Agenda for Economic Recovery and Prosperity

Sixth, the SAN proposal outlined the Monetary Policy Committee’s approval of the sharing of a portion of the Federation’s US dollar account for a foreign exchange transaction then scheduled for September 2007. But with the federal government’s political choice of permanently suspending the SAN, the MPC remained in the economic woods.

The MPC held its 282nd meeting since its inception in November 2020, but is currently content to applaud every action by the CBN. It is not flattering that, because the prevailing high lending rates discourage businesses from borrowing, the level of bank depositors’ funds and total bank credit to the economy are more or less equal, reflecting the strong unused bank lending capacity.

Overall, according to the World Bank, total domestic credit to the private sector as a share of GDP in 2020 stood at 12.1%, down from 21.2% in 2018 and 21.8% in 2014. By comparison, this indicator for Malaysia, Nigeria’s economic peer, stood at 134.1% in 2020, 143.5% in 2018 and 140.4% in 2014.

Clearly, Nigeria’s prolonged downward economic trajectory shows this. Moreover, while its main roles are suffering, the CBN has increasingly taken over the financial intermediation functions of the depository banks by offering intervention funds at subsidized interest rates for each economic activity and for all company sizes, even with loans for projects worth less than N50,000.00. Note that (a) CBN intervention funds amount to fiat printing additional volumes of naira to inflate the money supply, thereby fueling inflationary pressure. (b) Intervention funds are disbursed through the DMBs, which impose stable fees. However, DMB loans are generally part of the volume of safe inflation limit money supply which should be carefully controlled using cash reserves and liquidity ratios set by the CBN/MPC alongside prudential targets.

For years, the MPC has set a cash reserve ratio and a liquidity ratio that are out of sync with an optimal money supply, thus soaking the system in persistent excess liquidity. This unhealthy situation supported the monetary policy rate in the corridor from 2006. Among other things that hurt the economy, the apex bank and the MPC pay the DMBs the interest rates of the permanent deposit facility ( which varied from 4.5% to 10.0% over a long period) on loanable funds by banks left idle due to unattractive lending rates influenced by the MPR. Indeed, the CBN policies hamper domestic production with a negative effect on domestic employment while promoting the country’s excessive dependence on imports for the benefit of foreign economies. No wonder Nigeria runs heavy trade deficits with foreign countries.

At this point, remember the original sin of poor political choice by the old military regime. He ordered CBN to improperly monetize or even replace accrued liabilities from the Federation account with naira funds printed in fiat. Thus, the apex bank, supposed to be the bank of last resort, usurped the function of the DMBs (the first instance banks) thus triggering the uncontrollable inflationary problems facing the country. Note that despite being replaced by funding funds from the apex bank deficit, the retained FA dollars remained intact and were dubbed the CBN’s external reserves. Successive apex bank governors have allocated the misnamed external reserves arbitrarily at artificial exchange rates across multiple segments of the foreign exchange market to the detriment of the economy.

On the other hand, when currency holders, including government levels, convert their currency holdings through the foreign exchange market in which DMBs (as trial banks) act as currency brokers remunerated at commission, forex end users would buy currencies using naira. funds that are part of inflation deemed safe limit the optimal money supply. This way, naira revenue from FA oil revenue would not be inflationary.

We have shown in previous editorials that a single foreign exchange market (SFM) using the Appropriations Act Exchange Rate (AAR) as the anchor managed floating exchange rate would produce naira/dollar exchange rates reflecting the market in a stable band of AAR +/- 3 percent. The incorporation of progressive tariffs and progressive exchange access tax rates would achieve various desirable economic goals such as a balanced budget, a budget surplus or a low budget deficit. Take for example the latest NBS data showing foreign trade imports in 2021 (to date) from N21. 95 trillion. To annualize this figure, converting it to US dollars at the budget exchange rate and adding invisible trade disbursements to other countries would show that over $100 billion left Nigeria in 2021 for foreign entities. Then assume a FG budget revenue gap of 5 trillion naira. An average forex access tax (FAT) of N50 per dollar spent on imports could be collected through DMBs without recourse to domestic or external borrowing. Note that the forex access fee should be global but graduated according to the defined needs or priorities of the country. Funding for national development should not tolerate any tax exemption. Visualize the benefits. The applicable progressive FAT payable to the government would be much lower than the difference between the rate (I&E) and the BDC rates that manufacturers etc claim to be paying. But this difference is currently going to the intruders, sharks and wreckers of the economy. Thus, any federal budget is entirely achievable.


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