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Handicap-the-naira exchange rate system – Part 2


[FILE] Currency changer. Photo credit: Guardian Nigeria

The HNS instigates macroeconomic instability and precipitates national debt as it foists on the economy unbudgeted additional inflation-fuelling high fiscal deficits. They arise from (i) CBN pro-rata deficit financing of the budgets of all tiers of government following the apex bank’s withholding of the Federation Account dollar allocations; (ii) double-digit interest payment on mopped excess liquidity caused in (i) above, which ordinarily should attract 0-0.1 percent negligible interest cost; (iii) part of mopped funds in (ii) is restructured into FG revenue-guzzling and double-digit interest cost national domestic debt; (iv) ways and means financing of government, (v) double-digit standing deposit facility interest payments; and (vi) disbursement of apex bank development intervention funds.

Such is the handicap-the-naira exchange rate system, the sower of increscent extreme poverty in the land. The 2019-24 CBN Policy Thrust did not contain the name of any central bank of a flourishing economy that practises the handicap-the-national currency exchange rate system as in Nigeria.
Now, in a managed qua managed float exchange rate system (MFS) via a single forex market (SFM), the CBN policy Thrust-listed perennial macroeconomic challenges dissolve, the failed apex bank monetary policy-prompted development financing preoccupation vamooses and the FG ceases to borrow to fund its budget. How?


In the SFM, the country’s total public and private sector foreign exchange receipts without any arbitrary reduction constitute the forex supply. But exercising the sovereign right and responsibility for ensuring the wellbeing of the people, the government can and should moderate forex demand.

The National Planning Commission is expected to draw up discriminatory tariffs ‘ for the entire gamut of importable goods and services with the primary objective of (i) protecting and advancing domestic agricultural and industrial production; and (ii) accumulating external reserves. No importable goods and services should be banned as it fuels smuggling.

Unwholesome items and imports that unfairly target domestic production should be slammed with sufficiently high tariffs and forex access tax to render them uncompetitive and discourage their consumption. The settlement of all commercial size imports should be effected via banks in order to check dumping and evasion of tariffs and forex access tax.

For the purpose of generating maximum revenue from international trade and the use of forex, it is the lot of the RMAFC to advise and mobilise collection of as much revenue as desirable by imposing discriminatory forex access tax (FAT) on imported goods and services.

The importers’ banks should collect and remit FAT takings to the government treasury. Note that collection of adequate. FAT and protection of the economy using well-specified discriminatory tariffs result in near-zero inflation and ensure economic diversification ‘ whether or not a single commodity accounts for the supply of the country‘s foreign exchange earnings

Trading in the SFM based on unrestricted forex supply and moderated forex demand should be modeled after the NSE. Buyers and sellers (the tiers of government inclusive) of forex should approach commission-earning forex broker deposit money banks (NOT profit-maximising forex dealers) to transact “dematerialised” foreign currencies via a Central Forex Clearing System (the forex depository) (CFCS). Completed forex sales should be settled in naira via the sellers’ banks immediately while importers should direct CFCS to pay forex amounts at a due date to designated exporters based abroad via their banks.


With respect to the macroeconomic outcome, suppose the government runs ex-post balanced or surplus budget or incurs an ex-post deficit of 0-3 percent of GDP. At the cost of economic retardation, the CBN has for decades been conveniently remiss of the fact that CBN Act Section “2(a) ensure monetary and price stability” has duly specified boundaries. These are (a) the fiscal deficit ceiling of 3.0 percent of GDP set in the Fiscal Responsibility Act and the yearly Appropriation Act, which implies that the 0-3 percent inflation range (corresponding to incurred fiscal deficit level) denotes price stability (see Inflation targeting in Wikipedia). Note that to expend realised government revenue is non-inflationary or yields near-zero inflation.

In effect, with inflation figures constantly above the above range, the economy has not witnessed price stability for several decades running contrary to CBN self-serving claims. (b) The exchange rate is a price. Thus under the MFS, exchange rate stability falls within the band of Appropriation Act exchange rate plus or minus 3.0 percent (AAR+/-3 percent.

In the SFM, market-determined exchange rates would tend to bunch tightly in the 0-1 percent range within the AAR+/-3 percent stability band depending on forex supply and demand. The CBN is not required to intervene in the SFM when transaction rates fall within the stability band. Consequently, routine apex bank interventions in the HNS market along with the multiple (window) exchange rates outside the stability band signify raging exchange, rate instability contrary to CBN claims.

Monetary stability spans exchange rate stability and financial system stability (FSS). Expectedly, the permanent exchange rate instability and HNS-instigated macroeconomic instability noted earlier indicate the absence of FSS. There exists FSS when money supply in the system (it keeps changing based on the interplay of the monetary policy rate (MPR), cash reserve ratio, liquidity ratio and disbursed bank credit) is an optimal volume that confines inflation rate, exchange rate and interest rate within their expected stability limits. The MPR should nestle a little above the inflation rate thereby engendering 3-6 percent positive (in real terms) lending rates which are internationally competitive across-the-board.


Note, one, price stability, exchange rate stability and low competitive lending rates spell macroeconomic and conducive economic production environment as their presence enables the private sector (if need be) to embark on selected infrastructural and socio-economic projects (often provided by the government) as profitable business undertakings. Two, the above lending rate; the range is much lower than the so-called special interest rates being offered by the apex bank to selective sectors. That outcome renders unnecessary the CBN’s usurpatory development financing intervention.

All economic sectors are interdependent and should access low-interest rates without discrimination. That development would facilitate rapid and extensive diversification of the economy. In due course, cheap bank credit to the economy as a proportion of GDP would rise from the present 20 percentile mark to 100 percent and upwards.

Considering Nigeria’s current low GDP base, extensive diversification and intensified economic activities would position the economy to attain double-digit annual GDP growth rates (which outstrip the projected ERGP growth rates) for an unbroken 10-15 year period. As a result, there would be a rapid reduction in extreme poverty.

Necessary preparation for the fast-paced economic journey can be put in place within six months. And to start, CBN should dismantle the handicap-the-naira exchange rate system with utmost urgency. 

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