The fiscal and monetary cordiality that retards growth

The Monetary Policy Committee which is mandated “to facilitate the attainment of the objective of price stability and support the economic policy of the Federal Government” held its latest meeting on November 25-26, 2019. Although it was the committee’s 270th meeting in the CB’s 60 years of existence, the MPC (in its communiqué No. 127) “noted the use of home-grown heterodox policies by the bank (CBN) to successfully achieve substantial macroeconomic stability in 2019.” For the sake of historical perspective, the home-grown heterodox monetary policies (HHMP) began in the 1970s following the demise of the Bretton Woods system of fixed exchange rates in 1971. By 1979 most countries had adopted the managed float exchange rate system. In the intervening period, the economic gap between Nigeria and her 1970s economic peers in Asia has widened tremendously in favour of the latter.

On the eve of the MPC meeting, the CBN governor in a television interview said, “The independence of the CBN is enshrined in the CBN Act 2007 and nothing is altering.’’ However, the HHMP, by definition, runs counter to provisions of the CBN Act, which stipulate conventional approaches to achieving macroeconomic stability through price and monetary stability. In fact, the earlier claim that the HHMP had yielded substantial macroeconomic stability is grossly incorrect because the bane of the economy is the ever-present excess liquidity, which fuels high inflation and renders macroeconomic stability unattainable. The long-run outcome of the HHMP is the prevailing inhospitable production environment and GDP growth rates which are below the population growth rate and which thereby annually swell the ranks of people living in extreme poverty.

Nonetheless, as if the poor economic situation was mere make-believe, the HHMP received a boost lately when government closed the land borders as a heterodox way of stimulating the domestic economy. The Customs weighed in with claims that the closure of the land borders has led to increased tariff revenue collections. During the aforementioned television interview, the CBN governor gave full support to the border closure as he avowed the existing cordial relationship between the fiscal and monetary authorities did not hurt the independence of the apex bank. Indeed, the Budget Office of the Federation (BOF) highlighted the warmth of the cordial relationship by redundantly writing the HHMP, albeit in a confused manner, into section 7 of the 2020-2022 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP).

The obvious reason is to prevent implementation of conventional or orthodox (global best practice) fiscal and monetary procedures, which offer superior economic outcomes. The CBN Act, the Fiscal Responsibility Act (FRA) and the annual Appropriation Act (AA) envisage implementation of conventional fiscal and monetary methods. Given the specified AA naira exchange rate as the anchor, the three Acts require the operation of the managed float exchange rate system. The FRA-specified fiscal deficit ceiling of 3.0 per cent of GDP sets the range of 0-3 per cent for adjudged stable price and monetary rate movements. Interest rates would settle slightly above the relevant inflation rate. It is under such macroeconomics conditions that investors can access cheap bank credit, create jobs, contribute substantially to government revenue and rapidly grow the economy. These conducive conditions are unobtainable under the HHMP and, indeed, they have been unobtainable since the1980s. The presence of the conducive conditions would ordinarily not engender non-cordial relations between the fiscal and monetary authorities.

In contrast to the above, the BOF in subsection 7.3.2.3 of the 2020-22 MTEF/FSP indicates, first, that the official exchange rate has been N305/US$1 for a while (which is correct); second, “the CBN will continue to operate a managed float exchange rate regime in order to reduce the impact which continuous volatility in exchange rate could have on the economy; third, investors and exporters will continue to have opportunity to sell their foreign exchange at the prevailing market rate of the investors’ and exporters’ (I&E) window of the foreign exchange market; and fourth, “ the exchange rate appreciated from over N525/$1 in February 2017 at the BDC window to N360/$1. With improved inflow of foreign exchange, the exchange rate has remained stable around N360/$1 for the past 27 months.”

The foregoing calls for a brief comment. One, the cited subsection nails down BOF and CBN, the fiscal and monetary authorities, as collusive promoters of HHMP. Thanks to the BOF/CBN alliance, (a) the incidence of poverty climbed from 35 per cent in the mid-1970s to 72 per cent in 2012 and earned the country the prize of “poverty capital of the world” beginning in May 2018. (b) Realised GDP growth rate fell far short of projected GDP growth rates till date under the Economic Recovery and Growth Plan just as the proposed growth rate for 2020-22 will unlikely materialise. The rising incidence of poverty and retarded growth rates offer sufficient evidence for the HHMP to be jettisoned.

Two, the CBN has never operated a managed float exchange rate system. There are currently in place multiple naira exchange windows (rates) in contravention of Section 16 of the CBN Act and multiple currency practices again in violation of Section 2(b) of CBN Act amid excess liquidity arising from substitution of prorata fiat printed naira funds for withheld Federation Account dollar allocations. There is no provision in the CBN Act or any separate law that empowers investors and exporters and talk less bureaux de change (BDCs) to fix any naira exchange rate different from the AA exchange rate. The AA exchange rate applies to all economic activities and economic agents including the CBN itself. Both the multiple exchange rates system and multiple currency practices came into being at the behest of the political (ex–military) leadership and confirm the CBN lacks independence to adopt global best practice methods for implementation of the provisions of the CBN Act.

In general and for the sake of elucidation, contrary to the BOF/CBN’s HHMP, the managed float exchange rate system (MFS) provides a single forex market-determined weighted exchange rate within the stable naira price range at any given period. Public and private sector forex earnings should be transacted in the deposit money bank-based single forex market. The MFS is consistent with the AA exchange rate in the context of Section 16 of the CBN Act. Also the MFS prevents exchange rate volatility. Note that the single forex market-determined naira exchange rare is a function of supply and eligible demand for forex. It is the bounden duty of government through either the BOF or the National Planning Commission to control forex demand by checking the volume of items of both visible and invisible trade being imported with graduated tariffs complemented by forex access tax. The benefits derivable there from include (i) exercise of firm (planned) control over accretion to and use of external reserves; (ii) broadened and ascertainable tax collection at adjustable rates that prevent unnecessary borrowing; (iii) proper documentation and routing of imports through specified ports thereby eliminating closure of land borders as a means of stimulating domestic production; and (iv) foreign goods cannot be dumped on the country since the country’s forex will not be available via the forex market to pay for dumped goods. Generally, the operation of the single forex market will dissolve most of the economic issues raised in the 2020-22 MTEF/FSP and also facilitate double digit GDP growth rate within the near-to-medium term.

As regards inflation, the bane of the economy, it is fitting that during the earlier noted television interview, the CBN governor said, “We are not going to put the blame on the control of inflation on anybody.” Truly, although the political (ex-military) leadership directed the CBN to withhold Federation Account dollar allocations, CBN takes the blame for not upholding section 2(e) of its principal objects by professionally cautioning the political leadership about the inevitable inflationary effect and ruinous economic impact of improper and non-conventional substitution of the withheld FA dollars with prorata fiat printed naira funds for budgetary spending by the tiers of government. Similarly, CBN takes the blame for not admonishing the political (ex-military) leadership against instituting multi-currency practices through the use of domiciliary forex accounts considering the fact that the action destroys the primacy of the naira legal tender currency enshrined under section 2(b) of its principal objects as well as sets the naira exchange rate on a permanent tailspin.

Unfortunately, in spite of the BOF/CBN alliance, until the above breaches of global monetary best practices stop and until total public and private sector forex earnings are transacted in a single forex market, the economy will continue to underperform while Nigeria will wax as the poverty capital of the world.