Naira's slide

By 

Afam Onumonu

This opinion is an imaginary speech delivered by the writer in the Aso Rock council chambers in the presence of Mallam Adamu Ciroma finance minister, Chief Joseph Sanusi (CBN Governor) and the managing directors of bank. The occasion was the summoning of bank chiefs to Abuja by the president over the consistent two day slide in the value of naira from N112.7 to a dollar to N115.7 to a dollar on Monday, 9th April and Tuesday, 10th April, 2001.

Your Excellency, it is clear to all and sundry that you love this country. Your calling of this meeting at very short notice upon the two-day consistent slide in the value of the naira demonstrated this. I therefore empathise with you as a true Nigerian, and desire to see your administration succeed in its noble objective of strengthening the local currency and economy. My statements will therefore be blunt.

Those who might think my views are injurious to their interests should recognise that my love for this country drives me to the point of blunt honesty. The following are my observations concerning the travails of the naira.

First, your finance minister here cannot exonerate himself from blame on the issue of the crash of the naira, as he is attempting to do. He is responsible for the government's fiscal policy which relates to the generation and spending of Federal Government soured revenue. The Federal Government is the biggest revenue generator and spender in Nigeria. I will ask him some questions here: where has the monetary injection that is overheating the banking system and putting pressure on the value of the naira been coming from? Government budgetary disbursements to federal parastatals and ministries as well as to states and local governments, of course. Who has responsibility for managing these disbursements? Malam Ciroma. Has he seen these injection as his problems?

What recommendations has he made to government on how to minimise the negative impacts of such injections on the economy? What forum has he established through which public finance administrators can liaise over the management of the problem? I would love to hear his answers to the above questions. Another source of monetary injection that destabilises the value of the naira in the foreign exchange market is the impact of tax collections made on behalf of parastatals under his control by banks. These collections are held by banks for some time before being transferred to the Central Bank.

There is also a minimal balance that is always in such tax collection accounts with the banks (-value-added tax, import duties, exercise duties, NITEL bills). These balances constitute deposits that can be directed by banks towards the purchase of foreign exchange. What has his ministry done to ensure that these monies flow directly to the government's consolidated revenue account at the CBN immediately they are collected? These revenues (government deposits with banks and tax revenue collection by banks) constitute money volumes under the control of banks, which can in part be diverted into the foreign exchange market, thereby exerting pressure on the value of the naira.

Your finance minister should not see his job as that of a bookkeeper who balances his books after receiving and disbursing revenue allocations. He should take birds eye view of the general economy. How are his activities been impacting employment, inflation, interest rates and currency exchange rates? What can he do to advance the economic well being of the society using the fiscal policy tools at his disposal? How can he harmonise his fiscal policy programmes with the CBN's monetary policy programmes so that the nation's economic objectives are achieved? He should seek to introduce some creativity into his work. I will now point at two areas in which he can challenge his creativity: first, how can he manage and stagger monetary disbursements to the different tiers of government so that their injection into the financial system do not affect the major economic indices of interest rates, exchange rates and inflation negatively?

He should provide the answer. Second, what programmes can he put in place that will still use the banks for collecting government tax revenue, while ensuring that such revenue instead of remaining with the banks, and constituting a funds source with which banks attack the foreign exchange market go directly into the vaults of the Central Bank, where they are immobilized against being used as a demand source for the dollar in the foreign exchange market?

And now to your Central bank governor. I must admit I have lots of respect for chief Sanusi right from his days in the Central Bank through the UBA and First Bank. I however suspect that he is fast imbibing the mentality of a good civil servant. His job as Central Bank Governor is not to carry out your instructions. His job is to jealously protect and advance the strength of the local currency and economy via the right monetary policy regimes. He has not been doing badly in this regard. I however suspect he is too careful about treading on toes in the execution of his responsibilities. Why has he not emphasised the potential negative fall-outs of focusing on monetary policy alone to the exclusion of augmentation with the right fiscal policy regime? I will tell you a story here which I will ask him to confirm or deny, since he was a player in the banking industry (as chairman of the U.B.A. Board of Directors) when the said event were unfolding.

Towards the tail end of the Babangida regime (1990-1993), the ruling junta in pursuit of the political programme of its head had thrown financial discipline to the wind with government extra-budgetary expenditure (requisitioning of money from the Central Bank, and the spending of same outside the strictures of the year's budgeted plans) being the order of the day.

These monies spent by government eventually found their way into the banking system and then into private hands via loans and deposits. The result was consistent pressure on the inflation rate, and the value of the naira. The government, instead of tackling the problem at the root (the indisciplined demand for money made by government functionaries on the Central Bank (then under the headship of the late Alhaji Abdulkadir Ahmed) to control the volume of money in the banking system.

The Central Bank started issuing banks with stablisation securities (which had the effect of reducing the volume of deposits available to the banks either for the purpose of souring foreign exchange or granting loans.) The banks reacted by increasing the intensity of their competition for deposits. Deposit offer (interest) rates went up. So too did the rate at which the banks loaned out money to borrowers. The ultimate effect was the real productive sector's failure to repay borrowed funds because of the high interest charges, greater attractiveness of the import sector because of its less risky nature vis-à-vis the local productive sector, loan failure in the banking sector and banking sector crises. We all know how Abacha had to introduce the draconian Banking Distress Law, and how he positioned John Ebodaghe the erstwhile head of the Nigerian Deposit Insurance Corporation as his hatchet man, all in the bid to sanitise the banking sector. The irony of it all was that the real culprit (government sector prodigality) escaped scot-free.

This scenario has started playing its self out again currently as the banks in reality to the CBN's new monetary policy directives ( increases in the liquidity radio, cash reserve ratio and minimum rediscount ratio) have raised lending rates to 50 per cent as at last Friday. Although inflation and interest rates were eventually brought under check by Abacha, the exchange rate was not. The naira instead was devalued by government from N22 to N82.00 against the dollar, while the government sector continued to enjoy access to the dollar at a concessionary exchange rate of N22.00 to the dollar.

The purpose in mentioning the above case is to emphasise that Chief Sanusi should never get tired of highlighting the potential impact of government expenditure attitude on the Central Bank's monetary policy and the general economy, as history is currently attempting to repeat itself. Trust, your administration has made efforts at checking government financial profligacy at the federal level. There is however still a lot of be done especially concerning the utilisation (as distinct from requisitioning) of official allocations by the three tiers of government, and their potential impact on the general economy.

There must be a consistent effort to harmonies monetary policy with fiscal policy at the levels of the three tiers of government. Government expenditures too should be targeted at projects that will generate real sector productivity and employment. Such a focus will boost local employment and productivity while checking inflation and shoring up the value of the naira.

And now to the bank managing directors: There is the account of the African war Lord of the early nineteenth century who when approached by British anti-slave -trade lobby interests to put an end to his slaving activities simply said that if it is possible to stop the leopard from preying on other animals, then he too would stop going on his slave raiding expeditions. The question is: why do leopards hunt? Their genetic composition and hunger. Why do banks demand foreign exchange? Because they want to make profits. If you can kill the desire of a bank for profit, then you might be able to get these MDs to control their appetite for foreign exchange via moral situation as you are trying to do. To another story.

Your Excellency just came back from a trip to Imo State, which included a visit to Oguta. Oguta happens to be my home town. As a child growing up in that town during the civil war years, one of our favourite past times was fishing with hooks in the lake. There was this fish specie called Odoba in our local dialect which always outsmart us. This fish wanted the earthworms on our hook but knew that if it executed a frontal attack on the hook, it would end up in the fire. It therefore devised an effective strategy. It would hold unto the fishing line far above the hook with its lips and dive down. When we saw the bamboo floater attached to the fishing line (which is supposed to signal a potential catch) dip wildly into the water, we would swing the bamboo pole to which the line and hook was attached wildly in excitement, but alas, no fish. By the time the fish executes this strategy three times, the earthworm would in part have been torn off the hook by the force of our excited pulls. The fish thereafter came from behind the hook and ate up the dangling worm without disturbing the floater. We only discovered the earthworm gone and the hook out of the water to find out why it had not been attracting any prospects.

The embarrassing part of the whole exercise would be when on our return home; the maidens and house wives who had gathered to examine our catch, would start taunting us for bringing empty earthworm cans home with no fish to show for it. Looking back now, I believe we would have outsmarted the crafty Odoba if we had gotten some of our elders who had fishing nets to cast their nets over our hooks. Now back to your bank managing directors. The Odoba knew the hooks were dangerous, but they wanted the earthworms. They got their way because they were smart. If we were smarter, we would have gotten our way too.

The government has two things, which the banks hanker after the way the Odoba desires earthworms. These precious possessions are foreign exchange and loanable deposits. Now the government on its own part has made needs which only the banking sector can satisfy. Primary amongst which is the provision of loans to local agriculture and manufacturing especially those organisations operating at the small and micro levels. The solution to the problem of the naira is a virile local productive sector. If good quality goods are produced locally by Nigerian firms, why should anybody demand foreign exchange with which to import competing products (thereby putting negative pressure on the value of the naira)?

One problem of the local productive sector is the dearth of cheaply priced long-term loans. Banks have consistently shied away from providing such loans to the productive sector on the grounds that the sector is risky. These same banks have been gorging themselves fat on government deposits and foreign exchange. Our suggestion is that the government convert both the new Bank of Industry and the proposed Rural/Agricultural Bank into Real Sector Resource Centres.

These centres will not be directly involved in funding of production as their predecessors were. Their job should be research in the area of marketing and management with the aim of building capacity into our local productive sector. They should also screen and recommend local enterprises seeking cheaply priced long term funding from banks. Banks on their own part should grant and manage loans to the productive sector on the basis of the recommendation of these Resource Centres. Government deposits and foreign exchange will thereafter be made available to banks on the basis of certification provided by these Resource Centres based on banks co-operation with the government's local production revival programmes.

What will the benefits of this scheme be? The local productive sector would be able to source cheaply priced long term credit from banks thereby producing the goods that would otherwise be imported with the foreign exchange demand that is putting devaluation pressure on the naira, the banks on their own part would be putting something back into this economy in exchange for the foreign exchange and public sector bank deposit largesse that they have been freely enjoying; the funds that have been earmarked for the new Industrial Bank (N50 billion) as well as that proposed for both the Agricultural Bank and the small scale enterprise institute would be put into other uses, while allowing the private banks to concentrate on their area of competence (loans granting and management). If our hitherto existing development banks (NERFUND, NBCI, NACB etc) have failed or are having problems making them bigger will not be the solution.

Their energies should be directed at capacity building for local industry and agriculture. Private banks should provide the channels or loans granting and management since their performance records show they are capable in this area. These other institutes can support by exclusively sourcing long term development finance from outside Nigeria and supervising the management by banks of such funds, that it in addition t their provision of research and management support to the productive sector in the areas of management, marketing and finance.

To conclude this address, your Excellency, three things must be done if the strength of the naira is to be protected. There must be a harmonisation of government's fiscal and monetary policy programmes. The local productive sector must be brought back to life so that what we import can be produced locally (-and it is the responsibility of the banking sector to provide cheap long term funding for the productive sector); finally, the government must institute some barriers. )-import duties, bilateral trade agreements and outright banks) to protect over local productive sector. All our import liberalisation under the guise of free enterprise economy and globalisation is a lie from hell. Even the United States government protects the American economy from mindless importation. Why otherwise do we consider the ALGOA trade concessions that Bill Clinton gave us a special privilege?

Mr. Onumonu is a financial expert and Securities and Exchange Commission registered investment adviser