By: Henry Boyo

The price of crude oil has steadily increased beyond $50/barrel after OPEC agreed to cut output by about 1.2 million barrels/day in November 2016. Nigeria’s export revenue prospects will consequently be boosted, if this price trend is sustained, particularly if the youth restiveness in the Niger Delta is minimised. However, much against popular expectation, the more bountiful the export dollars, the bigger also will be our economic headache!

President Muhammadu Buhari must be disturbed that the naira exchange rate has suffered so poorly under his watch, particularly after he promised parity between the naira and dollar, if he won the election. Unfortunately, the worst has yet to come, because, if crude oil price further rises while output remains favourable, the dollar will paradoxically spike well above N500=$1 and may approach N1000=$1 before December 2017! Any attempt to bridge the widening gap between official and parallel market exchange rates will devalue the naira and trigger a steep rise in fuel price to shoot inflation well beyond 20 per cent and make Nigerians poorer still.

Advisedly, patriotic Nigerians should alert Mr. President that his legacy will be characterised by mass poverty if he remains in denial of this reality. Hereafter, an interview format will be adopted to explain the chain of cause and effect that will induce the horrifying realities foretold above.

Why are you so pessimistic and why should increasing dollar revenue make Nigerians poorer? Isn’t this a contradiction?

Yes, it will indeed seem a contradiction for a weaker naira and deepening poverty to be products of increasing dollar revenue, but interestingly, this has been our economic experience lately. For example, Nigerians became listed amongst the world’s poorest, despite the stupendous income from oil for several decades. Ironically, in retrospect, when crude oil prices hovered about $10/barrel, N1 exchanged for about $2.

Conversely, when crude oil prices bounced beyond $140/barrel and output remained at over two million barrels/day, with well over $50bn as reserves, the naira inexplicably exchanged for over N150=$1! Consequently, Nigerians have to work 300 times harder, just to earn $1, particularly when income levels rise more slowly, despite our buoyant reserves. It is therefore evident that deepening poverty nationwide, unfortunately, correlates with increasing dollar income! So, my perspective is not pessimistic but is actually a logical deduction.

So, are you suggesting that the economy will do better with smaller export revenue from oil?

Unfortunately, in view of our national experience, it’s a case of heads you lose, and tails, you also lose, as the present lower oil price and revenue is also promoting severe hardship everywhere.

So, why does oil revenue instigate this economic dilemma?

Ans: The oil revenue is not the problem; the primary cause of the oppressive dilemma is the distortional process the Central Bank of Nigeria adopts for infusing the dollar revenue into the domestic money market to drive economic growth.

So, how is the dollar revenue infused into the system presently?

Inexplicably, revenue allocations are all denominated in naira, even though dollar revenue, from crude, generally contributes the lion’s share. The question therefore is, what happens to the dollars held back by the CBN after substitution with naira and how is the exchange rate determined for the naira shared as allocations?

How does naira substitution and the applied exchange rate distort inclusive economic growth?

The fear of an unrestrained inflationary spiral is the first lesson in economic management everywhere. The CBN is constitutionally empowered to keep inflation at best practice levels, usually below two per cent, so that income values and consumer demand will be favourably sustained. However, the main driver of spiralling inflation is undeniably excess money, (in this case, excess naira supply). Instructively, money supply inadvertently expands every time the CBN unilaterally substitutes naira allocations for dollar denominated revenue. Thus, the higher the dollar revenue, the greater will be naira supply and the greater also will be the serious threat of unbridled inflation wrecking the economy!

The popular perception is that the CBN adopts the open market rate for the naira it substitutes for dollar allocations. This may indeed be so, but the same CBN is guilty of consciously manipulating the exchange rate mechanism to favour the dollar rather than naira, for which it is both custodian and guardian.

How does this happen?

Well, by directly substituting naira allocations, the CBN immediately assumes ownership of billions of dollars. Historically, the so-called dollar “reserves” have unfortunately been serially abused by the CBN itself and incumbent presidents. Nonetheless, the perverse argument is that once constitutional beneficiaries accepted naira allocations for their share of dollar revenue, they cannot turn around to also lay claim to the billions of dollars withheld by the CBN, as this would be akin to having your cake and eating it! However, if the tiers of government subsequently require dollars for any legitimate purpose, it is regrettable that they have to buy back such dollars from commercial banks, at a rate that may be higher than the earlier rate adopted by the CBN for substituting naira allocations.

So, how is the dollar rate presently determined?

Well, the present price mechanism appears regrettably skewed against the naira, as the CBN proceeds to AUCTION rations of the same dollars, earlier withheld, in a money market that it has unwittingly already suffocated by the bloated naira allocations paid to government every month. In practice, any item auctioned, will sell for higher prices. Consequently, the CBN’s subsequent auctions of dollar rations, in a naira surfeit market, obviously spells perpetual doom for the naira exchange rate and inadvertently also, distressingly fires the inflation rate.

Thus, the more bountiful the CBN’s withheld “dollar reserves” become, the greater also will be the threat from excess naira supply and spiralling inflation and the more urgent therefore will be the need to introduce restrictive policy measures to hold back inflation.

So, what measures are taken by the CBN to restrain spiralling inflation?

As I said, the presence of excess money supply is the major driver of inflation, so the CBN is invariably compelled to reduce consumer access to the excess naira supply, by increasing the mandatory Cash Reserve Requirement for banks and raising the interest rate commercial banks pay, whenever they borrow from the CBN to cover their temporary cash short falls. Expectedly, these banks will in turn, make lending more expensive to their customers by charging higher interest rates for loans advanced. This reflex action inevitably constitutes an obstacle to inclusive economic growth, and industrial competitiveness and clearly challenges the drive for import substitution.

So, what is the way out?

The CBN should adopt dollar certificates for paying allocations of dollar denominated revenues, rather than unilaterally substituting naira allocations which precipitate excess liquidity.

Is it not possible that issuance of dollar certificates to states and the MDAs will facilitate capital flight?

No, it won’t, because the beneficiaries cannot collect dollar cash; they can only collect the naira equivalent of their certificates from commercial banks at the prevailing market exchange rate. The dollars will always remain in the domiciliary accounts of public sector beneficiaries with the CBN, who will then directly act on the instruction of any bank, which purchased the dollar certificates from the original beneficiaries, to make onward payments for authorised imports on behalf of customers. Similarly, for their imports, government beneficiaries of dollar allocations will submit attested invoices for officially valid transactions, through their banks, for the CBN to debit their domiciliary accounts and settle their invoices with respective overseas suppliers directly.

Consequently, with this arrangement, there is little or no room for round-tripping and forex hoarding, unless the CBN management also compromises itself.