A renowned economist and Managing Director, Cocoshen Nigeria Limited, Mr. Henry Boyo, says there is a need for the Central Bank of Nigeria to review its monetary policy framework to address the problems of high inflation, foreign exchange scarcity and high interest rate, among other challenges facing the country’s economy, in this interview with OYETUNJI ABIOYE and TOBI AWORINDE
Recently, you wrote about why Nigerians could become poorer with higher crude oil prices, and this has generated a lot of reactions across the country. Can you throw more light on this?
It is public perception that our current parlous economy is caused by the fact that we don’t earn enough dollars because the price of crude oil has gone down. That is the belief of everybody. But for that perception to be correct, it must be supported by evidence that if we have more dollars, we would not suffer as much. And that position also suggests that we have never been in the position where we had surplus or plenty (of) dollars; because from your assumption, our exchange rate has fallen and the economy has collapsed because we don’t have enough dollars. Reverse: Did your exchange rate become stronger? Did your economy prosper to accommodate higher levels of employment, higher productivity, higher export of finished products and things like that, when the price of crude oil was $150 per barrel and we were producing steadily over two million barrels a day and our reserves touched as high as $60bn and above, our highest ever? Because that is the victory you want by suggesting that if only crude oil prices were up and production was up, we would have more money and we would not suffer. But then, I say, take a look back four or five years ago. Didn’t we actually have this position, where crude oil touched $150 per barrel and reserves were so much that we didn’t even know what to do with it? The Central Bank of Nigeria was even allocating, not even selling dollars to every one of the 2,500 to 3,000 Bureau de Change operators, whether you liked it or not, you could take $500,000. Is that not madness? This is your money, this is our money. And the agency that is supposed to manage the quality of the money we earn is doing this type of thing.
So, it is necessary for you to relate history with the present. History does not suggest that your exchange rate will become stronger when the price of crude oil is higher or you earn more revenue from crude oil sales because you’ve had it in the past and the exchange rate remained at N150 or N160 per dollar or thereabout. And suddenly, the price of crude oil fell and every other thing fell. You must wonder, why did the situation not improve? Why did the naira not become 100/dollar, instead of staying at 155 to 160/dollar for three to four years, when we had excess dollar reserves? We even had an Excess Crude Account. Like you rightly observed in my article, why should it be that when crude oil price is $10 per barrel, the exchange rate is $2 per naira? Whereas if crude oil is now about $40 per barrel, that is about 20 times the price at which the naira was $2; as you can see, things are upside down and this is not magic I am telling you. This is not rocket science. These are things that are obvious. If you want the data to prove it, go and check your records. If I’m wrong, challenge me; come and tell me that the naira was in fact very good. The naira was a very strong currency when we had $60bn in our external reserves and God knows how much was in the Excess Crude Account. And we prepared to give to everybody to go and invest, including the $7bn that Professor Charles Soludo gave to 14 banks to go and learn how to do international business. Where is the money? What were the terms? Shouldn’t we be asking for that money, at a time that we have the economy in such a condition? Shouldn’t we even wonder or have investigative journalists find out whether the $7bn Soludo gave to the 14 banks actually disappeared with those banks that collapsed? Do you think if all these things I am saying are wrong, they wouldn’t have challenged me and said, “No! The money is here. This is the rate. This person and that person have paid back.” But why are people not courageous enough to take it up and find out the truth? It is your country, it is my country.
Inflation is currently at 18.55 per cent in the country. How important is the management of inflation for a country?
The primary job of the CBN is to manage the purchasing quality of the money you and I earn. Somebody may dismiss that and say, “That’s not so important. What is more important is fiscal policy, this or that policy.” But the truth is that all those features of a successful economy that you wish or expect would never be possible, if the management of money in your country is not standard. In other words, without money, there is no government. Without money, there is no reward system that makes sense. Money is everything. Even your fiscal plan will be denominated in money. Everything is money. Without money, there is no business, there is nothing. Money is the river that connects everything. So, you must recognise the significance of money. But something that is so innocuous, the importance is never easily recognised. When you find that to give birth, you pay money; to marry, you give money; to work or visit the hospital, it is money; if the management or the quality of the money that is in the system in your country is defective ab initio, every other thing would not function effectively. That is why, for example, the CBN 2007 Act which has been enacted in almost all successful economies, gives a lot of independence to the Central Bank of Nigeria to manage the value of money in such a way that it will not be counterproductive to other areas of economic activity in the country. But if, on the other hand, the management of that money from the source of supply is inappropriate, you will find that every other thing will also be inappropriate. By the same token, you can observe this reality on the most singular objective to stop inflation from going out of control. So, you now have a system where, in order for the money you earn to be useful and of value to you, in order to continue to encourage students to want to learn so that when they finish school, they can earn money, in order to create an environment where people don’t see other countries where they go for greener pastures, it is all because of the value of the money.
As an aside, I came back from England in 1975 after studying there for almost 10 years. I was happy to come back and rushed back home. People of my age all rushed back because the naira was two to $1. You could buy a new car for an amount you can’t even buy a tyre for today. So, you can see the importance of money. The brain drain was to our side (towards Nigeria). But the moment the money started getting useless — in other words, you have to work 10 times more to get the same thing, because of the fact that your money has been eroded and people say, ‘I’m working so hard, and I am only earning peanuts’ — the brain drain started. The point I am trying to make is, the first lesson of governance is the fear of inflation. And what is inflation? Inflation means that you’re not managing your money supply very well. An Inflation rate as high as 20 per cent means that in five years, the money they are paying you at that time will not buy you a single loaf of bread because inflation has been taking out 20 per cent each year. An example is pensioners who may be earning static salaries. So, if you’re not getting 20 per cent increase in salaries annually, it means that in five years’ time, the money is nothing.
So, you can understand how critical it is to make sure that inflation rate doesn’t go haywire. And that is only 20 per cent. Suppose it doesn’t stop there and it goes to 40 or 50 per cent, it means that if you go into a shop to buy your toothpaste, by the time you come out, the price would have changed. How can you grow your economy (like that)? That is why the first lesson in governance is fear of inflation. So, the CBN has a role to make sure that whatever the circumstances, it must keep inflation down because if it doesn’t keep it down, every other thing will go haywire. Even if you can have your fiscal plan in your budget at the beginning of the year and before the end of the year, 30 per cent of the purchasing value as a result of inflation has gone out, can you implement your budget? Can you bring relief to the people who are earning salaries? Obviously not, because they also find that they are having 80 per cent less purchasing value than what they started with. That is why people who don’t understand keep saying, ‘The CBN is bad, including our Minister of Finance. The CBN should bring down the interest rate.’ How can you bring down interest rate, when you can’t bring down inflation? So, I’ve explained, inflation on one hand erodes your income. When inflation is eroding your income, you can’t buy as much bread or sardine or fish as before? What happens to the people who are producing those things in your country? They reduce their production because of low demand, which is also a result of low purchasing power. And if the low purchasing power continues, only few people will be eating bread because they can afford it.
So, in order to ensure that things don’t get to that stage, you have to manage the supply of money in such a way that inflation is kept at best levels, as low as one or two per cent, as it happens in successful economies everywhere, which we all know. If we have inflation as your first priority, it means that you also would have your cost of funds tied to the rate of inflation. For example, you would not listen to anybody who says, “Lend me N100,000 in January, and on December 31, I will pay you 15 per cent interest on your money.” If you are not money wise or you didn’t go to secondary school, at least you would think that I would get 15 per cent on my N100,000. But if inflation is growing at 20 per cent, if a man gives you N100,000 plus your 15 per cent, you find that it can only buy what N90,000 used to buy before. By the same token, it is impossible for anybody to expect cost of funds to be below the rate of inflation because it doesn’t make sense. Why would anybody want to lend you money when he knows that at the end of the year, the money is going to be less rather than more? So, you can understand. It is only when people don’t understand that they will challenge the CBN and say, ‘Why is cost of funds so high?’ And these same people do not say, ‘Why is inflation so high?’
What are the implications of high inflation rate?
It is the instigator of high cost of funds. Inflation in the first place reduces consumer demand, which means less production and less productivity. It also means more unemployment because if you are not producing, you send people (employees) home. If inflation is high, cost of funds also will be high. So, it is inappropriate to ask the CBN to bring down the cost of funds without first attending to the issue of inflation. The higher the cost of funds, the more difficult it is for those industries who are still surviving despite the lower demand to also survive because it is impractical to expect them to make a profit when they produce their power, water and yet they can also take loans that they have to service at about 20 per cent. They cannot survive for very long. If they want to survive, they may not be able to do it effectively with goods that are coming from countries where interest rate and inflation are three to five per cent. So, you can see that inflation and cost of funds go together. That is why it is inappropriate to start talking of bringing down cost of funds without bringing down inflation.
So, the starting point is inflation, and as I said before, what is the major primary cause of inflation? Its too much money chasing too few goods. So, if you want to attack cost of funds, start with inflation. Reduce the too much money that is chasing too few goods. Reduce the need for the CBN to continuously mop up excess liquidity. Then you start asking the question, where did the excess liquidity come from in the first place? The CBN is paying as high as 15 to 18 per cent for money that it doesn’t need only to come back later to say, ‘I want to help the economy. I want to intervene. Agriculture, take N20bn.’ We are borrowing excess of N6tn annually. In 2016, they already planned ab initio that they were going to mop out N6tn that was supposed to be excess liquidity. How did it get there?
Vice-President Yemi Osinbajo was at the World Economic Forum in Davos, Switzerland recently. He said the Federal Government was working with the CBN to bridge the huge gap between the parallel market and official window exchange rates of the naira. Is this possible with the CBN’s current price mechanism that is skewed against the naira?
The issue of foreign exchange pricing is a case of the blind leading the blind. It is not the first time of us having these multiple exchange rates. This happened also during the Babangida era. It also happened when Obasanjo came into power. We had multiple exchange rates. But fortunately at that time, our mismanagement was covered by the huge amount of dollars that they were earning at that time. But the reality is that the mechanism for determining the exchange rate is not different from the mechanism that determines the price of any commodity — demand and supply. But then, the price would be adversely affected if the process of demand and supply is interfered with. It will not give you the right equilibrium price for a very simple reason. Let’s take a market example, but in this market example, instead of comparing tomatoes with onions, in terms of price, let us compare like with like. Let us use a currency market where all kinds of currency, including naira, dollars, pounds and euro. In that market, that is all they sell — currencies. We see a situation where you have a particular currency always in surplus in the market, and it is so embarrassing that the central bank of that country is compelled to be borrowing it and paying interest. Meanwhile, the real sector says, ‘Where is the money? We need money.’ The man (central bank governor) says, ‘Wait, I’ll give you money later. But let me borrow this one and pay 15 per cent, even though I’m not going to use it. But at least, it will reduce liquidity in the market, so that inflation would not take over.’ Remember, the fear of inflation. ‘I can’t allow all this money to be in the market. If I don’t mop up, the banks will be lending to every Tom, Dick and Harry and the price of commodities will go haywire. I can’t allow that. So, I need to borrow this money back to back the price mechanism.’ We are now in a market where there is continuous surplus of naira, meanwhile you see them introducing the other currencies into the same parallel market in rations. What do you think will be the state of the naira? Worse still, the agency that controls also happens to be the custodian-general of the naira. Yet that agency appears ignorant and auctions continuously as a tradition rations of dollars from time to time, in a market that is continuously suffocated with surplus naira. So whether the price of crude oil goes to $200 per barrel and your reserves go to $500bn, so long as there is that mechanism where surplus naira always appears in the currency market against rations of dollars, it is not the price of crude oil that will save you. At least, it didn’t save you when the price was $150 per barrel and you had $60bn in reserves, your best — ever reserves. Yet that was when they started listing Nigeria among the one of the world’s poorest nations. Not when the price of crude oil was less than $10 (per barrel) and we had reserves of less than $2bn or $3bn. If you earn more dollars from here till tomorrow, and the system continues to have excess liquidity juxtaposed in a market with rations of dollars and other currencies, which are unfortunately also being auctioned. If you want to auction your phone, presumably it is expected that you would want to sell it to the person who offers to pay the highest. When the custodian-general of the naira decides to be auctioning rations of dollars, for instance, ‘Today, I will only auction $200m’ and the naira in the market can buy $10bn and that continues. If the custodian-general is auctioning dollars in a market that is suffocated with naira, it would not be wise to expect the naira rate to ever improve because you will always have rations of the dollar and billions of naira chasing it. And of course, the billions of naira are in the system chasing inflation, now you have the billions of naira also in the system chasing the weaker naira exchange rate. You have a situation where the cost of excess liquidity and inflation cannot be controlled. Cost of funds cannot be controlled and the exchange rate also can never be brought to what should be. Therefore, the pursuit or control of excess liquidity should be the first step we should take if we want to bring inflation, cost of funds and the exchange rate of the naira under control.
What is the solution to this problem of excess liquidity?
Number one, change the mechanism. By changing the mechanism, you have to reduce the excess liquidity. Also, make the dollars open; distribute dollar certificates for dollar revenue. The intention of these two actions is to drive away excess liquidity, minimise liquidity surplus and when you do that, you will control the inflation. When you control the inflation, you will control the cost of funds and in turn people can buy more because the purchasing power is more because there is less inflation. Purchasing power is more, there is more consumer demand, production and employment is straightforward because you can’t produce without people.