The accrual of foreign exchange to the tiers of government is ordinarily national good fortune. But the benefits have been inverted for over four decades owing to the improper handling of the forex earnings. Otherwise, based on the achievements of Nigeria’s quondam economic peers of Malaysia, Singapore and South Korea, the country by now would have ranked among the world’s top 10 economies. But alas, is Nigeria truly the world’s 26th largest economy?
Nigeria’s economic bane is unending excessive fiscal deficits. How? The Bretton Woods system of fixed exchange rates ended in 1971 leaving individual countries to figure out a suitable exchange rate fixing mechanism. By 1978, the world’s leading economies had settled for the managed float system. However, the Nigerian political leadership has remained wedded to a procedure that corners Federation Account (FA) forex receipts and facilitates the corrupt enrichment of the political elite to the detriment of the economy. The evidence stares all in the face. The practice had a super patriotic colouration at its inception. Since the 1970s the political leadership at the federal level has held that other tiers of government could not be entrusted with their share of FA forex earnings. In practice, the distrust is all-inclusive because the CBN withholds FA dollar allocations to all tiers. In their place, the apex bank prints and substitutes naira amounts proportional to the forex withheld for disbursement to the tiers of government for budgetary spending. By such a procedure, economics teaches, the CBN engages in proportionate deficit financing of the tiers of government. Asked to declare its stand on the adopted procedure vis-à-vis the above economic axiom in July 2006, The
World Bank responded within three weeks that the practice was not proper but hedged that it “is fully a decision for the Government in Nigeria” to choose what to do. By contrast, for 15 years since 2001, the FG has stonewalled and refused to shift from the baneful method. It is therefore a blessing in disguise that the collapse of crude oil prices has exposed the severe adverse effects of the excessive fiscal deficits, which had hitherto been covered up with false claims that the economy was making progress.
What is the size of the substituted fiscal deficits? From 1974 up to the 2016 Budget proposal, FA oil proceeds accounted for over 50 per cent of the annual budgets on paper. Thus the replacement of FA forex receipts with CBN deficit financing (any deficit funding otherwise incurred is additional) means over 50 per cent of each annual budget was financed with deficit. That explains why the economy has over the years failed to shake off the full-blown symptoms of excessive fiscal deficits: high inflation, unfriendly lending rates and the ever-sliding naira (these make up the triple conditionality of macroeconomic instability) which give rise to unconducive production environment, restrictive monetary policy stance, gross underutilisation of financial sector lending capacity and rising unemployment.
Misnamed CBN external reserves, the improperly withheld FA forex has found use in wasteful activities including, one, a part was/is deployed for liquidity management whereby excess liquidity is mopped up, sterilized (not invested) and accumulated as national domestic debt (NDD). Used in that way for liquidity management, FA forex becomes a withdrawal component from the circular flow of income contrary to economic teaching. Two, from 2005 to last January, the CBN paid a part of the withheld FA forex directly to bureaux de change (BDCs) to facilitate forex speculation, round tripping and front-loading activities as amplified in the January 2016 CBN Press Statement. The BDCs flouted the guidelines, profiteered by orchestrating naira depreciation and periodic devaluation. Three, as the naira slid in value, it lost the confidence of the public as a store of wealth and so dollarization became entrenched. From the assets declared by politicians, kingpins of the present administration, like their predecessors stretching back to the coup makers, are in the tight embrace of dollarization.
The predilection for owning domiciliary dollar accounts (which is economy-wrecking) makes laughing-stock of successive policy makers who tote premier Nigerian university, Oxbridge, American Ivy League and IMF/World Bank credentials and pretend not to know (even after 15 years of intense media campaign) that over four decades the economy would wear distinctive features between on the one hand government expending realized revenue plus fiscal deficit within 3% of GDP (which is purported to be the case but which does not show) and on the other hand government financing 70-80% of annual budget expenditure with funds furnished by the apex bank (which indisputably has left the economy prostrate). Nigerians are all diminished the world over by the laggardly economy that the lack of patriotism of the elite has bequeathed.
The way forward? It is essential to adapt the exchange rate fixing system, which has brought great success to the world’s leading economies since the 1970s by blocking possible avenues for abuse. Accordingly FA beneficiaries should collect dollar allocations through secure means for conversion to realised naira revenue using dummy forex accounts held with deposit money banks (DMBs). For the public and private sectors there will be a single and open DMB-operated forex market (FM) under the managed float exchange rate fixing system (MFS).
A little detailed outline of the FM is as follows. The monetary authority sets the initial middle value rate (MVR) in a band with a tight width of, say, MVR +/-3%. To avoid arbitrariness and in conformity to MFS, the MVR may shift monthly, quarterly or semi-annually (whichever is adopted) based on the mean, median or modal (whichever is adopted) daily exchange rate (DER) in the preceding period. Individual forex transaction rates determined by negotiation between buyers and sellers or by market forces would fluctuate within the set band. The weighted average of such rates in one business day gives the DER. Bureaux de change purchase forex from small holders and sell to the FM or to small end-users. In the latter case, the BDC selling rate should be within the DER plus a margin not exceeding 2 per cent.
In order not to continue inverting the good fortune inherent in the ample inflows of public sector forex, any forex receipts or earnings meant for domestic spending shall be converted to legal tender naira amounts only through the FM (thereby averting CBN substitution of naira funds). The major sources of forex supply to the FM would include (1) FA dollar allocations, public sector external loans, internally generated forex revenue (or external reserves), treasury loot returned by foreign governments. Such forex inflows would be in the custody of the CBN physically for as long as desired, but any portions for domestic spending should be routed to the FM through dummy forex accounts opened with DMBs. Converted naira amounts should be subject to the TSA rule. (2) Remittances and forex voluntarily brought in from abroad. (3) Export proceeds, investment funds, balances in domiciliary dollar accounts. Forex is not legal tender. Thus forex supply items (2) and (3) should bear a “shelf life” of not more than six months from the date of receipt or lodgment into account. Individual holders and firms should utilize such unexpired forex for eligible transactions or voluntarily sell same in the FM. Forex deposits in these two categories should be mandatorily sold in the FM on the date the shelf life expires. (4) Dollar hoards hidden in purpose-built soak-aways, attics, bunkers, etc, will be propelled to the FM by the profit motive as soon as confidence in the naira as a store of wealth is restored.
As regards demand for forex, there is need to moderate and tailor demand with a view to creating a national economy that produces the bulk of the goods and services consumed by Nigerians. Hence government should draw up and regularly update a list of eligible goods and services that may be imported to complement what is available or should be produced domestically. Will the WTO demur? No, because the recurring resort to international sanctions forces a variant of this list on some countries and some affected countries emerge better off. So much for the FM outline.
In the national interest and as a matter of deliberate policy, forex demand should be kept below supply in order to guarantee steady accretion to external reserves. Being a product of monetary or exchange control management (over which the FG exercises exclusive constitutional responsibility), the external reserves represent internally generated forex revenue (IGFR) of the Federal Government as distinct from FA export proceeds. The IGFR strained and saved from the various sources of forex supply and controlled forex demand will before long provide the foundation for (a) ending further external loans; (b) making the country a net creditor to multilateral institutions; (c) paying transparently assessed oil joint-venture cash calls; (d) providing critical infrastructure such as government independently undertaking power and gas transmission grids which the private sector is unlikely to foot in the foreseeable future; (e) plumping up the sovereign wealth fund; and (f) accumulating robust external reserves, etc.
Did you ever doubt the European Union’s oft-stated position that Nigeria is a rich country that does not require external aid for development? But have you found any patriots among the political elite yet?
• Ojomaikre is a visiting member of The Guardian Editorial Board