naira remains self-stabilising and strong. And there is no need for external and domestic borrowings. For the avoidance of doubt, a strong naira today would not wear trappings like N0.5464/$1 of yore. To restore that relationship requires a simple arithmetical cosmetic surgery of redenomination, which has no real economic production value.
To be continued tomorrow.