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PEAC, naira exchange rate and the economy

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Naira notes


Following its appointment in September 2019, the Presidential Economic Advisory Council (PEAC) became the unseen hand on economic matters behind the President. It became the final economic policy/decision-making organ that is expected to ensure correct implementation of the country’s existing economic laws by means of presidential policy directives. It could also propose necessary amendments to those laws. In effect, working behind the scenes, PEAC is expected to present economic scenario outcomes of various policy options for the President to make informed choice. The chosen option should then be cast in the form of a policy directive. Under the President’s signature, the presidential directive goes to the relevant MDA(s) for execution with PEAC keeping abreast of the timely stage-by-stage implementation.

Sadly, this missing modus operandi led the frustrated President to say on at least two occasions that CBN would be given written instruction not to release the country’s forex for food imports. So the impanelling of PEAC in the second term of the administration in all probability was to put an end to lingering economic policy implementation failures. Recall that early upon assumption of office, the President, a non-economist, wanted and still wants the country to rely as much as possible on domestic food production.

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However, a CBN circular in June 2015 intended to translate that vision into reality flawedly barred the use of so-called official forex for importation of 42 (later 44) food and largely agricultural based items. It should be noted that apex bank classification of official and autonomous forex sources constitutes only a statistical detail because splitting the country’s forex that way neither has the force of law nor has economic best practice basis. Accordingly, an economic policy making organ, which understands that Nigeria-owned forex is not limited to public sector oil export proceeds alone and also knows that national self-sufficiency in food (including the other banned items) cannot be achieved overnight, has the duty to craft a beneficial national policy option to accommodate the presidential vision as much as possible. But disappointingly, PEAC appears to be shirking and shifting the responsibility to fashion such a policy option to a non-existing body or the MDAs. For example, the PEAC chairman, in a virtual keynote address to a bankers’ association on 19/1/21, practically mocked that national food imports worth N1.85 trillion between January and September 2020 despite border closure meant the country could not feed herself. Yet there is no evidence that PEAC behind the scenes presented any alternative option to the President for the purpose of improving the economy by lifting the inappropriate closure of the borders. That is so because the borders have finally opened, but the flawed 2015 CBN circular remains uncorrected while the economy continues to slide.

In the address, the PEAC chairman superfluously highlighted economic problems that were well known whereas the occasion should have been used to shed light on specific government action(s) already taken on the advice of PEAC to tackle the nagging issues such as macroeconomic instability, accelerating inflation, removing exchange rate differentials without devaluation to allow the economy to grow, boosting government revenue in order to reduce borrowing whose utilisation is opaque. However, a fortnight after, another PEAC member said that the 2021 Budget exchange rate of N379/$1 would reach N472/$1 by year-end. The implication is that the advisory council has been mostly asleep but exhibits signs of internal division during the brief periods it is awake.

Now, the Nigerian economy, which sank steadily to become the poverty capital of the world beginning in May 2018, bears the very mature fruits of uninterrupted five decades of macroeconomic instability (also known as excess money liquidity or volatile macroeconomic environment). The situation arose because successive governors of CBN including the incumbent refused to adhere to central banking principles. Although the ex-CBN governor member of PEAC confessed to entrenched dereliction of central banking best practice in the bungled 2007 Strategic Naira Agenda proposal, the apex bank till date remains heterodoxly astray. The endemic macroeconomic instability originated from monthly proportionate replacement of improperly withheld Federation Account dollar allocations (by CBN at the instance of the erstwhile military regime) with fiat printed naira funds based on artificial exchange rates. It was inappropriate for the military leadership to make the alien dollar the choice currency over the naira legal tender.

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To elucidate, given the fiat paper money system, (the Federal Government through) the CBN has the sovereign capacity to print unlimited amounts of the legal tender naira money. But the accepted central banking restraint is for the apex bank to maintain optimal money supply level that keeps both (price) inflation and open market movements in the exchange rate within specific low limits which instill public confidence in the value of the legal tender. The price limits are not left to the discretion of the CBN governor. While in the CBN ACT 2007, the first principal object is the open-ended “Section 2(a) to ensure monetary and price stability”, the stability level is delimited by 0-3 per cent inflation range together with a flexible 0-3 per cent exchange rate band around the set budget exchange rate (it is the managed float system). The delimited stability level corresponds to the fiscal deficit ceiling of 3 per cent of GDP stipulated in the Fiscal Responsibility Act 2007 and the applicable Appropriation Act. Moral: the volume of money which a central bank puts in the system and the manner in which the money enters the system determine a country’s economic success or failure. So the multitudinous fiat printed apex bank substituted Federation Account and intervention funds go against central banking principles with consequential ruination of the Nigerian economy. PEAC is meant to bring the stray CBN to the right path and ensure healthy economic management.

This newspaper has since 2001 campaigned for the supply of fuel to the unceasing macroeconomic instability to be turned off by adopting best practice single forex exchange rate fixing system (as sketched below shortly). Relatedly in the 2020 Article IV Consultation report released on 8/2/2021, the IMF asserted that monetary policy would support the economy through a well-functioning exchange rate system. While acknowledging possible implementation risks, the IMF recommended a multi-step approach to exchange rate unification and flexibility. A brief review of the recommendation is as follows.

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