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The wrong way to defend the naira - VANGUARD

JUNE 25, 2019

By Henry Boyo

A REPORT on Page 33 of the June 21, 2019 edition of The Punch Newspaper indicated that “between April 2018 and March 2019, the Central Bank of Nigeria injected over $42.3bn into the foreign exchange market to ensure liquidity in that segment of the economy.”

Naira
In the same report, Isaac Okorafor, CBN’s Director of Corporate Communications also attributed the relative stability, in the forex market, largely to CBN’s continued intervention; furthermore, according to Okorafor, private international money transfers, estimated at over $20bn annually, plus the Naira swap arrangement with the Chinese Yuan, have all contributed to relative stability in the forex market.
Conversely, however, the same edition of the Punch Newspaper, also carried another story titled “DMO records 655% oversubscription at Treasury bills auction;” Page 35, notably, the DMO had rolled over a total of N17.61bn at its Treasury bills auction on Wednesday 19th June 2019, when CBN borrowed at a cost ranging between 9.6% and 12.2% respectively for the bills offered for sale.


The implication of the above is that, in place of the N17.61bn Treasury bills actually sold, the 655% oversubscription is indicative of a Naira liquidity excess above N111.35bn in the money market. It is inexplicable that the related Treasury bills rates were as high as between 9-12%, when in reality, there is an undeniable Naira surfeit in the system; surely tomatoes do not cost more when the market has an excess supply of tomatoes!
Instructively, nonetheless, with the subsisting 22.5% Cash Reserve Requirement for banks, the N111.35bn liquidity surplus indicated above will translate to an oppressive Naira excess above N400bn, which invariably will propel higher rates of inflation and cost of loans while also jeopardizing consumer demand, economic growth and job opportunities!

Worse still, with the suffocating subsisting burden of excess Naira liquidity, the embattled fate of the Naira rate thereafter, becomes sealed, in CBN’s auctions of between $200-$300m weekly to set an exchange rate for the Naira, as the subsisting Naira liquidity surplus expectedly overwhelms the small dollar rations simultaneously offered for sale by the same CBN.
Unexpectedly, nonetheless, the more modest value of CBN’s total forex sales, is inexplicably popularly presumed to be the main driver of Naira exchange rate, even when the total autonomous component of forex inflow may be equally significant.

Indeed, a cursory examination of CBN’s forex reserves, clearly indicates that Naira exchange rate bears minimal correlation with the size of “CBN’s External Reserves or forex sales;” this means, rising reserves do not translate to stronger Naira rates! For example, in January 2012, Government’s Reserves, was over $34bn, while Naira exchanged for about N155/$1, but unexpectedly, later slumped, to N161=$1, even when forex reserves rose well above $43bn!
Similarly, in 2013, External Reserves fluctuated between $45bn in January to $42bn by December, yet the Naira rate remained sticky, between N153-N162/$1. Furthermore, in 2014, the Naira rate also weakened to N170-N199, even when external reserves still trended favourably between $44bn-$45bn! Curiously, however, when External Reserves dipped below $30bn in 2016, the Naira which, was trading around N197=$1 in January, was officially devalued before December to N305-N360=$1, while the economy was, also officially confirmed to be in recession.
Conversely, however, the Naira rate in retrospect, was as strong as N84=$1 between 1995-98, even when total reserve was a very modest $4bn. Similarly, between 1972-1984, official forex reserves was barely $390.71m but one Naira exchanged for almost $2!

Instructively, since 2017 External Reserves have since climbed above $40bn, but the Naira rate, still appears inexplicably stuck between N305-N360=$1 even after about 41 items were excluded from forex sales. The obvious question therefore is, if dollar rate rose well above N300=$1, because reserves dropped below $30bn in 2015, why then, has Naira rate remained static between N305-N360, even after reserves have climbed, once again and remained stable between $40bn-$47bn.

Although CBN’s Communications Director, Isaac Okorafor, indicated exchange rate stability as priority, rather than size of reserves, invariably however, rapid depletion of reserves would perfunctorily precipitate market panic and induce further reserve erosion, which could, ultimately, compel another huge Naira devaluation below N500=$1. The social and economic impact of such a rate will, inevitably, fast track more Nigerians into poverty, and sustain our Nation’s odious title as the reigning “World Poverty Capital!”

It is rather macabre that, the CBN willfully depletes it stock of reserves to defend the Naira, through its regular, weekly auctions of hundreds of millions of dollars, to all and sundry at face value, while conversely, Government simultaneously, seeks dollar loans and pays upto 8% as interest on such debts despite CBN’s heavy cache of idle dollars!

For example, the DMO has lately (June 2019) confirmed its intention to borrow $2.7bn from foreign sources in 2019. Nigerians must question why the loan required could not be obtained directly from CBN’s caché of almost $50bn, part of which CBN unilaterally auctions against the Naira and freely distributes sans interest to even Bureau-De-Change, who are probably the major source of foreign exchange for those smuggled goods which continue to threaten Nigeria’s economy.
The above title “The Wrong Way to Defend the Naira” was first published in April 2011 in Vanguard Newspaper, to reflect the perspective of the contradiction of higher External reserves while Naira exchange rate, inexplicably, conversely, remain sticky and under siege, even when dollar reserves exceed budget expectations. The fear of economic contraction, increasing joblessness and deepening poverty expressed in that article have all become oppressively apparent. A summary of that article follows hereafter. Please read on.

“In practice, the Naira exchange rate is actually more a function of Excess Naira liquidity in a strictly regulated market in which small rations of dollars are auctioned intermittently by the CBN. Regrettably, such a market model will only spell disaster for growth and deepen poverty for our people.”

Specifically, the CBN Governor, Lamido Sanusi in his acceptance Speech as Silverbird’s 2010 Man of the Year, referred to IMF’s recommendation for a devalued Naira as one of such ‘bad’ or anti-Nigeria recommendations that pauperise our people. Consequently, he rightly refused to play along with IMF, as he saw no observable benefits in a weaker Naira, which would “trigger higher industrial production costs, fuel inflation, increase fuel prices and subsidies and increase our national debt burden.”

“Undoubtedly, Sanusi’s argument with regard to the critical need for a stable naira value appears more plausible; but the real question is, can the CBN Governor keep Naira below N155/$1 within the context of the present framework that explodes Naira supply whenever distributable dollar revenue is substituted with naira, in monthly allocations to government? This column has consistently maintained that naira substitution for dollar revenue is the poison in our economy, as it engenders a system that cripples our economy and oppresses our people whenever we earn increasing dollar revenue; a veritable paradox if there was one!”


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