Normalise the naira for accelerated inclusive growth – Part 2

The prevailing high lending rates have led to very high unutilised bank lending capacity with the proportion of domestic credit to the private sector as a proportion of GDP as low as 12.1 per cent in 2020 according to the World Bank. By comparison, this indicator for Malaysia was 134.1 per cent in 2020.

As regards inflation under the Buhari administration, the usual double-digit inflation stood at 18.72 per cent (year-on-year) in January 2017 amid economic recession and 18.17 per cent in March 2021, which proceeded that year’s recession. Both recessions were avoidable.

Given the double-digit inflation regime, the apex bank’s excuses blaming the surge in inflation on COVID-19 are false and diversionary. Instructively, measures taken by Western countries to combat the pandemic raised 2021 inflation in the EU to 5.2 per cent on average and 7.0 per cent in the U.S. (the highest level for U.S. since 1982). In 2021, average inflation was 2.4 per cent in China and 1.9 per cent in Vietnam. Keen attention should be paid to the fact that Malaysia, Nigeria’s quondam economic peer which also produces crude oil, experienced deflation (fall in general price level) of negative 1.1 per cent in 2020 and inflation of 2.5 per cent in 2021.

Again, following the pandemic-induced high inflation level, mooted plans by Western countries to normalise monetary policy in order to restore the accustomed low inflation have exposed the CBN’s strange monetary policy direction under the HFMP. As contained in the Bankers’ Committee’s RT 200 FX programme and also stated in recent MPC communiqués: “The imminent monetary policy normalisation by Western countries would lead to outflow of foreign portfolio funds from Nigeria.’’ The MPC was therefore under self-induced pressure at its January 2022 meeting to raise the monetary policy rate (despite the already business-unfriendly high lending rates) in order to retain foreign portfolio funds. Yet such funds (if any) in the system did not impact positively on the economy in 2020-21. On the contrary, foreign portfolio funds constitute net drainer off federal revenue and external reserves.

Three, some features under the HFMP represent outright economic fallacy. For example, only government share of export proceeds from Crude Petroleum and Natural Gas (CPNG) forms the sole source of the country’s external reserves. Farcically, it means that Nigeria would not own and accumulate external reserves if crude oil proceeds did not accrue to the Federation Account.

Stranger still, the CBN withholds and appropriates the Federation Account dollar accruals to form the so-called CBN’s external reserves by replacing the dollar funds with fiat printed naira funds (at arbitrary naira exchange rate so that the Federation Account oil proceeds even as crude oil prices and output fall could fetch progressively bloated nominal naira revenue of FG and other) tiers of government for their budgetary expenditure. That inappropriate procedure constitutes the root cause of the excess fiscal deficit, excess liquidity, high inflation, etc.

Further into the strange economics, the CBN ultra vires devalues its so- called external reserves at different artificial exchange rates and allocates portions of the withheld Federation Account funds to the forex distributing market segments (namely, interbank, Investors’ and Exporters’ Bureau de Change, Small and Medium Enterprises, etc) for onward sale at profit to forex end-users. What a sham!

Note that the CPNG represents the single item 5 GDP activity sector. In the latest full year 2021 GDP, item 5 accounted for 7.24 per cent of total GDP. The CPNG export receipts belong to the Federation Account and mainly private sector international oil companies roughly in the ratio of 55.45. There are 46 GDP activity sectors, 45 of which accounted for 92.76 per cent of total GDP. Intuitively, given the confined and restricted source of CBN’s external reserves and the fact that only a fraction of the reserves is released through the forex segment distributorships, there would be perennial and artificial forex scarcity leading to naira depreciation and devaluation, forex speculation and profiteering to the detriment of genuine forex end-users for production of goods and services.

Four, it will be recalled that in 2021, the Ministry of Finance, Budget and National Planning collusively agreed with the Central Bank of Nigeria to devalue the naira from the initial 2021 Budget exchange rate of N379/$1 to N410.15/$1, no thanks apparently to malicious goading by IMF/World Bank behind the scenes. Shortly after that, a photo of a page of a Nigerian passport was posted on the social media indicating that the exchange was N0.550/$1 in 1980 or so. There was widespread public concern that the dollar was scarce, but where it was available, the exchange rate was N550/$1. That meant the difference between N550/$1 and the soon to be shown 2021 single forex market exchange rate of N367.63/$1 amounted to N182. 37. That amount represented almost wholly Federal Government revenue loss per dollar of the so-called CBN’s external reserves that passed through the forex distributorship segments.

Under the SFM system only a fraction of that amount would be paid as customs tariff and /or forex access tax to FG, the exclusive monetary authority. In addition to the massive revenue loss, amid the purported forex scarcity, FG in 2021 contracted domestic and external loans. FG debt servicing cost was in excess of 70 per cent of revenue. FG could not fulfill its agreement with various labour unions, which led to strikes. Down the years, embellished GDP growth has remained tepid and fragile.

To be continued tomorrow.