CBN, Foreign Reserves and the Economy-by Les Leba

In last week's article, “Dollar Reserves: Who Owns What?” we endeavoured to lift the shroud over the amorphous concept of Nigeria's foreign reserves. Incidentally, the Senate has lately in consonance with our position, also frowned at the illegality of the component of the reserves defined as excess crude account! (See Daily Independent headline of 23/10/2009, “Sharing of $2bn Excess Crude Fund Illegal – Senate”). Senate Spokesman, Ayogu Eze maintains that “The Senate has always said that the Excess Crude Account is illegal. But you know that governance is give and take, and then a matter of convenience,” Eze explained.

“All the major stakeholders, the President and Governors, seem to have agreed that in the interim, where there is no law, since the illegality has already started, they would allow the system to operate!

“But ordinarily, it is wrong for anybody to put his hand in such an account without appropriation. That act is illegal…

“It is not an account known to anybody in this country. It's not known to our Constitution.”

“Not to be left out, Appropriation Committee Chairman, Iyiola Omisiore also insisted that:

“The excess crude account is unknown to the National Assembly because it wasn't an Act of Parliament that established it”.

The question that derives from the above is why should the highest legislative organ in the country openly recognize and condone such illegality? Where will hope for national redemption come from if the National Assembly is incapable of stopping such constitutional infractions?

The following is the text of a piece titled: “CBN, Foreign Reserves and the Economy”, first published in this column on 6/08/07. The article raises the question of similar illegality in the disbursement of our foreign reserves. Please read on:

“Two respectable Newspapers – the Guardian (2/8/2007) and Daily Independent (13/7/2007) courageously carried editorials condemning our Central Bank's tradition of unilaterally converting our distributable foreign reserves into naira before sharing because of the disruptive and debilitating effects of this action on the welfare of our people. The text of the Guardian editorial follows below, and it is in consonance with what we have consistently advocated in this column.

“During their screening of ministerial nominees, Senators inquired from the then Central Bank Deputy Governor, Shamsuddeen Usman about the rationale of the country piling up huge but idle foreign reserves at a time there is no let up in the glaringly harsh economic privations facing the people. Usman confessed to having anticipated the question at home and so came to the Senate fully prepared….

“To summarise his response, one, he dazed some quarters when he claimed that the apex bank owned 71 per cent of Nigeria's foreign reserves then standing at $43.6 billion; two, he admonished that the country would not derive much benefit from spending out of the accumulated hard currency though he subsequently contradicted himself; and three, he put the cart before the horse when he prescribed intensified internal revenue drive as recovery pill for an economy in CBN-induced coma. Rather than reflate a weak economy, over-taxation, as proposed, pushes the economy further downhill.

“Coincidentally three days later, the Federation Account Allocation Committee (FAAC) shared N430 billion among the federal, state and local governments as June (2007) revenue with crude oil receipts purportedly accounting for N324 billion, leaving the CBN owning $31.3 billion out of the foreign reserves. CBN is part and parcel of government and what belongs to the former is owned by the latter. The real issue, however, is what Usman said: “All the three tiers of government have shared this $31.1 billion and spent it”. In other words, government still has in its firm possession foreign exchange that has purportedly been spent! There is economic explanation for this seeming oddity, namely that the naira amounts regularly substituted for government oil earnings which FAAC distributes come via a process known as deficit financing, for which the CBN has no authorization. Parenthetically, the relevant Senate committee should be interested in unearthing through public hearings total foreign exchange earned by CBN in this manner from government oil earnings from inception to date and where it went.

“Because oil earnings account for at least 80 per cent of the national budget year after year, their replacement with deficit financing subjects the economy to destabilizing inflationary pressures. It is for this reason that Usman cautioned that not much benefit would be gained from spending the foreign reserves. It is also the very reason hundreds of billions of dollars realized since the discovery of oil that were replaced with trillions of naira which government shared and spent over the years did not bring about national economic prosperity.

“When in an about-turn Usman proceeded to advocate that the foreign reserves be devoted to capital expenditure in order “to generate economic development”, he momentarily forgot that foreign exchange expended on capital projects is equally inflationary because naira equivalents are first created for the entire fund going by CBN's extant monetization procedure. Thus, his suggestion will not lead to sustainable development.

“Usman, true to CBN logic, linked problems with spending foreign reserves to its oily origin and vouched that other oil producing countries such as Iraq and Norway snuffed out the problem by saving their oil export earnings. That is incorrect. In the case of Iraq, its oil reserve fund from whatever little oil the country managed to sell, was instituted after the American invasion and it was earmarked for paying Western firms for any reconstruction work carried out. It was clearly questionable for the ex-Deputy Governor to suggest that the arrangement had opened Iraq to the blessings of oil revenue amid the pervasive destruction and daily harvest of deaths by violence.

“With respect to Norway, Usman was wide off the mark as that country has put its oil revenue to the best use possible. Unlike Nigeria, Norway is not mired in poverty as it is highly industrialised and comes first in UNDP world human development ranking while Nigeria lolls among the bottom 20 countries out of the 177 nations usually listed. As a poor and populous country, Nigeria cannot afford to lock up her foreign reserves. Moreover, it is thoroughly absurd for CBN to insist that the huge piles of foreign reserves be left untouched only for state and federal government teams that invariably include the Minister of Finance and CBN Governor to go round the globe to beg foreign investors to come and develop the country with their relatively minimal foreign exchange portfolio. The same government officials also ridiculously harangue hamstrung businesses to produce for export and generate foreign exchange for investment to grow the economy. All that is admission that CBN has questions to answer on how it handles available foreign reserves. Usman lent firm support to that conclusion when he likened CBN to a bureau de change which takes the federation foreign exchange and gives naira equivalents to governments.

“That again is incorrect. The CBN is not and cannot be likened to a bureau de change. CBN is the regulator of the naira and has responsibility for the overall national economic good health. The federation foreign exchange must necessarily go to the CBN but simply for safe custody and proper monitoring. The information derived as a result is meant to help the apex bank to plan and take appropriate monetary measures in the nick of time.

“Because every kobo that comes out of CBN swells money supply which should always be kept at the optimal level as enjoined by the apex bank's core mandate, CBN like all central banks is precluded from engaging in over-the-counter conversion of foreign exchange into naira as Usman paraded. Playing strictly by the rules, CBN must ensure that holders of foreign exchange, without exception, and requiring naira for domestic transactions, convert such funds into naira through deposit money banks since naira supply consistent with the level of economic activity is already available in the economy at any point in time.

“That way the process of translating foreign exchange into naira for government business (including execution of capital projects) simultaneously releases foreign exchange to entitled end-users to invest, help further stated government objectives and drive rapid economic growth and development. It does this without unleashing the destabilizing liquidity surfeit and its attendant high inflation, prohibitive lending rates and adverse naira exchange rate that have held the economy hostage for over three decades. Usman wrongly pinned such self-inflicted problems on Dutch disease.

“In place of Usman's ill-fitting analogy of bureau de change, we should liken the malfunctioning of the economy as a result of faulty CBN methods to attempting to run a heavy industrial machine by feeding electric power wrongly via a negative line, a mistake that makes the machine to either stall or malfunction. The Nigerian economy will not only work perfectly but will actually enjoy a great boom whenever the CBN stops stonewalling and agrees to feed foreign reserves correctly into the system. Government should therefore immediately compel the CBN to adhere strictly to the rules of central banking.” SAVE THE NAIRA, SAVE NIGERIANS!