The Solution To Nigeria's Inflation By Henry Boyo - Politics - Nairaland
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| The Solution To Nigeria's Inflation By Henry Boyo by jpphilips(m): 10:02am On Sep 27, 2016 |
Hereafter, we will discuss the related adverse consequences of the Current Payments Model against the positive attributes of the Advocated Payments Model for the allocation, for example, of $1bn export revenue in the following explanatory steps. Thus, in the CPM: -1 The Central Bank of Nigeria unilaterally determines the naira exchange rate and thereafter unconstitutionally captures the distributable $1bn revenue and prints/creates in replacement (read as monetises) N200bn as statutory allocations, which are then domiciled in the bank accounts of beneficiaries. CPM:-2 If, however, the CBN’s mandatory cash reserve ratio for banks is, for example, 10 per cent, the N200bn inflow can be leveraged 10-fold, to create additional credit and expand consumer spending power which will invariably fuel inflation. The recent establishment of the Treasury Single Account will, regrettably, only temporarily absorb such cash injections, as the N200bn allocation, for example, will ultimately migrate, when spent, into private sector bank accounts and invariably expand naira liquidity, consumer demand and the banks’ credit capacity. CPM:-3 In response to the resultant inflationary threats, the same CBN, ironically, “altruistically” sells treasury bills and borrows money it does not need, often, at over 10 per cent, just to combat the challenges of systemic excess naira and excessive consumer demand! Inexplicably, however, despite the crying need of the real sector for cheap funds, these CBN borrowings are simply kept sterile, while fresh cash interventions are created to stimulate sectors of the economy, despite the subsisting systemic liquidity challenge. CPM:-4 Since unrestrained access to excess cheap funds fuels inflation with adverse economic and social consequences, the CBN responds by raising its Monetary Policy (Control) Rate to force banks to also significantly increase their own lending rates, so that higher cost of funds would ultimately discourage borrowing, and sadly, inadvertently also reduce any prospect of industrial growth and job creation. Thus, the CBN unexpectedly becomes vicariously liable for the very high cost of funds that cripple the real sector. CPM:-5 Meanwhile, the ministries and state governments that require imports to enhance social infrastructure, become constrained to buy back their earlier captured dollars at a higher regulated rate from commercial banks, that strangely become the prime beneficiaries of the CBN’s dollar auctions. Ultimately, naira exchange rate comes under threat as increasingly surplus naira is unleashed by the CBN to chase the dollar rations it regularly auctions. Consequently, the market dynamics of demand and supply become unfavourably skewed against the naira, ironically, despite the CBN’s custody of relatively impressive “reserves”. CPM:-6 The less dollars sold, the larger would be the CBN’s purported reserves, but the weaker ironically also will be the naira rate, as less and less dollars compete against the flood of excess naira that the apex bank earlier instigated. Ultimately, the gap between official and black market naira rates will invariably, widen, to provide irresistible opportunities for speculation, hoarding and currency round tripping. CPM:-7 In order to reduce the gap between parallel market and official exchange rates, the CBN commits the unforced error of allocating dollars to the Bureau de Change operators, who in turn funded the requirements of treasury looters and smugglers of contrabands, not minding the adverse economic impact of such misguided dollar allocations. (Thankfully, after seven long years of our advocacy of this recklessness, the CBN terminated this clearly obnoxious strategy of official dollar sales to the BDCs in January 2016). Conversely the Advocated Payments Model will turn around the existing counterproductive process and operate as follows. APM:-1 The same $1bn distributable revenue is not immediately substituted with N200bn allocation; instead, constitutional beneficiaries receive dollar certificates equal to their respective allocations, while the actual $1bn remains domiciled in the CBN, so that the naira exchange rate is conversely determined by, competitive market forces of demand and supply between banks and holders of dollar certificates. APM:-2 With strictly dollar allocations, the $1bn income does not translate to additional FRESH naira injection; consequently, naira supply remains the same, and cannot therefore further instigate the usual disenabling spectre of systemic surplus cash which usualy fuel inflationary consequences. APM:-3 In the absence of the usual naira surplus, the CBN does not have to mop up excess naira liquidity by borrowing money it does not need, often with interest rates above 10 per cent. Consequently, the present N12tn ($60bn) oppressive debt and related service charges will become restrained. Additionally, reduced government borrowing will also naturally force commercial banks to chase the real sector for business and promote economic growth. APM:-4 Furthermore, with optimal naira liquidity, the CBN can gradually align its Monetary Policy (Control) Rate to international best practice below three per cent; commercial banks will also, without persuasion, correspondingly drop lending rates across board to single digit, and chase real sector borrowers. APM:-5 The MDAs and state governments can directly exchange for naira, all or portions of their dollar allocations from time to time, through commercial banks. Thus, in the absence of the usual naira surge when the CBN substitutes fresh naira creations for dollar revenue, the market dynamics will inevitably change to favour the naira, with relatively more dollar supply chasing the already existing naira balances. A stronger naira rate will expectedly reduce production cost and also lower fuel prices to make subsidy totally unnecessary. Furthermore, a 10 per cent sales tax on cheaper petrol and kerosene would favourably consolidate over N1000bn annually into the treasury. APM:-6 The CBN’s usual monopolistic dollar auctions will cease, as the constitutional beneficiaries directly trade their dollar certificates for existing naira balances with banks before spending, (as the dollar is not legal tender in Nigeria). Nonetheless, the dollars will remain domiciled with the CBN, irrespective of the ultimate buyer, until the apex bank receives appropriate instruction from respective banks to directly pay overseas suppliers of “authorised” goods/services, from the dollar balances in the dormicilary accounts the banks maintain with the CBN. This payment process certainly provides a more transparent usage of funds than presently. It is understandable that banks and other rent seekers would reject this reform. APM:-7 With optimal naira liquidity and relative dollar surplus, the naira rate will gradually improve, and stabilise; this will promote the perception of naira as a safe store of value over time. Furthermore, with reduced opportunities for round tripping, capital flight and speculative dollar purchases, the black market for the dollar will rapidly contract. Sadly, the patriotic and rational fervour evident in President Muhammadu Buhari’s recent affirmation, at a meeting with the Nigerian community in Kenya, that he did not see any valid reason to further devalue the naira, may ultimately come to nothing if the increasing pressure from local and international experts and powerful interest groups persists and the gap between official and parallel exchange rates further widen beyond N100/dollar. In conclusion, therefore, the present payment system will shunt us back to the fourth world, while the advocated model will propel us amongst the top world economies within a decade. Clearly, our fate as a nation is not in our stars, but obviously in the choices we make! http://abokifx.com/sensible-path-to-stronger-naira-economic-prosperity-punch/ 2 Likes 1 Share |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by Nobody: 9:28pm On Sep 27, 2016 |
What a post! It would def be kicked against, especially as many have a lot to lose. I wish... |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by jpphilips(m): 11:45am On Sep 28, 2016 |
cedaraustine: That has been on my mind for a while now and i don't seem to understand where the excess liquidity is coming from, every 2 weeks, the CBN mop up liquidity yet inflation soars, the writer is saying that the smartest thing to do is to stop paying federal allocations in Naira. He did not mention that some components of the federal allocation to states are naira denominated (FIRS receipts), but i guess that is not where he chose to lay his emphasis. If the federal allocation to states on a monthly basis, is done with dollar certificates, while allowing them to have access to their naira component, invariably we wouldn't have need to mop up excess liquidity every two weeks again inflation will disappear for good. |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by chriskosherbal(m): 11:47am On Sep 28, 2016 |
Nice one |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by idupaul: 11:51am On Sep 28, 2016 |
Henry Boko is the one of the smartest economist in Nigeria yet one of the most under estimated ..I have always said he should be on any economic team in this country 1 Like |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by Nobody: 2:52am On Oct 08, 2016 |
jpphilips: Chief, the truth is the Dollar-Naira disparity is too tempting. Banks are getting forex at the cheapest rate, and throwing into T-Bills to keep profits decent in the slow economy. With that I don't see a way forward. The case of dollar cert should definitely be considered. Monetary and Fiscal policies alignment would do us good. 1 Like |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by Bevista: 8:20am On Oct 08, 2016 |
Thus, in the CPM: -1 The Central Bank of Nigeria unilaterally determines the naira exchange rate and thereafter unconstitutionally captures the distributable $1bn revenue and prints/creates in replacement (read as monetises) N200bn as statutory allocations, which are then domiciled in the bank accounts of beneficiaries.This is the premise on which most of Henry Boyo's analysis and suggestions are based upon. However, I do not think that the CBN prints/creates new Naira to give to FAAC (FG & SGs) every time they (CBN) receive dollar revenue from oil sales. If that were to be the case, there would be a ridiculous amount of "new" Naira pumped into the economy every month which would lead to hyper inflation and an even more terrible exchange rate. What the CBN actually does is to sell the dollars to importers (i.e. exchange the dollars with existing Naira) and use the Naira receipts to give to FAAC. So, basically, the Naira the CBN gives to FAAC every month is not newly created money but rather already existing money that has been mopped from the financial system by exchanging dollars for it. 3 Likes 1 Share |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by jpphilips(m): 9:39pm On Oct 08, 2016 |
Bevista: You took the writer off context he said, "prints or creates" the take home point is that one way or the other, the CBN source the equivalent of $1b in naira and throw it into the economy on a monthly basis. The source of its naira equivalent is not in contention, so dont miss the point. The CBN then sell TBN to mop up the excess liquidity, how does doing the same thing the same way produce a different result? 1 Like |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by omohayek: 10:24pm On Oct 08, 2016 |
A miracle - a meaningful discussion about monetary policy on Nairaland! I'm too tired to participate tonight, but keep up the work guys [@Bevista and @jpphillips]. 1 Like |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by Bevista: 11:43pm On Oct 08, 2016 |
jpphilips:The Naira that the CBN throws into the economy is simply a "transfer". For instance, the CBN sells $1b to Dangote Refinery and collects N320bn, which it then gives to FAAC. This is simply a transfer or recirculation of Naira from one economic agent to another. This does not increase the Naira in the financial system. This point (source of Naira) is important as this can help debunk or validate Boyo's inflation theory. Nigeria's inflation comes from quite a number of factors outside CBN monetization. Firstly, corrupt public officials have access to stupendous CHEAP money which they then use to chase the few goods and services. Secondly, we are becoming less and less productive, and more of a consuming nation. When more funds are deployed to consumption rather than production, inflation is bound to go up. Sadly, the current inflation is not demand-pull, (since we are in a recession). It is rather Cost-push, caused primarily by the high exchange rate. Being an import-dependent country, a high exchange rate means that the cost of imported goods will go up. Their market prices will, thus, follow suite causing higher inflation. The problem in Nigeria is that we usually have lazy Fiscal authorities, who usually fail in their responsibilities thereby leaving the monetary authorities (CBN) to carry its cross. It is the job of fiscal authorities to articulate and drive a clear industrial plan. It is their job to provide infrastructure. It is their job to promote and facilitate agriculture, solid minerals, etc. However, what they do instead is to loot the treasury and flood the system with cheap money (especially during campaigns/elections), only to leave the inflation mess they have caused for the CBN to clean up. Most of the excess liquidity Boyo is concerned about is not caused by CBN, but rather corrupt politicians and public officers. 4 Likes 1 Share |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by jpphilips(m): 8:52am On Oct 09, 2016 |
Bevista: I agree with you completely on the exchange, I think Boyo has a point as regards the "Timing" of such exchange, why must it happen on a monthly basis? shouldn't the dollar cert kinda delay the exchange for a while such that goods will remain competitive with money supply? Dangote does not need $1b every month neither does our importers, there should be a priority list and a delay mechanism for non essential imports if the naira must gain value. 1 Like |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by Bevista: 9:26am On Oct 09, 2016 |
jpphilips:TBH, I do not fully understand how the dollar certificates concept works. Maybe you will do well to enlighten me in that regard. Of course, Dangote does not need such money every month. I only used him to represent importers in general. You advocate for a priority list and delay mechanism for non-essential items. This is precisely what the CBN did with those 41 items it banned from accessing official Reserves. Unfortunately, these items simply moved their FX demands from the CBN to the parallel market causing a complete distortion btw the official & parallel rates. There is no easy solution from the CBN. This mess was not caused by them. They are not responsible for a drop in oil price. They are not responsible for militant activities causing a drop in oil production. They are not responsible for Nigeria being a mono-economy. They are not responsible for lack of infrastructure. They are not responsible for lack of investments in other sectors of the economy. They are not responsible for Nigeria being an import-dependent nation. They are not responsible for treasury looting by public officials. These are the immediate and remote causes of high inflation and high exchange rate. Yet, we always try to blame them and demand solutions from them, simply because we cannot dare challenge our public officers (or maybe we are in cahoots with them in causing the mess). Politicians and public officers (by their actions & inactions) always put the CBN in an economic zugzwang, where any move the apex bank makes will lead to some form of negative consequences. |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by Captwahala(m): 9:53am On Oct 09, 2016 |
omohayek: This reminds me on the Nairaland of old, before data became cheap |
| Re: The Solution To Nigeria's Inflation By Henry Boyo by 989900: 10:33am On Oct 09, 2016 |
I explained Boyo's concept with some slight alteration, on some thread, some months back. |
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