Protecting the dollar against naira with cbn reserves In the light of popular perception regarding the virtue of large reserves, it may seem incredible for anyone to suggest that the process of accumulating reserves by the Central Bank of Nigeria is actually the primary reason for a low value of the naira! Let us begin to expound this observation with the recognition that out of the total current national reserves of about $50bn, the excess crude account apparently holds about $9bn, while about $1bn is domicilled in the Sovereign Wealth Fund account; the balance of about $40bn comprise what the CBN proudly claims as its own reserves, which do not technically belong to the federation account, and cannot therefore be appropriated or indeed, deployed to repay part of our current debt burden of over $40bn, in spite of the attendant oppressive service charges. Undoubtedly, such unfettered largesse in the CBN custody would pose the grave danger of moral hazard, defined as “a situation where there is a tendency to take undue risk, because the costs are not borne by the party taking the risk”. Nonetheless, the $40bn cache represents the answer for those Nigerians who wonder how the CBN funded a host of social welfare interventions in the recent past namely the cash allocations to victims of Kano and Madalla bombings as well as hundreds of millions of cash donations to selected educational institutions, provide ample testimonies of the CBN’s liberal discretion to disburse funds from its bountiful reserves. We also recall that after Prof. Chukwuma Soludo’s consolidation exercise, the CBN also allocated about $500m each without collaterals to 14 Nigerian banks, to fund international operations. Furthermore, the seed money of Soludo’s African Finance Corporation initially also came from this same source. However, let us focus for now, on the discussion of how the accumulation of CBN’s reserves actually depreciates the naira exchange rate and also creates a series of obstacles in the path of industrial, social and economic progress. In essence, the larger the CBN’s component of reserves, the deeper also would be poverty nationwide, with the collateral of average annual double-digit inflation rates with cost of funds to the real sector equally disenabling. An inquisitive observer may even wonder what business the CBN does to garner such bountiful dollar revenue. The answer to this question is actually quite obvious. The CBN earns its dollar revenue by selling back public sector dollars to the true owners of the dollar revenue; i.e. the three tiers of government. The question then is, how does the CBN achieve this sleight of hand? Our annual fiscal plans indicate that over 80 per cent of budgeted revenue comes from crude oil export, while the balance is derived from internally generated tax revenue. Curiously, however, all monthly allocations to the three tiers of government are always fully denominated in naira. The implication, therefore, is that the dollar component of the distributable revenue has obviously been captured and substituted with freshly-minted naira allocations, at a rate of exchange that is unilaterally determined by the CBN, with a cursory glance, at prevailing rates in the black market for guidance! Thus, the CBN can literally keep printing more naira to “buy up” and thereby increase its own dollar reserves! Evidently, within such a framework, the size of naira allocations would definitely increase as dollar revenue also rises. Thus, for example, a distributable monthly crude export revenue of $1bn would translate to the CBN’s cash injection of about N160bn, while $5bn dollar revenue would result in a bloated injection of N800bn fresh funds into the money market (i.e. horrendous increase in money supply). Consequently, the larger the naira cash injections, the greater will be the problem of surplus cash or excess liquidity, which is defined as “that amount of cash over and above what a bank is legally required to hold for its day to day operations”. The greater the extent of excess liquidity, paradoxically, the more urgent will be the need to reduce the cash surfeit, so as to combat the threat of inflation. The process of excess liquidity reduction forces the CBN to return to the money market to borrow back and reduce part of the burdensome systemic cash surplus. To this end, the CBN would gallantly stride into the money market and offer to pay the commercial banks mouthwatering double digit interest rates to induce them to part with some of the surplus cash in their till!!
Posted on: Thu, 06 Jun 2013 12:50:15 +0000
Trending Topics
Recently Viewed Topics
© 2015