Wednesday, March 25, 2009

Rescuing the overvalued naira

IT is important to bear in mind that the slide of the naira predates the present global financial crisis. When the naira recorded its highest value relative to the U.S. dollar in 1980, the annual average naira exchange was N0.5464/$1. But the rate climbed steadily (with the value of the naira falling monotonically) to N133.50/$1 in 2004. Then followed the much celebrated four years of mock naira stability and contrived slight appreciation which saw the naira exchange rate dip to about N117/$1 by the third quarter of 2008. Thereafter came the global financial meltdown in September 2008 as well as the officially proclaimed deliberate naira devaluation (changes in the value of the naira have not been otherwise) which has pushed the official naira exchange to N150/$1 today. Yet, despite losing 99.6 per cent of its value since 1980, at the current exchange rate, the naira still remains overvalued.

The inherently overvalued naira goes back to 1971-73 when the major trading economies dumped the Bretton Woods system of fixed exchange rates and began to float their currencies. But our government has shied from floating the naira on ground initially that the financial system was weak. Do financial institutions not become strengthened through practice? That faux pas and the attendant problems which became intractable since 1974 when oil proceeds supposedly assumed dominance in the annual budget are, in what has become a ritual, restated in the two opening sentences of Chapter 2 of the 2007 Central Bank Annual Report and Statement of Accounts as follows: "The persistent excess liquidity in the banking system was a major challenge for monetary management in 2007. This development arose from the monetization of excess crude oil sales receipts and the distribution of enhanced statutory allocations to the three tiers of government, huge autonomous inflows and pre-election spending as well as supplementary budgeting".

In truth and to Nigeria's economic ruin, however, the three tiers of government do not monetise or convert Federation Account oil proceeds into naira for public expenditure in line with economic, fiscal and monetary best practice. In contrast, ways and means naira advances are substituted for the distributable public dollar receipts at officially determined but nonetheless artificial exchange rates for sharing among the statutory beneficiaries in utter contempt of Section 38 of the CBN Act 2007. That persistent wrong government action, which shatters the very foundation of an independent national currency, swells money supply to levels that are inconsistent with the core function of the apex bank as contained in Section 2 of its enabling law.

As a result, ample inflows of official and autonomous foreign exchange, which ordinarily are a blessing and the economic managers' delight, annually transform into unsafe levels of budget deficit thereby making the naira overvalued. The unhealthy budget deficits account for the persistent excess liquidity, persistent bloated demand for foreign exchange that induces persistent fall in the value of the naira excepting when the slide is officially halted or temporarily reversed, persistent high inflation, persistent prohibitive lending rates with all culminating in persistent hostile economic environment.

Because official fixing over the last 38 years of artificial naira exchange rates resulting in 99.6 per cent diminution in the quondam value of the naira has merely kept the economy in persistent coma, the time is overdue to abandon the faulty fiscal/monetary framework that has brought about three decades of economic malaise. As practised by successful economies, there is need to transparently transact public sector foreign exchange through deposit money banks based on available supply and demand predicated on established national economic need within the ambit of optimal money supply. That will promptly evolve a market-determined floating naira exchange rate that will open the economy to the benefits of its ample supply of foreign exchange.

By way of illustration, in 2007, the Federation Account Allocation Committee distributed N3.973 trillion among the three tiers of government. With oil export receipts accounting for about 85 per cent of the disbursement, a sum of N3.377 trillion out of the total represents ways and means advances substituted for public dollar proceeds, which swelled money supply as well as created excess liquidity and the persistent problems cited earlier. To combat the liquidity surfeit, the CBN among other contractionary measures mopped up N1.73 trillion in the form of treasury bills or unproductive bank credit on which the apex bank made high unearned income payments to the sinecure banks that were preoccupied with granting over-the-limit margin loans that have helped destroy the capital market.

In 2007, total imports according to the National Bureau of Statistics stood at N4.128 trillion. In effect, by means of the dirty or managed floating exchange fixing system of pegged exchange rates, beneficiaries of the Federation Account could have swapped their dollar proceeds via the banks for some N3.377 trillion actual revenue from importers using funds and productive bank credit within existing money supply volume.

This approach clearly, one, eliminates unnecessary addition of ways and means advances to existing money supply which predisposes the system to excess liquidity and high inflation; two, cuts down to the barest minimum treasury bills which ordinarily should attract only processing cost of less than 1 per cent; three, ends the crowding out of productive sectors from bank credit, which is left fully at the disposal of investors at competitive rates to grow the economy; four, prevents abuse of foreign exchange, blocks undesirable imports and subjects all imports to full payment of going tariffs; and five, facilitates conducive economic environment that responds to appropriate control measures.

This method of infusing official and autonomous foreign exchange into the system provides the basis for a stable and, with fine-tuning, realistic (as against the present whimsical) exchange rate needed for sound economic management as in successful economies. The time is long overdue to adopt this beneficial method.