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President Yar’Adua Stops Naira Revaluation!

Posted August 30, 2007 · Ejike Okpa II

The independence of a nation’s Central Bank is sought as a way to minimize undue interference on monetary policies, actions and initiatives taken by such institutions in furtherance of its functions. In today’s world, the line between the executive branch and its apex financial institution is becoming increasingly grey, and in developing countries, it is unclear. The timely intervention of Nigeria’s President Yar’Adua to stop what Nigeria’s Central Bank Governor Soludo proposed on revaluing and or denominating of the naira, is seen as a move to avert what could have created unintended and consequential move on Nigeria’s fragile economy.

The naira denomination/revaluation while an idea that may have some merit, is not suitable for Nigeria at this time. For the current naira exchange rate of about N125 to $1 to jump to N1.25 to $1.00, by simply ‘hacking off’ (two) zeros-zeros, is not a sound economic approach to revalue the naira and bring it to its 1986 rate or level.

The CBN’s nipped proposal would have meant for every deposit of say N100,000, the depositor in essence would have been notified that the amount is now N1,000. This would have unduly penalized depositors, created a rush to withdraw and redeposit once the policy comes into effect. For the unbanked and unbanking Nigerians that keep their money under the mattress or in the attic, they would have waited to see what direction to take. With the confusion, Nigerian banks would have been unable to handle the withdrawal requests which in turn, would create chaos and likely failure. When there is a rush to withdraw due to panic, banks fail because they are not able to meet its primary ‘deposit-on-demand’ policy/clause, and in such situation, the government has to step in to avert failure.

To improve the naira value, CBN should focus on certain key functions:

# Reduce the interest rate it charges other banks on loans and or money advanced to the banks. Such rate should float below 7%.
# Identify certain key sectors of Nigeria economy such as local manufacturing, land use/real estate development, capital equipment sales and leasing, whereby interest rate loans to these industries and sectors must never be more than 2% above prime rate CBN charge banks. Loans in these sectors must be at a minimum for 20 years at fixed rate with a 10-year call.
# Request via shared debt/equity placement on a graduated scale investment in major oil/gas exploration and development in Nigeria. By this policy, Nigeria must place at a minimum 50% investment in every oil/gas exploration and gradually increase that placement to whereby the amount of any foreign investment in such sector over time should not be more than 25%.
# Peg [lock-in] to a base year by equivalent subordination savings in Nigeria’s NDIC insured institution, never to be below the initial deposit. For instance, if a depositor in 2000 deposited N1m whose dollar equivalent is $12,000. In 2007, the depositor should be able to withdraw an amount that includes the value of the principal [at the base year value], plus all accrued interest. If the value of the savings keep eroding because at the time of withdrawal the value of the principal is not realized, the nation’s savings rate is diminished and discouraged.
# Impose heavy duty tax rate on leisure overseas travels to countries where Naira is not a currency of choice or hard to convert. Every quarter only allocate certain dollar available for leisure travel. The amount to be by auction. Nigerians quest and insatiable taste to go overseas at every opportunity impacts the naira due to pressure on the foreign reserve.
# Budgetary policies should require that federal government as well as the states have balanced budget with compulsory and or mandatory ‘Rainy Day Account’ set at a certain percentage [floating] of its annual budget. As it is, the government operates on a ‘deficit budgeting model’, a sort of ‘pay-as-you-go’ scenario, whereby most expenses are funded as a ‘Promise-to-Pay’. The uncontrolled manner whereby state governors with the state accountant generals’ raise short term debts to finance certain expenses must be restricted and severely monitored. With a ‘Rainy Day Account’, states should be able to pay for certain goods and services without having to raise short term debts.
# Eliminate advance payment and or mobilization fees for contracts. In the alternative, a contractor must meet the financial capability clause or go to a financial institution to finance the contract. If Nigerian financial institutions do not have confidence on government awarded contracts, then the economy will never grow and or develop. The government should not finance contracts. Contract financing is a test of capacity, capability and performance. In order words, if a contractor cannot raise a performance bond to assure the state or federal government that the contract will be delivered, then the contractor must be deemed incapable. The attendant benefit of this is that sitting government officials that unduly award themselves contracts would now have to prove they are capable of performance.
# Remove Advance Rent Payment. Long term obligations in the forms of level payments/annuities as represented by leases, mortgages and rents, create confidence on the present and future value of money. In Nigeria, the demand by landlords to collect up to 3-5 years in advance, create undue pressure on the tenant sector of the leasing industry. Instead of requesting such advance payment, the first and last month rents should be made as a deposits.

The stability of any currency is to ensure two main objectives: Create consumer confidence for local produced goods and services and help a nation sell its export bound goods and services at a rate to earn foreign reserve. If the former is not achieved, the latter is a hard to realize. The target should be for the naira to float along the world’s major currencies at levels and rates commensurate to Nigeria’s economy. When the monetary and fiscal policies that govern naira’s value, are done as reasonable measures to meet the need of the average Nigerian, naira will assume its rightful place among its competition with undue massaging and fixing.

Mechanically and manually fixing currency value to stabilize its value is uneconomic. Rather via carefully crafted, monitored and policed policies that constantly check the measures against sound economic policies, enables a currency to emerge as an indicator and legal tender for exchange of goods and services. Naira is on its way but not as proposed by Mr. Soludo.

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