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Normalise the naira for accelerated inclusive growth – Part 4

By Editorial Board
31 March 2022   |   4:11 am
To maximise profit, forex buyers (end-users) always seek the cheapest forex price available. Accordingly the SFM-determined exchange rate paid by the apex bank tended to N379/$1 less 3.0 per cent......

[FILES] Bureau de change. PHOTO: QZ

To maximise profit, forex buyers (end-users) always seek the cheapest forex price available. Accordingly the SFM-determined exchange rate paid by the apex bank tended to N379/$1 less 3.0 per cent or N367.63/$1. (This is so because the SFM exchange rate floats within 3.0 per cent stability band in the AAR+/-3 percent corridor.

Additionally, note that based on the SFM exchange rate tendency, the 2022 Appropriation Act ordinarily would have retained the previous year’s initial exchange rate of N379/$1 if government had chosen to promote continued undervaluation of the naira or would have fixed the 2021 cheapest exchange rate of N367.63/$1 and even stronger exchange rate depending on whether or not the country’s economic objectives and defined needs so required.

Thus under the assumed 2021 SFM conditions, the subsequent devaluation of the naira to N410.15/$1 had no basis and was unwarranted. And arising therefrom, the crawling devaluation of the naira since the takeoff of the 2022 Budget (it currently stands at N417/$1) does not arise.) And as further proof of a firmer naira, there was additionally at least $16 billion in forex domiciliary accounts held by operators in 45 GDP activity sectors and international oil companies in contravention of the legal tender naira principal object of the apex bank. Upon mandatory conversion of the $16 billion via the SFM to legal tender naira funds, DMBs would pass the forex to CBN as last- resort purchase at N367.63/41 to swell external reserves, which would have settled at $56.20 billion.

At this juncture, it is necessary to examine some implications and outcomes of the SFM system in 2021. (i) The naira was not under pressure in 2021 as the naira exchange rate tended to appreciate. Instead, the dollar was under pressure as huge forex funds queued to be admitted into the naira economy. (ii) That development gave signal to those keeping dollars under the +-pillow and in foreign bank accounts (in anticipation of the accustomed steadily weakening naira under the HFMP) to have a rethink and bring out such forex funds for sale in the market before the dollar became cheaper still thereby further swelling national external reserves in the CBN vaults. (iii) Considering the brimming external reserves, the FG would have no cause to take external loans. (iv)The ample naira revenue that flowed from takings via customs tariffs and forex access tax would make it unnecessary for FG to borrow domestically.

(v) In the absence of actual figures, it may be assumed that the entire FG 2021 Budget of N14.57 trillion including supplementary budget accrued from the Federation Account oil proceeds if we equate federal non-oil tax revenues to the combined share of FA dollar accruals to state governments and local governments. The above amount under the HFMP represents fiat printed naira funds that were substituted for withheld dollar accruals. Then add N3 trillion intervention loans to obtain N17.57 trillion as CBN deficit funding pumped superfluously into the system. That increase in money supply accounts for the high inflation and other problems bedeviling the economy. By contrast, under the SFM in 2021, only N1.459 trillion ($3.97 billion accretion in external reserves multiplied by N367.63) represents addition to money supply. Note that the $16 billion in domiciliary account that was converted to naira funds would be retained in CBN vaults via cash reserve ratio requirements. Thus under SFM, there is trim money supply and inflation can be easily tamed.

(vi)The positive SFM-induced changes would raise the prospects of operating balanced budgets or even budget surplus. In such scenario, inflation range would settle within 0-3 per cent in the short term. Prevailing bank lending rates would be lower than the rate at which CBN intervention funds are being offered just as non-performing loans would be rare. The duty of CBN with respect to bank lending would be to set loan liquidation terms based on project –gestation periods.

(vii) In place of the fragile and low growth rates which were celebrated under the HFMP for four decades, the economy would be expected to roar to double digit GDP growth rates annually in the first decade following the adoption of the normalised naira exchange rate method and thereby remove increasing numbers of the people in their millions out of extreme poverty.

Moral: In the light of the dismal experience following undiluted implementation of the homegrown heterodox fiscal and monetary procedures over four decades and the credible expected outcomes of the single forex market system, it is clear that any country’s, nay, Nigeria’s economic fortunes and prosperity depend on sound management of the legal tender naira currency. That statement reinforces and validates the earlier assertion that the oil boom economy of the 1970s occurred owing to the management of the naira exchange rate then, which was similar to what obtained in the leading economies at the time.

Without doubt, the adoption of the SFM system in Nigeria is inevitable. The transition from the discredited HFMP arrangement to the SFM system can and should be effected without delay. A period of three weeks will be enough for the transition. Recall that the suspended strategic agenda for the naira, which was announced on 14/8/2007, had slated takeoff of forex market trading for September 1, 2007, a period of less than three weeks.

So in the event the leadership of the FMFBNP and that of CBN stonewall and fail to adhere to the above transitions time frame, the NASS should get the FMFBNP minister and the CBN governor to step down.

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