Neither the CBN rate nor the
interbank rate is a realistic naira exchange rate that will bring about
macroeconomic stability to catalyse productivity and inclusive economic growth.
And contrary to Osinbajo’s standpoint, the interbank rate was not the only
option open to the Federal Government. Indeed, it was the worst option. In any
case, it is doubtful if the MPC, which may conclude another meeting today will
consider the vice president’s option to be the outcome of the anticipated
comprehensive reform of the forex market, which will help deal with the
monetary and economic issues at hand. Also the VP’s option does not signify the
flexible naira exchange rate being demanded by the organised private sector.
Rather, the option betrays a refusal by the Federal Government to learn from
history because it marks a return to the tried but discarded Second-tier
Foreign Exchange Market (SFEM).
And as happened under SFEM,
existing forex holdings, which were speculatively amassed in the past at cheap
rates, and any forex procured from CBN at its present rate will be sold to
end-users usury-like at N285/$1. But after a short spell, government would
formally devalue the naira to N285/$1 under the spurious pretext of stopping
forex abuse, which was inbuilt in the first place. Thus, the VP’s option, which
is actually a two-step or crawling devaluation, will only enrich the banks and
private forex speculators at the expense of the economy. For the ensuing
hyperinflation will wilt the real sector and impoverish the generality of the
people. Even if the Federal Government gets the CBN to sell withheld Federal
Account dollar accruals at the so-called interbank rate in order to rake in
naira sums to meet budgetary provisions (the Information Minister said
government is broke), the impact would be deepened fiscal deficits that would
further worsen the economic distortions.
To pursue the welfare of the people
that is constitutionally mandated, the beneficial option is for government to
find and maintain a realistic naira exchange rate that will simultaneously
leave inflation within the safe range of 0-3 per cent. This is achievable when
government budgetary spending is limited to realised revenue plus borrowing
(deficit) not exceeding three per cent of GDP. When fiscal deficit breaches
that limit, government should deliver a matching actual (not cooked) GDP growth
rate to tether inflation within the safe bracket. That way, internationally
competitive bank lending interest rates of 4-5 per cent, which are positive in
real terms, will become available domestically.
It takes such low-interest rates to
put to work investors, who help push the reach of government budgets well
beyond the projects contained in the budgets. In fact, a humongous bank credit
potential topping 70 per cent of GDP (over 11 times the size of the 2016 FG
budget) currently has been rendered inaccessible to prospective investors by
the prevailing high-interest rates with prime lending rates and maximum lending
rates averaging 16 per cent and 28 per cent respectively.
However, when government is content
to implement its budgets in a manner that facilitates globally competitive
lending rates, the bulk and even the entire idle bank credit offering would be
accessed and utilised by investors to finance viable projects in the various
sectors of the economy including projects that break the infrastructure
bottlenecks often wrongly cited to justify the harmful high lending rates.
Therein lies the surest road to economic diversification, massive job creation,
enhanced tax revenue and inclusive economic growth, the very objectives
government has set its eyes upon to reduce dependence on oil.
Now, Osinbajo meant that the CBN exchange
rate of N197/$1 was not realistic by opting for the interbank rate of N285/$1.
But, as earlier noted, neither rate is realistic. The country’s unrealistic
exchange rate, high inflation and high-interest rates are traceable to the
persistent excess liquidity in the system, which is the characteristic of
excessive fiscal deficits. The excessive fiscal deficits result from
implementing over 50 per cent of the yearly budgets of the tiers of government
with implicitly borrowed freshly printed naira funds, which the CBN
inappropriately substitutes for withheld dollar allocations. So the antidote to
the gamut of negative economic conditions created by the excessive fiscal
deficits is to stop withholding Federation Account dollar allocations by
allowing the beneficiaries to properly convert respective dollar allocations to
realised naira revenue, which is not only non-inflationary but also ends the
excess liquidity occasioned by substituted CBN deficit financing. That can be
done through a simple and corruption-free process.
To arrive at the realistic naira
exchange rate, there should be a single foreign exchange market for the public
and private sectors as both of them operate in one and the same economy.
Technically, all foreign exchange in the system may be termed the country’s
visible and invisible export earnings. Apart from government forex holdings
which may be retained in the CBN for as long as desired, export earnings
broadly defined as above, which are repatriated by individuals and firms,
should be converted to the legal tender naira amounts. Similarly, portions of
government forex for domestic use should be converted to naira amounts through
the single forex market. Transactions in the forex market should be channeled
through deposit money banks. The DMBs should earn commission (which may be
split with the apex bank) while the CBN plays its role of bank of last resort.
The pooled public and private
sectors’ supply of forex guarantees regular and ample availability of hard
currency. Demand for forex should be controlled and the volume demanded should
be dictated by the country’s duly specified import needs from time to time.
Without fail, forex demand should be controlled below supply to facilitate sale
of surplus forex by DMBs to the CBN as a last resort which enables the CBN to
build up external reserves. Given the available supply of forex in the system
today, in the single forex market, the market-determined naira exchange rate
will be stronger than the CBN rate of N197/$1. Under the managed float system,
there will be a realistic naira exchange rate that is flexible within a stable
range. Osinbajo should, therefore, always consult widely.
Surely, with proper management of
the country’s ample forex resources, needed imports like fuel will not
experience scarcity of foreign exchange. (Guardian)
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