How CBN can reverse Nigeria’s underdevelopment

The Central Bank of Nigeria underdevelops the economy through heterodox monetary and fiscal procedures contrary to the express mandate and intendment of its enabling law, which aims to promote national economic wellbeing. Ignore the alibi of the COVID-19 pandemic.

Despite enjoying presumed independence which should find expression in upholding Sections 2(d) and 2(e) and 38 of its mandate by providing the government with sound economic and financial advice, successive CBN leaderships at the prodding initially of the erstwhile military-political leadership, have since the discard of the Bretton Woods system of fixed exchange rates in 1971 persistently run against several key provisions of the CBN Act.

To wit, one, Section 2(a) of the CBN Act enjoins the apex bank to ensure monetary and price stability. Towards that end, the Fiscal Responsibility Act and annual Appropriation Act contain binding provisions for achieving a sound and productive and self-reliant economy. They set conditions that FG should run annual balanced budgets or surplus budgets or (if need be) budget deficit of up to 3 per cent of GDP. The intendment or expectation from such budget outcomes is to evolve a stable macroeconomic environment in which the apex bank should routinely (i) maintain an annual inflation range of 0-3 per cent, (ii) float the naira rate within 0-3 per cent stability band, (iii) fix minimum rediscount rate range within 1-4 per cent (and not the heterodox double-digit monetary policy rate in a corridor), which in turn would give rise to 3-6 per cent lending rates that are positive in real terms and internationally competitive.

Such conducive conditions would allow the 46 GDP economic activity sectors to access cheap bank credit to steadily grow and expand an economy that would wax through flourishing forward and backward linkage enterprises. Sadly, against the above-intended results, evidence abounds that CBN’s heterodox measures underdevelop the economy: there has long existed over 70 per cent un-utilised banking sector lending capacity, no thanks to double-digit inflation, unstable exchange rates and uncompetitive interest rates that have ranged from 14.5 per cent to over 30 per cent since the mid-1980s. Recall that FMFBNP and CBN are wont to cite the high-interest rates arising from their joint action as justification for FG to contract foreign (multilateral, bilateral and international capital market) loans. Even in several sections including section 28 of the 2020 IMF Article IV Consultation report, CBN actually portrays Nigeria as unique by describing the glaringly unstable multi-segment naira exchange rates that vary by over 18 per cent as welcome and stable exchange rate system and that the prevailing double-digit inflation (up to November 2020) represent price stability. And by implication, the attendant contractionary monetary stance via high interest rates is propitious. But instructively, the European Central Bank has defined price stability as inflation close to, but below, 2 per cent, the definition which central banks of the leading industrial countries have adopted as the standard.

Two, Section 2(b) of the CBN Act invests the apex bank with the sole authority to issue and protect and maintain the primacy of the legal tender naira currency in Nigeria. However, the erstwhile military-political leadership naively divested the naira of its primacy role by, to be charitable, ignorantly operating multiple currency system and taking steps that allowed the dollar to supersede the naira. The military leadership’s naivety simultaneously rendered Nigeria’s apex bank, Central Bank, against the Naira, the economic lifeblood. All that resulted when the military leadership, purportedly intent on preventing state government access to physical oil dollar proceeds, instigated CBN to (i) improperly withhold Federation Account dollar allocations, and (ii), in technical terms, fiat print naira funds at artificial exchange rates in their place for disbursement to the tiers of government for budgetary spending. Although the military bowed out of politics in 1999, the CBN has covetously stuck to the injurious practice in total neglect of Section 16 of the CBN Act thereby, as earlier indicated, forsaking its presumed independence and compromising over the years all its actions under Sections 2(d) and 2(e) and 38 of its enabling law

In plain truth, naira funds being shared and attributed to oil receipts by FAAC inclusive of the March 2021 disbursements represent improper proportionate apex bank deficit financing of the budgets of the tiers of government. Therefore, the recent denial of that fact by the National Economic Council, FMFBNP and CBN amount to feigned ignorance. As far back as 2001, then CBN Governor J.O. Sanusi removed any official doubts about FAAC disbursements when he stated what has remained the official mantra in a paper titled, “The Nigerian Economy: Growth, Productivity and the Role of Monetary Policy” that “monetisation of (read fiat printed naira funds for) foreign exchange receipts from crude oil exports resulted in inflationary pressures and severe macroeconomic imbalances.”

These are features that are associated with excessive fiscal deficits which the conditions duly set in the Fiscal Responsibility Act and the annual Appropriation Act seeks to avoid. The volume of fiscal deficits being fed into the system may be measured by the fact that, beginning in 1974, crude oil proceeds have consistently accounted for over 50 per cent of the annual budgets of the tiers of government on paper including the 2021 budget. Hence, the oxymoron of Nigeria’s oil curse popularized by some analysts is in reality forced reliance by the tiers of government on improper CBN-foisted fiscal deficits that persistently exceed 50 per cent of their annual budgets.

Consequently, the country’s incurred total annual fiscal deficit persistently tops the safe ceiling of 3 per cent of GDP thereby unleashing unconducive production environment. That situation can only result in economic failure.

Note that Nigeria’s oil boom decade (1970-79) was permanently extinguished after the CBN-created fiscal deficits reached the tipping point. Little wonder since then every form of national economic planning- Fifth National Plan, NEEDS I&II, Vision 2020, three-year rolling plans (MTEF), Agriculture Transformation Agenda, National Industrial Revolution Plan, Agriculture Promotion Policy, Forex Restriction Policy- has ended as an exercise in futility.

Without doubt, if the Nigerian-style macroeconomic instability and ultimate economic failure were truly the outcomes of the monetization of export earnings, the world would not witness export-oriented developed economies.

Indeed, during the same five decades which witnessed Nigeria’s transformation from oil boom economy to the poverty capital of the world, countries which relied and still rely far more heavily on exports such as China, U.S., Germany and Japan (to name only the TOP 4 export earners in 2020) were not thrown into volatile macroeconomic environment. Instead, they became increasingly industrialised and prosperous.

Three, policy makers should stop unnecessary pretences and face the facts. NBS data show that contributions to the 2020 GDP by the 45 non-oil economic activity sectors combined and the Oil sector alone stood at 92.0 per cent and 8.0 per cent respectively. That again clearly belies official claims that the economy is petroleum oil-reliant. The tragedy, however, is that the faulty handling of oil proceeds by the apex bank has severely weakened the naira thereby stunting the 45 non-oil GDP economic activity sectors in varying degrees and so underdeveloping the economy over the years.

Pertinently, within a fortnight of assumption of office in March, the WTO Director-General visited the country: she raised several economic issues including concerns about forex restriction for importation of 43 items and the existing multiple exchange rates. The problem lies in the operation of Central Bank against the Naira. Ordinarily, the Appropriation Act exchange rate (AAR) should serve as the anchor in a single forex market (SFM) in line with Section 16 of the CBN Act. The operation and benefits of the SFM have been outlined in some earlier editorials.

However, the CBN leadership in military style of yore overrides the budget document and the existing fiscal and monetary laws with impunity and proceeds to arbitrarily and ultra vires set devalued naira exchange rates that vary by over 18 per cent relative to the AAR for some segments, namely, Interbank, Investors’ and Exporters, (I&E), Bureau de change, Forwards, Diaspora remittance, etc. Mockingly, Forbes awarded the incumbent CBN governor a prize for introducing the injurious I&E window in 2017.

The multi-segment exchange rates have several disadvantages. (i) The predictable depreciation/devaluation of the naira across the segments has made currency trading and speculation a far more rewarding engagement than productive activity; (ii) the operation of multiple currency system via domiciliary dollar accounts has led to permanent artificial scarcity of forex for productive use whereas under the SFM, forex supply would exceed demand and the naira, being currently grossly undervalued, would appreciate; (iii) the multi-segment exchange rate system exacerbates inflation  because importers use the most depreciated exchange rate available in the market for costing and pricing; and (iv) the multi-segment exchange rate system facilitates dumping of foreign products on the country to the detriment of government revenue and domestic production.

It is over two months since the WTO director-general raised the above concerns, but the operation of Central Bank against the Naira has not relented while reports indicate that wheat and sugar would be added to the list of items placed under forex restriction. Note that the forex restriction policy was adopted six years ago, but none of its stated objectives has been realised.

And so, the operation of heterodox fiscal and monetary measures should stop. Only global best practice and conventional procedures contained in the existing fiscal and monetary laws will develop the economy at a fast pace.

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