EXCLUSIVE INTERVIEW: [Video] The trouble with Nigeria’s economy, by Henry Boyo

Take One:

Inflation is a ravager, destroyer, an enemy of government and the people. If Inflation, which is undeniably instigated by the fact that there is too much money in the system, is left unrestrained, you find out that the social values will also collapse.

Take Two:

To make sure that they can control this too much money that drives inflation, what the CBN does is to ensure that the people cannot get access to the money. So they will borrow the excess money out of the system and they tell you that they are mopping up excess liquidity.

Take Three:

They offer enticing interest rates to the banks to make them easily release the money. However, you should note that the interest rate they offer must be higher than the current inflation rate. Consequently, if inflation is pegged at 20%, and the CBN wishes to mop up as usual, it means the CBN must offer interest rates above 20% before the banks can willingly part with their monies.

Take Four:

The CBN prints Naira equivalent of the foreign reserves. So you find out that the more Dollar we earn, the more the Naira liquidity that the CBN pumps into the system, the more naira that the CBN pumps into the system, the greater the need to mop up to stop inflation and in the process of trying to mop up, inflation must be below the cost of funds and the cost of funds becomes higher in such a way that industries cannot afford to borrow with the exorbitant interest rates that banks charge.

Take Five:

The issue is not earning more dollars or the monetary payment structure but the dynamics in the foreign exchange market which entails the CBN releasing rations of dollars from its reserves after having inundated the system with excess naira and then auctioning the rations against the excess Naira.

Take Six

So you can see that the economy is destroyed ab initiao from the foundation and any other thing that you use to paint it by saying we launch this, diversify the economy, etc. won’t help so long as the tripod (inflation, interest rate and exchange rate) that is supposed to successfully carry the economy is fractured from the beginning. Have you seen any successful economy where the cost of funds in the real sector is 20 something %? Have you seen any economy where they even celebrate inflation at 6%? The answer is NO!

Take Seven:

As we speak, the CBN has about $30-31billion in its reserves and we are told that the presidency wants a loan approval of 500 million Euros and they tell you frankly not to look in the way of the CBN reserve but to start making immediate borrowing plans from that same bank the CBN is also keeping it reserves. So can you see how much we are being taken for a ride in this country?

It was indeed a sermon “in the valley of cocosheen” when TheNewsGuru.com spoke with the extra ordinary financial expert, Henry Boyo, who in almost two decades has been crusading for a stronger Naira and economy, not only x-rayed the situation but also proffered solutions.

READ ON…

Management of money supply, consequences

The economy has always been in a reverse gear. However, before now, just like a car, the speed of acceleration was slow enough to make it possible for you to control the backward trajectory of the car. But now the speed has accelerated and it’s becoming much more difficult to keep the car in reverse gear in any meaningful movement.

We now have a situation where there is total confusion. The situation can be compared to giving your car to a roadside mechanic who keeps extorting money from you without detecting the actual fault of the car. In other words if you are applying a defective petrol, even with a new engine, the car will not move.

Money is so ubiquitous that people take it for granted. Money is a most significant thing that one can identify as a binder of community, society and nations.

However, people really don’t understand the significance of management of money supply. And this should be the priority of any government.

The popular reaction of people in power is since we control the money supply, why should we have a problem? We don’t have to depend on any country for help, anytime there is little or no money in circulation, we simply print some more money. However, that is dangerous because the moment you fall into that trap, you will now recognize why I said the proper management of money supply leads to a successful economy because once you start printing money in excess of productivity, what you get in return is called inflation.

And inflation is a ravager, destroyer, an enemy of government and the people. If Inflation, which is undeniably instigated by the fact that there is too much money in the system, is left unrestrained, you find out that the social values will also collapse.

And the reason is not farfetched. Any environment, community or nation where there is so much money in supply that inflation is triggered beyond restraint and we are talking about say 20, 30 or 40%, but to make the case clearer much more quickly, let’s assume that inflation as a result of mismanagement of money supply extends as far as 50%. See in this case, there is no economic plan or budget that you can device that can avert the imminent danger.

In fact, any hope that your budget will rescue you is a foolish hope.

For example, we are told that for power to work effectively in Nigeria, we need close to $100 billion and possibly more. But what we are considering will kick/jump start the economy is 7trilion naira which is equivalent to $23 billion for the whole economy for one year whereas, all $100 billion is actually required to fix just power. In other words, your expectation that any physical intervention that is related to a small budget of 7 trillion naira is ab initio likely to be inadequate to drive any meaningful revival of the economy because for power alone you need $100 billion and your budget for a year is only $23 billion. Out of this $23 billion, already 75-80% will go into consumption, so it has little or no timely intervention apart from providing consumer demands or something like that.

For the balance 20%, maybe 50% of it is stolen. So isn’t your hope and constant clamour for the budget to pass frittered? Even if they pass the budget early enough despite that they pass it in April or May as it’s been consistent for close to 10/12 years now and then at the end of the year, because the time is so limited, the small capital budget that is usually less than 20% they cannot spend it.

From my experience in those days, what the ministries used to do at the end of every year is whether they have need for anything or not, so long as there is money in the account, they will quickly spend it so that they can get a new allocation for the coming year.

Inflation therefore is the very delicate baby of any administration or government. If it is not well handled, it can ruin the nation. There’s no diversification, intervention, policies or budget that can stop its ravaging effect on the economy. So you have to be afraid of letting inflation go out of control.

In responsive and successful economies all over the world, the rate of inflation will be adjudged to have gone haywire when its above 3 or 4 per cent for the same reason because it is believed that if inflation is trending at 20%, for example, if you are going to be retired in 5 years and you are depending on your pension, you are gone because within these 5years if inflation grows again by 3%, then what are you going to fall back on? Because by then what you would be paid as pension will be peanuts and it might be so bad that you have to get something else doing even in retirement to supplement the poor pay. So in this scenario if someone brings an illegal deal for to, you will gladly accept it, thereby causing a gradual breakdown of our social values and the circle goes on that way.

As a nation we don’t produce as much as we should, that is even if we produce at all, and ability to import what you need is constrained, so how come we still find ourselves in inflation?

As earlier noted, Inflation is undeniably caused by excessive money in circulation. So the question is where is the money if it’s in excess? If your purchasing power is buying less and less, you can’t talk of consumer input. If you say the country is experiencing inflation despite the fact that we don’t produce as much as we should, this of course is the side effect of inflation. Inflation is too much money purchasing very few goods.

You can ask, why do we say there is too much money when we can’t see it, unemployment rate is high and the entire country is in a near comatose? More so, how can something that is so surplus become overtly expensive?

The reason is because the CBN that has the mandate to ensure that inflation is kept at a single digit (2/3 percent at the maximum) is busy restraining the amount of too much money that is in the system, which is why the naira remains unnecessarily expensive.

The CBN recognizes that there is too much money in the system. It is also aware of the fact that if the two much money is allowed to remain in circulation, the inflation rate won’t stop at 20%, it might climb higher to 30/40%. Especially when instead of the two much money reducing in size, every month the two much money is expanding in scope. Because every month when you make additional allocations and also do special intervention to some sectors, you are obviously bloating up the inflation rate because again you are pumping more money in circulation when in the first place the primary cause of inflation is too much money in circulation.

However, to make sure that they can control this too much money that drives inflation, what the CBN does is to ensure that the people cannot get access to the money. So they will borrow the excess money out of the system and they tell you that they are mopping up excess liquidity.

In order to mop up excess liquidity, they have to offer the banks an incentive to make the banks want to part with their monies in the custody of the central bank.

To achieve this, the instrument they use is that of interest rate. What they tell the bank is we are not particular about where the excess money in your dormain comes from, but the point is we have to control it to ensure inflation rate does not go much higher. So they offer the banks treasury bills to part with the excess money.

In addition they offer enticing interest rates to the banks to make them easily release the money. However, you should note that the interest rate they offer must be higher than the current inflation rate. Consequently, if inflation is pegged at 20%, and the CBN wishes to mop up as usual, it means the CBN must offer interest rates above 20% before the banks can willingly part with their monies.

So you can deduce from the foregoing that the CBN’s inability to tame inflation also drives your cost of funds

So you have a situation where inflation makes you poorer because your purchasing power is weak. Unfortunately that same inflation now drives cost of funds in such a manner that industries that are supposed to employ people now start finding out that if they too go to the banks to borrow they find out that the interest rate is above 20%. Now you will be quick to discover that as the cost of funds and inflation rise, exchange rate also rises.

The frame work for determining the exchange rate is not liberal free market framework.

The third factor which is the exchange rate also falls a victim of the excess liquidity that we are talking about. You have a framework where the CBN accumulates over $16billon foreign reserves not by doing business or any transaction for that matter, but by proceeds that accrue in dollar income from crude oil sale.

However, in return, the CBN prints Naira equivalent of the foreign reserves. So you find out that the more Dollar we earn, the more the Naira liquidity that the CBN pumps into the system, the more naira that the CBN pumps into the system, the greater the need to mop up to stop inflation and in the process of trying to mop up, inflation must be below the cost of funds and the cost of funds becomes higher in such a way that industries cannot afford to borrow with the exorbitant interest rates that banks charge.

And of course the consequential effect of this is that the industries will be left dilapidated because none of them will want to risk taking loans from the banks at 25% interest rate…

But worst still the market dynamics for the CBN to release the dollar that was initially captured back to the market, you now find out that the CBN that is supposed to be the custodian, protector and defender of the naira suddenly becomes the greatest enemy of the naira.

How? I’ll explain. I as the CBN have $60billion worth of reserves which I consolidated by pouring an equivalent amount of naira into the system. I’ve put more than enough naira liquidity into the system to balance up for the $60billion in my custody as the CBN. If I offer the whole $60billion at the same time and the whole naira that I initially pumped out, we might end up having an equilibrium rate and the equilibrium rate might be distorted if I don’t offer the whole $60billion. The whole liquidity surplus caused by the $60billion substitution is already there then I bring $4billion out of the $60billion dollars against all the naira earlier pumped out. Now you can imagine the supposed custodian of the naira now bringing a little portion of the dollars to auction expensively against the Naira. Isn’t that a death knell in itself to the Naira?

So if anybody tells you that our economy is dying because we are not earning enough dollars, then you know that is far from the truth. But the question you should ask such people is when we had $60billion foreign reserves; did the exchange rate improve or increase?

In other words if we have the price of crude oil going up to $200 per barrel today and you have increasing dollar reserves and we still have a system where the CBN keeps the dollar and prints its naira equivalent, then we’ll continue having same or even greater problems.

What should we do, how do we solve it?

As I have shown you, the problem of the structure imbalance that made it impossible for us to grow emanates from this tripod of inflation, interest rate and exchange rate which is mismanaged. That was why I first of all hammered on the importance of money and money supply management.

Money supply management targeted at keeping inflation at a reasonable rate of 2-3%. So if I (as the CBN) know that this format/matrix is within the system, then the solution is simple.

How do we then handle the management of money supply? First of all I have to realize that this excess liquidity is initiated by the release of excess naira into the system whenever we earn dollars. And I’ve also been foolish enough to call on the banks to say I put all this naira in your hands and I am also going to make it easy for you to lend out this money. So we can fix cash reserve ratio for the banks at 20% or thereabout.

That means that the money that you put in their hands through the substitution of naira for the dollars, let’s assume is $500billion (usually this is too small but let’s consider it for the sake of 5months) so the banks get 100bn each month. So you tell the banks, your cash reserve ratio is 20%. So it means that the 100bn can serve as the 20% and the banks can then create another 80% of liquidity on top.

However, when you say your cash reserve ratio is 20% for example, it means that if a bank has N20, it can lend out 5 times back, in this case amounting to a N100. It means that the bank is required to keep at least 20% of its obligation in cash.

So if the 500billion given to them is their 20%, it means they can still create another five times amount of that. So not only have you initiated the excess liquidity surplus but you also manipulated the cash reserve requirement in a manner that will still make it possible for them to expand money supply.

So you can ask, where will they get N80 more when all they are given is N20? It’s simple, what they do is borrow from the CBN, and that is why the CBN has what is called Monetary Policy Rate (MPR). And they have liberty to do so as long as they are within the limit of the 80% borrowing window. And the higher the MPR, the higher the interest rates charged by the banks. For example if a bank has to borrow at the current 14% policy rate, in order to meet any shortfall in their cash requirement, no bank will lend at less than 20%.

In other words, if your MPR is lower, the banks also will have to fix a lower interest rate. If the MPR for example is 3-4% in the UK and elsewhere, the policy rate is 1% of the loan, so the banks can lend at 3-4%. But here that the MPR is 14%, then it means there is no way the banks won’t lend at above 20% and tell me what sensible businessman will go borrow at that exorbitant rate unless he wants to do trading?

So you can see that the economy is destroyed ab initiao from the foundation and any other thing that you use to paint it by saying we launch this, diversify the economy, etc. won’t help so long as the tripod (inflation, interest rate and exchange rate) that is supposed to successfully carry the economy is fractured from the beginning. Have you seen any successful economy where the cost of funds in the real sector is 20 something %? Have u seen any economy where they even celebrate inflation at 6%? The answer is NO!

Have you seen any country where the amount of foreign exchange they earn does not reflect a healthy reserve balance? So it pains me that we are ‘open eyedly’ walking into hell. I’m not fabricating anything, the fact and figures are there for anyone to verify. So when all these so called experts come and dance around with fine English and present stale, unrealistic agenda, I just laugh because its either they themselves don’t know what they are saying or they are just deliberately trying to deceive the unsuspecting public because the facts are clear!

I’m not fabricating anything. The CBN has never denied that they substitute Naira for Dollar revenue. It also has never denied that they do business that earn them over $60billion reserves or whatever, it also has never denied that it mops up excess liquidity because it wants to prevent inflation, they have also never denied auctioning rations of dollars in a market that they have already suffocated with naira.

To be continued….