PEAC, naira exchange rate and the economy – Part 2
First, the approach has immediate through near-term to medium-term steps. Obviously, the drawn-out proposal does not show any urgency to put right the country’s economy. Second, the IMF favours prolonging the existing multi-segment exchange rate system together with the multiple currency practices. It proposes 18 per cent devaluation of the 2021 Budget exchange rate. By implication, CBN is expected to print additional paper money in a situation where they’re already exists excess money liquidity. The IMF admits that by this step the current high inflation level would rise further, the monetary policy rate would be raised and the monetary stance would tighten leading to increased unemployment. Also given the proposed devaluation, forex brought in by predatory investors could then fetch cheap naira funds for use in buying up quoted companies and government debt instruments to the detriment of the people. The IMF proposal may be likened to a physician asking his patient to jump into a river and stay in the water for a while in order to keep dry. It is absurd. Note that the patient here is the FG representing 208 million Nigerians.
Third, the CBN will continue to improperly withhold Federation Account dollars and auction part of it from time to time. Doubtless, to auction forex ousts market price equilibrium while enthroning arbitrary or artificial exchange rates. Access to forex is reserved for those who most depreciate the legal tender. As a result, inflation soars and macroeconomic instability intensifies. For sound economic management, the legal tender currency does not play second fiddle to any alien currency. Fourth, in the medium-term and final stage of the IMF proposal, there would emerge an oligopolistic forex market with banks (several of them have sizeable foreign ownership) rigging up unfavourable naira exchange rate to the detriment of the Nigerian economy.
And so, far from solving the economic problem, the IMF recommendation would deepen the country’s economic woes. By the recommendation, the IMF plays the economic hit man as exposed in John Perkins: Confessions of an Economic Hit Man. Additionally, Nigeria is required to retain an IMF resident adviser (he will effectively supersede PEAC and be a veritable economic hit man) to help implement the agenda on domestic revenue mobilisation. In the final analysis, the IMF recommendation would transform the country into a colony of the Bretton Woods institutions. It is unacceptable.
Had it not been shirking its responsibility, PEAC within three months of its 18 months of existence should have behind the scenes built scenarios of the Nigerian economy recording balanced budget or budget surplus or posting a fiscal deficit of 3 per cent of GDP for the President to choose from. And given the presidential choice, PEAC should have drafted and obtained a signed presidential directive for the normalisation of the naira exchange rate by CBN in abidance by the CBN Act 2007, the Fiscal Responsibility Act 2007, and the applicable Appropriation Act.
As shown in some earlier editorials, in conformity to section 16 of the CBN Act, there should be a single forex market to be hosted by deposit money banks. The DMBs will act as commission-earning forex brokers. The Appropriation Act exchange rate (AAR) will be the anchor exchange rate in a managed float system. Sellers and buyers of forex using forex broker banks will freely bid within the forex stability band marked by AAR+/-3 per cent. The market-determined flexible exchange rates so generated should be weighted to arrive at the ruling single exchange rate for a given period.
Forex supply will be made up of total public and private sector forex inflows inclusive of forex domiciliary account holdings and remittances. Forex inflows should be converted to naira legal tender funds within 30 days of receipt. Dollarisation is illegal and forex loans (said to amount to 30 per cent of outstanding bank loans) should be converted to naira loans. Demand for forex should be tailored to the country’s needs with variable tariffs and variable forex access tax (FAT). There should be no administrative import restrictions.
Accordingly, following Buhari’s interest in promoting agriculture, the Federal Ministry of Agriculture and Rural Development had by May 2019 drawn up required sets of policies some of which, with the aid of a presidential directive prompted by PEAC, the ministry in collaboration with the Federal Ministry of Finance, Budget and National Planning should have formally expressed in product tariffs and variable FAT. For example, take the N1.85 trillion worth of food imports noted earlier. Suppose, to better discourage various food imports and to encourage consumption of local substitutes, there was in place average FAT of 20 per cent in addition to applicable customs tariffs. That would have swelled FG revenue by N370 billion in January-September 2020 thereby reducing the deficit incurred. Similarly, the purported forex backlog of $2 billion can be disposed of by imposing FAT. At 20 per cent FAT, some N152 billion non-oil revenue would accrue to government.
The operation of the SFM will eliminate speculative demand for forex. Also the pooled forex supply and moderated forex demand using tariffs and FAT will firmly establish that forex supply substantially exceeds forex need with the surplus swelling foreign reserves. It will also show that the 2020 AAR of N379/$1 undervalues the naira. Thus via the SFM, the naira will tend to appreciate for a period of time till optimal naira exchange value emerges. From day one of the operation of the SFM, conversion of FA dollar allocations in secure form by beneficiaries will immediately begin to firm up the money supply volume, remove inflationary pressure and in due course, the inefficient structures erected on excess money liquidity will crumble.
In general, the adoption of the single forex market will (a) bring about low 0-3 inflation and produce flexible exchange rates that are confined within AAR+/-3 per cent band; (b) tremendously increase credit to the economy because there will prevail competitive 4-7 percent lending rates that are positive in real terms; (c) facilitate extensive domestic industrialisation as businesses will be sheltered by tariffs and FAT, a development that will lead to robust GDP growth rates which far outpace the population growth rate thereby rapidly reducing the ranks of those living in extreme poverty; and (d) generate enhanced government revenue and produce budget surpluses in the near to medium term.
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