Pay Federation Account oil accruals in dollars
The 36 state governors intend to demand that “their states’ shares and those of the local governments from the Federation account” revenue accruals be distributed in the selfsame currency collected. That intention is borne out of dissatisfaction with net Federation Account (FA) oil export proceeds made available for distribution among the beneficiaries after unilateral deductions by NNPC of amounts to offset self-styled petrol price under-recovery. Ordinarily under the rule of law, the absence in 2018 of requisite authorization of payment of petrol subsidy by the representatives of the people in the NASS provided the leeway for the executive arm of government to effect full deregulation of the downstream sector of the oil industry.
Expecting that such eventuality would lead to increased receipts from the FA to enable them to meet some of the pressing needs of the people in their respective states, the governors advocated the removal of subsidy on petrol, the last refined petroleum product still being subsidised. Yet, the Buhari administration, professing to be shielding the poor from the prevailing economic throes, deducted and misapplied FA oil proceeds without prior legislative approval. That way, the President disdained the rule of law under the democratic dispensation. It is imperative for the President to always operate within the laws of the country. For contrary to the stated wish of the President and as things have turned out, the misapplied FA proceeds did not benefit the poor at all as evidenced by both the low 2018 GDP growth rate of 1.9 per cent and the sinking of the country into the poverty capital of the world. In reality, the unauthorised decision to offset price under-recovery of bloated volume of petrol imports filthily enriched corrupt vested interests. The Nigerian people (the poor inclusive) would have been well served if the misapplied FA proceeds had been invested in sorely needed priority infrastructure, education, health and other socio-economic projects.
In the circumstances, it is noble and pro-poor to seek that FA accruals be distributed in the appropriate manner. The 36 state governors, in pursuance of the overall national economic interest, can actualise their demand on the platform of National Economic Council and ensure distribution of FA dollar allocations as earned, which would then become established convention, going forward. Alternatively, they should put their demand in operation by using the option of prevailing on their respective State electees in the NASS to appropriately state in words and expeditiously amend the relevant section of the Revenue Mobilisation, Allocation and Fiscal Commission Act. The unanimous support for the demand by the states is a guarantee that any express presidential veto or veto by default can be overridden with dispatch.
However, it evokes tearful regret that, despite the long-drawn-out print and electronic media campaign for an end to the blanket sharing of FA receipts in naira owing to its clearly harmful economic effect, the states are only contemplating necessary action after the wrong practice has driven the economy to its straits. The lacklustre economic showing was avoidable at least beginning from 2001. Historically, this newspaper blazed the trail and still sustains the campaign for the disbursement of FA oil receipts in dollars to the beneficiaries. Savour three installments of the campaign among other bellowing flags. One, on October 14-16, 2002, The Guardian published the proposal made by two economists to the Federal Government for the release of FA oil proceeds as earned including its benefits under the caption of “Liberalisation of the Foreign Exchange Market.” Two, on February 25, 2003, The Guardian’s lead front page report bore the title of “CBN faults calls for govt funding in dollars.” The source letter made it clear that the then President directed the issuance. Three, very early in the life of the Buhari administration, The Guardian carried an OP-ED contribution on June 3-4, 2015 titled “Economy: Undo Buhari’s sealed failure.”
It helps appreciation of the matter to briefly review the journey to and the economic harm inflicted by sharing FA oil receipts in naira. The second principal object of the CBN, namely, “2(b) issue legal tender currency in Nigeria” accords international best practice primacy of status to the legal tender national currency. The provision axiomatically prevents the naira from both playing the second fiddle to and even cohabiting with alien currency in Nigeria. However, the leadership of the ex-military regime venerated and coveted FA oil proceeds and so turned the dollar to the favoured currency. Professing superpatriotism, the military regime from the 1970s denied the states and local governments direct access to their shares of FA dollar allocations in dollars. The CBN has ever since withheld FA dollar allocations and substituted in their stead prorata fiat printed naira funds for sharing and budgetary expenditure by the tiers of government. Also the legal tender provision suffered another direct blow in 1995 when a successor military administration formalised multiple currency practices by decreeing the operation of domiciliary forex accounts.
The breach of the legal tender provision by the military regimes and successor quasi-military and civilian administrations has permanently robbed the country of macroeconomic stability. The CBN conceded in its stillborn 2007 Strategic Naira Reform Agenda proposal that FA dollar allocations were (they are still) being aberrantly monetised. Consequently, the monthly FAAC disbursements relating to FA oil receipts fall under Section 38 of the CBN Act 2007 as ways and means advances or government debt. But the debt is not being repaid as stipulated in the Section. Ordinarily, going by that method of advance payment FA beneficiaries should collect their dollar allocations, convert same to naira revenue in the forex market and repay the advances for the sake of avoiding excess liquidity and curbing inflation. Because the FA dollar proceeds have on paper accounted for over 50 per cent of the annual budgets of the tiers of government since 1974, the total accumulated ways and means public debt alone over the years would not but exceed 100 per cent of current GDP, which is an unsustainable debt level regardless of its neglected repayment owing to FG disdain for the enabling law of the apex bank.
In plain economics, the outstanding ways and means debt represents unbudgeted and illegal deficit financing of the budgets of the tiers of government by the apex bank. The begotten poisonous children include the persistent excess liquidity, high inflation, high monetary policy rate, restrictive monetary policy stance, high lending rates, high national domestic debt based on mopped excess liquidity (part of that non-investable national domestic debt has been refinanced with dollar borrowings), unproductive real sector, high import dependence, and many more. The intractable fiscal and monetary problems, the straying usurpatorily by CBN into development financing, twice weekly forex market interventions and the descent into the poverty capital of the world, all stem from the unbudgeted excessive fiscal deficits arising from the unrepaid ways and means advances being substituted for withheld FA dollar allocations originally on the command of the ex-military regimes. Doubtless, the Nigerian economy has failed. But it is clear from the foregoing that the economy failed not because of reliance on oil earnings as being diversionarily spread by government and elements milking the system. The economy failed because the tiers of government rely on and expend heavy amounts of ways and means advances provided by CBN in place of withheld FA dollar allocations with inevitable miasmal reverberation in the real sector.
Yes, it is proper and long overdue to share FA accruals in the currency earned, that is, in dollars for oil proceeds instead of ways and means naira advances. That action represents the essential first step towards the sound management of the economy for productive and rapid growth. But the dollar is not legal tender in Nigeria. Therefore, the next step after collecting FA oil accruals in dollar is for the FG, states and local governments to convert the dollar allocations to oil-derived and non-inflationary naira revenue in a single forex market (SFM) operated via deposit money banks, the banks of first instance. The CBN should be confined to its role of the bankers’ bank or bank of last resort as well as regulator.
The country will not benefit from adopting a free-float naira exchange rate system. It has drawback considering the existing artificial segment naira exchange rates have depreciated far from the true free-float rate that would emerge within a short time given the forex supply and eligible demand profiles. The beneficial option is the implicitly and officially recognized managed float system (MFS), which is denoted by setting the naira/dollar exchange rate in the yearly Appropriation Act. The SFM would bring together forex sellers and forex buyers made up of forex end-users based on the country’s needs for productive economic activities. A regime of graduated tariffs complemented by discriminatory forex access tax will define eligible imports without imposing ban on any goods and services.
Forex supply in the SFM would in the main come from the Federal Government, states, local government, private sector export earnings inclusive of remittances, foreign direct investments and domiciliary forex holdings running out of set time limit. Through the SFM would emerge the market determined naira exchange rate (within the stability band around the set MFS rate). The MFS rate would change at intervals (which may be shorter than a year) in response to (forex) market forces and government economic policy.
If there were strict adherence to the rule of law, it would be taken as a matter of course that the primacy of the legal tender naira enshrined in the enabling law of the apex bank supersedes and stamps out the cohabitation since 1995 of the naira with economy-wrecking alien currencies being unpatriotically held in domiciliary forex accounts. Nonetheless, to eliminate the damage, the Nigerian Law Reform Commission in 2016 submitted a bill to the NASS to amend the 1995 decree (which was redubbed an Act in 2004) requiring funds held in domiciliary forex accounts to be sold in the forex market after a specified short period of grace. The state governors should prompt their respective members in the NASS to pass the bill.
This newspaper has repeatedly shown the roaring benefits derivable from operating the SFM. The Federal Government would normally take the glory for a prosperous Nigerian economy. But most strangely, the federal leadership has willfully kept this country down with faulty policies. The Nigerian people do yearn for progress. So the Federal Government should let Nigeria go now.