The Finance Act 2022 fixed the exchange rate of the naira at 410.15 naira/1 dollar. But six days into the fiscal year, the Central Bank of Nigeria (CBN), as it usually does, unilaterally and ultra vires devalued the naira. The action appears to be a response to calls from the International Monetary Fund (IMF) for a devaluation of the naira to pave the way for a loan from the World Bank. However, the currency devaluation was not justified, nor was a loan from the World Bank necessary. In fact, the unique forex market conditions rather indicate an appreciation of the naira to stimulate economic activities.
About 10 days into February, the CBN held consultations with the Committee of Bankers with a view to finding “sustainable and local solutions to the persistent problems of insufficient foreign exchange supply and constant pressure on the change rate”. The CBN Governor said, “We would need to follow the best practices of other countries and make sure that we protect ourselves a bit from factors beyond our control.”
He then announced the outcome of the consultations as “our new initiative in Nigeria’s foreign exchange market (in the form of) Race to $200 Billion in Foreign Exchange Repatriation (RT 200 FX Program).” It should be pointed out without delay that the Committee of Bankers is a syndicate of banks to which the apex bank should not belong. The Bankers Committee should not dictate Nigeria’s monetary policy. Several of the banks are largely owned by foreign entities, which bow to the ascendancy of Western interests over Nigeria. No wonder that despite 364 meetings since its inception, the Bankers Committee pushed the CBN to announce the RT 200 FX program instead of the naira program.
It should be noted that in the RT 200 FX program, the Banking Committee, firstly, retains the practice of multiple currencies and the system of multiple exchange rates, both incompatible with the best practices responsible for economic success in the targeted economies; second, usurps the functions of the planning agency of Nigeria (where is the Nigerian Planning Commission?) thereby ousting our national sovereignty over monetary affairs; and third, promises economic results that require prior achievement of CBN’s main objectives to achieve them. By putting the cart before the horse, the RT 200 FX program is another deceptive ploy by disguised foreign interests to unnecessarily prolong damaging bank profits through the end of 2022 under the existing market deal. changes. The RT 200 FX program is not the desired solution.
It should always be kept in mind that Nigeria, home to the largest concentration of black people, is the seventh most populous country in the world. Therefore, the cause of the self-inflicted economic failure of our generously endowed country should be presented in detail from its inception as an integral part of presenting the single foreign exchange market system to best practices for adoption without further delay. First, the Nigerian economic situation is characterized by extreme poverty or absolute poverty which is constantly increasing. The term refers to a growing number of the population living on an average income of less than the equivalent of $1.90 a day.
But once upon a time, Nigeria experienced the oil boom decade of the 1970s with GDP (purchasing power parity) per capita peaking in 1977. During this decade, the extreme poverty rate averaged 35%. Absolute poverty rose steadily to reach 70% in 2012. Nigeria then became the poverty capital of the world in May 2018, with more people falling into extreme poverty than in any other country at any given time. These dismal indicators occurred before the onset of the COVID-19 pandemic in the country in February 2020. As absolute poverty continues to grow, the World Bank has established that high inflation alone has driven seven million and four million Nigerians in extreme poverty in 2020 and 2021 respectively.
Yet, after the decade of the oil boom, the country remained a major exporter of crude oil and natural gas. Indeed, the proceeds of these exports from 1974 until today have represented more than 50% (on paper) of the Federation’s account (ie the budgets of the three levels of government). The question that logically follows is: why has the economic scenario of the oil boom not made itself felt from the 1980s until today? Relevantly, the decade of the oil boom in 1971 saw the abandonment of the Bretton Woods system of fixed exchange rates. Subsequently, different countries experimented with different methods of setting their exchange rates. And like other countries at the time, Nigeria used a basket of currencies from its 12 major trading partners to fix naira exchange rates. So, in hindsight, Nigeria’s decade of oil boom was made possible through the use of the same transitional exchange rate fixing system as other countries. However, in 1979, the world’s major economies opted for the floating exchange rate fixing system (MFS) while the defunct military regime devised the local heterodox fiscal and monetary procedures (HFMP), which prevailed until day.
Second, explicitly, undiluted HFMP has been in place for 40 years, which qualifies in long-term economic analysis. Over these four decades, crude oil prices have characteristically risen and fallen on and off. But due to the HFMP, the crude oil revenues accruing to the Federation account were not injected into the economy using a correct Naira exchange rate fixing system: the economy therefore lost the benefits of crude oil production and has instead been plagued by persistent excess liquidity and high inflationary pressure with their unhealthy economic accompaniments. As a result, from the mid-1980s, inflation-influenced prime rates averaged 14% and above, while average maximum lending rates reached 30% and above. These loan rates are not favorable to production.
• To be continued tomorrow.