In spite of the perceived stability in the foreign exchange market after months of serious crisis, renowned economist and Lagos-based industrialist, Henry Olujimi Boyo, in this interview with Onyedika Agbedo, insists that the strategy adopted by the Central Bank of Nigeria (CBN) in managing the market is wrong and unsustainable.
Boyo, who is the Managing Director of Cocosheen Nigeria Limited, however, acknowledges that the apex bank’s intervention in the market has led to a slight fall in the prices of goods but warns that the success is only temporary.
He also spoke on other topical issues in the economy. Excerpts:
The Central Bank of Nigeria (CBN) intervention in the foreign exchange market appears to be working as the naira has continuously recorded gains since the apex bank adopted its current strategy. Have they finally got it right?
I will ask you a question back in return. Has the central bank adopted a strategy that is different from the strategy that brought us to our knees? Do you think the CBN has adopted another strategy different from the same strategy of consolidating dollar reserves and then auctioning the dollars? Has there been a twist to that strategy? Is it the twist that has led to the naira becoming “stronger” at N360 to one dollar? There is no twist basically. So, why should the same strategy create a huge problem on one hand and after a little while down the road appear to be supporting the wish to make a stronger naira? A strategy cannot fail and win in the same context when nothing has changed.
The CBN still consolidates huge dollar reserves and then goes a step further to auction the dollars. I don’t recall mentioning during the last interview I had with you that you are deliberately increasing the price of anything you auction. In other words, if you want to auction any property and there are five or 10 people wanting to buy, you will not sell it to the person that says he will buy it for five kobo; you will probably sell it to the person who says he will buy it for one naira. So, the process of auction technically implies that you are expecting a higher price from anything you auction. So, when you then have a situation where the custodian of the naira is busy auctioning another currency against its own indigenous currency, do you expect the result to be different? No!
As long as the CBN continues the same strategy of consolidating huge sums of billions of dollars and taking rations of those dollars to auction in a money market that is already undeniably, admittedly by the CBN, suffocated with naira liquidity, the weaker exchange rate of the naira has already been foretold. By auctioning rations of the dollar, you are simply saying that everybody with naira should come and bid; and you are by that strategy weakening the exchange rate of the naira. This is an international thing and there is nothing secret about it. So, the exchange rate of the naira will continue to go down as long as the CBN continues with this strategy.
But how come the strategy appears to be working now because the naira was exchanging at almost N500 to one dollar, but it has been gaining strength since the CBN began to inject more dollars into the market?
You are asking me whether the naira has not done very well because the exchange rate has become N360 to the dollar instead of N500 and I make a simple analogy to answer your question. You deliberately built your house within the confines of a petrol tank farm that has leakages and inevitably there was a fire outbreak. Fifty per cent of your house was burnt in the inferno as a result of your negligence because you deliberately built your house there. And then you say it’s not too bad as the fire was going to consume 100 per cent of the house. But you forget that if you have to bring the house back to the level it were before, you have to go and find the 50 per cent value you lost from somewhere else. Basically, what I am trying to say is that the exchange rate, official or unofficial, has come down from N500 or thereabout to N360 but should that bring you much happiness? The answer is no. Your house is a composite whole so saying that you lost half of it but you still have half of it is not tenable because you are already much poorer.
So, you can’t celebrate because you are still worse off. If you don’t look at it from that perspective, you will say ‘oh, their strategy has worked’. But their strategy damaged and took away 50 per cent of your value. So long as that 50 per cent is out of your pocket, you will remain poorer than you were when you had the full value of your income; and so long as the purchasing power of that income you have has been halved, there is no way you can say it is better. Anyway, you can say it is better because you are not dead. But is that an argument?
The same strategy in the same environment cannot produce success and failure at the same time; it’s either success or failure. And it’s failure if 50 per cent of the real value of your income has gone away. You should only be celebrating if in the process of redressing the value of the naira, it comes back to exactly N165 that it was before it started to go down. That is when you can say the agency has done well. Without that, you are a naked man with 50 per cent of your dress gone and you are saying, ‘the man has tried; at least I’m not totally naked’.
How sustainable is the strategy in your view, as it has succeeded in enthroning some level of stability in the market?
We are still on the same level. That is why I told you that the same strategy that produced failure cannot produce success within the same metrics. So, it is for you to say it’s a failed strategy ab initio because it did not restore me back to status quo. That already is a failure.
The issue of whether or not it is sustainable answers itself in the sense that the process that would sustain the “so-called stability of the naira” is a process that depends on pouring dollars into the market; a market that still continues to auction the dollars against the naira. It is a confused strategy because it can only succeed to the extent that our source of foreign exchange will continue to be buoyant. The moment our source of foreign exchange, for example, dips below $50 and starts touching $38 or $40 as the case may be, we are definitely going to be worse off. It will be so because we did not anticipate that the problem of exchange rate is not that of dollar inflow into the market but the result of deliberate rationing of the dollar that you sell in a market that is already suffocated with naira. That is still the playing field.
So, whatever anybody says about the naira being stronger is what we call the peace in a graveyard because it is not sustainable; we don’t have control over the dollar inflow into our economy. We don’t determine the price of crude oil; we don’t determine even our own output because of the problem of militancy in the Niger Delta and other factors. So, if the only strategy you have to stabilise the naira is by pouring more dollars into the market, then you have not really achieved anything because the supply aspect of it is not within your control.
At the peak of the foreign exchange crisis, the economy witnessed spiralling inflation. Why are prices of commodities still high up even though the exchange rate has been crashing?
I don’t think you are being fair and honest on this particular occasion because it’s not true that prices have not come down. At the time that naira was going to N450/N500 to the dollar, all manufacturers and importers started using an exchange rate of N500/N450 in order to hedge their pockets. It was so because if they had to pay their suppliers abroad, they will have to pay in dollars and if they had to buy dollars at N450 or N500 as the case may be, there was no way they would have been able to pay an invoice of $100,000 for which they needed N40 million or thereabout at N200 to one dollar without adjusting their prices upwards, when they required N80 or N100 million for the same bill.
So, if you are an importer or a manufacturer, immediately you see this type of thing happening, you adjust your prices. Now that it is becoming clear that the exchange rate has temporarily come to N360, if they want to sell in the market, they will also have to adjust their prices accordingly.
If not, they will find that the people who are bold enough to adjust their prices based on the exchange rate of N360, even though they know that the N360 will not be sustainable, will take all the market. Their margins may be small but they will take the market away from you and you are still holding your goods.
I’m a manufacturer so I know exactly what I’m talking about. Immediately the exchange rate went up, we also adjusted the prices of our goods upwards so we can be able to sustain our level of income and pay our suppliers, but now that it has come down to N360, if you decide to keep your prices at what they were before now, you will not sell because there are people who are anxious to pay their suppliers and ensure that they don’t lose their credit lines. So, some manufacturers are prepared to sell at even exactly their cost price while you are still waiting to make your wide margin. Until those people finish selling, you will not sell and maybe you also borrowed the money you used to produce. That is how it works.
But the rate at which prices are coming down is not appreciable so to speak?
You can put it this way. At least 33 per cent has come off the price of the naira to the dollar from N450 or thereabout; that’s why it’s now N360. Most manufacturers and suppliers will be costing their products at may be N360/N380 to still hedge themselves. That is what every businessman would do otherwise you are out of the game. So, it is not as if prices will crash overnight. Manufacturers and suppliers will still be trying as much as possible to make sure that they get to that equilibrium price where they can still be in the market; not so much to make a profit but to sustain their businesses until the time for profit comes much later down the line.
Yes, prices have come down. I know, for example that I have had to reduce the prices of some of the things I sell here in the last six weeks or so. But I cannot reduce it to the level it were when the exchange rate was N200 or so to the dollar because I still cannot have access to cheaper foreign exchange and I will not be able to go back to that level where I could buy dollar for N165 to the dollar so long as the process whereby the CBN captures the dollar earnings of the country and substitutes naira as allocations to beneficiaries and then goes a step further to auction rations of the same dollars. That structure as a strategy is basically defective; if any success comes out if it, the success can only be temporary. At the end of the day, it will be counter-productive to continue to sustain that kind of strategy as a market practice because it is a strategy that is meant to fail. So, if you want to change the history of exchange rate in Nigeria, you have to change the strategy.
It should bother Nigerians that over the years, we have been made to believe that when we earn more dollars particularly from crude oil, our lives would be better. In truth, when you go and interrogate the trend historically, you will find that it has never been so. Indeed, the higher the price of crude oil, the more the dollars we earn but incidentally and inexplicably, in spite of the huge income, you find that cost of funds remain high, unemployment continue to rise, consumer demand continue to fall even as almost all industries remain challenged. It has been so because it is not the quantum of reserves you earn that is the issue but how those reserves are infused into the economic framework of the country. And the process of first capturing the dollar earnings and then creating new naira values for you to spend means that the more dollars you earn, the more your excess liquidity problem. With that kind of relationship, you will recognise that the future of the economy is doomed.
Away from the issue of exchange rate, how would you look at the plan by the Federal Government to restore the annual budget back to the January-December timetable from next year. Given that this year’s budget effectively took off in June, won’t the plan create the problem of excess liquidity in the system if faithfully implemented?
You assume that the money is there to implement the budget in full but the money is not there. First, there is a huge deficit which has been accommodated in the N7.3 trillion 2017 budget. But I think a lot of Nigerians are a little bit distracted in the sense that they seem to believe in the capacity of the budget to drive our economy. But unfortunately, it is a false belief; it is not a tenable belief. If you want to check, go back in history and tell me in the last 20 years which budget you think actually transformed the economy of this country in any way. You will not be able to say any of the budgets did very well. And it should not be surprising even though the generality of people still have this fake hope on the budget. Why do I say so? We all recognise that the issue of power is paramount for development. And it has been variously speculated that to get the power sector right will still cost us $100 billion even though we have spent close to $30 billion or more in the last 10 years starting from the Obasanjo administration. So, our entire budget in 2017 is N7.3 trillion, which is only about $22 billion. So, if we spend the whole of the 2017 budget on power alone, we still have not met our power requirements. Not only that, we still have not taken care of our healthcare, education, transportation, water and our other needs because power has taken up all the allocations. You find that if you depend on a budget of N7.3 trillion or $22 billion to change your life, you make a fool of yourself. Out of that $22 billion, $14 billion is recurrent expenditure. So, it’s really going to add very little into your life.
And what is even expected to add something to your life is possibly the N2 trillion plus capital expenditure. When you convert that, you are talking about just $5 billion, meanwhile power alone needs about $100 billion. Why then should you hope that the budget that contains $5 billion for active capital use will transform your life especially when you know that 50 per cent of that $5 billion is going to be stolen anyhow? So, isn’t it stupid for any Nigerian to think the budget will change his/her life? It is a story that has been told severally over the years and people believed it and every year they get disappointed but the next year they believe it again. The reality is that at the end of the day, the private sector is where to look forward to, to drive the economy because they have infinitely elastic credit.
Are you saying that returning the budget to the January – December timetable will make no difference?
It makes no difference because the value of what you are even contesting about is so small compared to what your needs are.
What about this year’s budget. If the government pumps the capital expenditure into the economy in a space of six months, how will that impact on the economy?
The money you are saying they would spend is just $2 billion. Is that what you are so concerned that it would ginger the economy and everything like that? No! Don’t waste your time on that because it’s too small. Whether they spend $2 billion in one month, six months or whatever, the impact on the economy will be minimal because your demands or requirements are much higher.
And you think that spending it in six months won’t result in excess money in the system?
That is not what leads to excess money in circulation. It is too small to be an issue; the $2 billion capital expenditure is too small to be an issue for a very simple reason. Apart from the fact that the amount is a very small component of the total amount required to galvanise the economy, what creates the excess liquidity is not the $2 billion net of capital spending; it is when CBN pumps money into the hands of the banks by substituting naira allocations for dollar revenue.
Let me give you a good example – if the Cash Reserve Requirement (CRR) of banks is 10 per cent, which means that if a bank has N1, the bank can lend out N9 in addition to the N1 that it physically has; the CRR is 10 per cent, so one per cent of 10 per cent is one. And you should ask yourself, where will the bank go to make N9 to make up N10 and lend to somebody. The answer is very simple; that is why there is a Monetary Policy Rate (MPR). The bank has the right to go to the CBN and say, ‘look, my cash position is still like this; it is not critical. I have one per cent as you say we should do but I need N9 to make up my 10 per cent’. So, the CBN will lend the bank nine naira to make 10 per cent. When you have only $1 billion that you are sharing at the end of the month, which is about N360 billion; now imagine that you have that $360 billion in the hands of the bank and the CRR is still 10 per cent, what do you think will happen? It means that the banks have the opportunity to go and take from the CBN the difference between N360 billion and N3.6 trillion because the N360 billion they have is one per cent, so another nine per cent is still required. So, they have the ability to go back to the CBN and borrow N3 trillion. That is where the excess liquidity is coming from.
Finally, the Federal Government recently commenced the exportation of yam. While some have expressed concerns that it could lead to scarcity of the commodity and subsequently hunger in the country, others fear that the exported unprocessed commodity could be processed and shipped back to us to consume at an exorbitant price. How do look at the initiative?
I have no quarrels with the development especially against the recent statement by the Minister of Agriculture, Audu Ogbeh, that we actually produce a surplus of things like yam but we don’t have good storage facilities to preserve them. So, if what could have been wasted is now being exported, I think it’s a double plus for us.
In any case, in the United Kingdom and elsewhere where you have African population, there are countries that export staple African foods to the place. I know for example that Ghana at a stage was exporting just pineapples. I was very impressed with the way I saw the yams packed in cartons ready for export; that’s how the Ghanaians used to pack their pineapples. The yam that we turn our nose up and say it’s too expensive at N500 for a tuber, if you get it there you will buy it for five pounds. So, it will also bring us some foreign exchange and I don’t see anything wrong with it at all. In fact, I had always been disturbed whenever I travelled abroad and saw products like garri exported from some other African countries and there was none from our country. So, I think it’s a good development.