By Adefolarin A. Olamilekan
As a matter of economic protectionism, the CBN must prioritize the best monetary policy to avoid mismanagement of the nation’s reserves, because, it is very strategic to the nation’s economic wellbeing.
The practice of administering monetary policies that are injuries to the economy should be discouraged.
The revelation about the CBN taking loans from international banks to defend the naira is not healthy for an economy like ours with loan debt standings at above $15billion.
It makes one ask, why our economy managers think borrowing could solve our naira depreciation when they know, in fact, that our economy has so much dependency on importation which needs to be reversed.
Just some weeks back in this same light of the borrowing spree, the NNPCL went cap in hand to take a $3billon loan from AFREXIM Bank with the goal of strengthening the naira through a crude oil swap repayment deals.
The same writer (myself) raised concerns over this kind of retrogressive and retarding action of NNPCL taking up a monetary action meant for the CBN, while a critical look into it avail us it is going to boomerang after its six months implementations.
For the CBN, it went into securities lending agreements with two American leading investment banks, Goldman Sachs and JP Morgan.
The deals in securities with these two banks afford CBN to receive cash in dollars to the sum of $500million from Goldman Sachs and $7billion from JP Morgan in exchange for using its securities as collateral for the loans.
Shocking, the moment the CBN got the money, it pumped it into the I&E Window foreign exchange market of “Willing Buyer and Willing Sellers” of Dollar for Naira or Naira for Dollar.
And, all this excess still could salvage Naira free fall of N780 to $1 at the I&E Window foreign exchange market and N900 at the parallel market and black market at N1000 to $1.
For us, we can’t tackle our currency problems with proclivities for loans all the time, as it is going to worsen the naira situation and disarticulate our economy.
Particularly, that of the CBN is painful because the recent loan is tied to our foreign reserve which is very critical to trading in goods and services importation, as a precursor to balance of trade deficit corrections.
Regrettably, the same CBN has been borrowing to defend the naira to the detriment of decreasing the nation’s foreign reserves.
For instance, figures indicate that between January and July 2021, the CBN spent $2.1bn propping up the local currency over the same period in 2019, and the amount spent defending the local currency was $1.43bn.
In the two months of December 2021 and January 2022, the bank spent a total of $3.36bn supporting the naira, as follows: $1.71bn and $1.65bn, for the two months respectively.
However, this amount spent defending the naira at each point always depends on the tempo of the market, without achieving any meaningful goal of making the naira stronger in value.
Meaning while having observed the recent development within the nation’s foreign exchange market, essentially the Forex Unification and CBN’s I&E Window policy, the Apex bank has not been able to achieve the set goals of eliminating multiple forex markets and mitigate currency speculation, round tripping and insider abuses that has put undue pressure on the naira.
With the recent JP Morgan’s report which we have carefully interrogated, it portends a great danger with the current status of the nation’s foreign reserves which JP Morgan puts at $3.7 billion as against the quoted CBN’s figure of $37.08 billion.
Although the Apex bank has faulted JP Morgan’s report as not being correct, that it lacked the understanding of the workings of the nation’s foreign reserves’ management, the import of the report is not ambiguous but a reminder of where we are coming from, since 1999 when the nation enjoyed a robust and steady increase of about $60 billion standing in 2008.”
Sadly, things turned downward for the nation’s foreign reserves when successive governments between 2009 and 2012 deflated it to $43.43billion, and again things became worse from 2012 to 2014 as it went downhill to $41.96 billion, and between 2015 to 2018, it dropped drastically to $35billion, and another drop to $29 billion occurred in 2020, but received a boost just after the post COVID-19 period to rise to $35 billion in 2021.
Interestingly, it gradually increased to $38 billion but dropped sharply to $15billion in 2022.
We acknowledge the fact that the CBN Act of 2007, section 24, specifically mandates the monetary authority to maintain external reserve, primarily as a formal backup for the domestic currency and safeguard the value of the naira; to provide a fallback in case of a fall in revenue, to provide buffer against external shock or unforeseen emergencies and natural disasters; and timely meeting-up of international payment obligations such as to finance international trade which gives rise to demand for liquid reserve that can readily be used to settle trade obligations, amongst others.
However, we need not remind the CBN that the same CBN Act 2007 eulogized the importance of external reserves to an economy as a measure to demonstrate the strength of the economy and that it expected the monetary authority to be mindful of the consequence of a decreased foreign reserves’ negative impact and risk foreign exchange rate on the economy.
What needs to be done differently?
As a matter of national priority, we call on President Bola Tinubu and the CBN to build our external reserve on prudential macroeconomic management that would create buffers against shock as well as invest in a critical sector of the economy that would strategically lead to an export-oriented economy.
As a stakeholder in the Nigerian economy and development project, we believe that the CBN must explore avenues to rectify this situation by taking appropriate measures to reduce external and internal vulnerabilities, and debt imbalances that could make worse the status of our reserve.
In addition, the magnitude of such imbalance debt either in the short term or long term could erode investors’ confidence in the economy, and at the same time defeat the CBN’s intervention in the foreign exchange market to stabilise the naira.
