By Jerry Uwah
The monetary policy committee (MPC) of the Central Bank of Nigeria (CBN) is worried. The MPC rose from its quarterly meeting last week lamenting that Nigeria’s foreign reserves was being depleted at an alarming rate.
The concern of the MPC is well placed because a nation’s foreign reserves is one of the key economic indices that informs the flow of foreign investment into an economy. It determines the possibility of investors repatriating the returns on investment.
The CBN had vowed to build the nation’s reserves to $50 billion by the end of 2013. It missed the target by $7.15 billion. The year ended with foreign reserves standing at $42.85 billion.
Those who thought the CBN was a bad student of foreign reserves management in 2013 might shudder at the trend of events in 2014. As at the end of the MPC meeting in Abuja last week the reserves had plummeted to $38.3 billion, and there are fears that the days ahead may be more treacherous and demanding for the nation’s lean reserves.
There are both external and domestic reasons for the entangling pessimism. America’s economy is waxing stronger and the Federal Reserves Board might tighten the noose on liquidity.
Besides, economic prospects in emerging markets are increasingly diminutive. Both developments portend drastic downturn in forex inflow to Nigeria.
The domestic front is beclouded by even more catastrophic fiscal, monetary and security challenges. Politicians are warming up for the elections in 2015. The nation’s monetary floodgates would be opened for vote-catching spending sprees that would worsen the excess liquidity in the system and mount unbearable pressure on the naira. While the banking system is battling liquidity squeeze, a culture that encourages the stashing away of huge sums in all sorts of unholy private vaults has unleashed an uncanny speculative attack on the naira.
That speculative attack on the naira is largely responsible for the depletion of the nation’s reserves. People are buying up dollars because of fears that the CBN may soon run out of dollars to defend the naira.
The speculative attack on the naira is fueled by the fiscal rascality of the federal government. The unabated corruption in the system has seen the doubling of the cost of government projects with the excess funds slipping into the pockets of well-wired politicians and high ranking civil servants.
The slush funds cannot be kept in Nigeria for obvious reasons. The looters convert them into dollars and export to Dubai for investment in
that country’s booming property market. Dubai has replaced Switzerland as haven for stolen funds.
Dubai is now the new home of third world economy looters. Most of Nigeria’s stolen money is used to develop the skyscrapers crowding the Arab nation’s skylines.
The danger ahead is that some of the debilitating domestic factors listed by the MPC might worsen the speculative attacks on the naira in the days ahead.
Everyone is worried about the deteriorating security situation in the country. But investors have a way of dipping hands into fire to bring out money. The Irish Republican Army (IRA) terrorized Britain for more than 25 years. People were still investing in Britain because they knew there was money to be made there. There is a lot of money to be made in Nigeria despite the worsening security challenges. Investors would still come.
Therefore, the most difficult challenge for the managers of the nation’s foreign reserves would definitely not come from the terrorists controlling a huge swathe of North-eastern Nigeria. The looters of the nation’s treasury and vote-catching spendthrift would worsen the fiscal buffer depletion and spin the exchange rate of the naira out of control.
If the flow of slush funds from public coffers continues uninhibited, the pressure on the naira would get to a point where the CBN would have no option than to allow the naira find its level. That is what happened during the financial meltdown of 2008. We may actually be looking at an official exchange rate of N170 to the dollar. The coveted single digit inflation rate celebrated by the apex bank may become a mirage.
During the ill-fated media chat at the beginning of the month, President Goodluck Jonathan embarked on a gratuitous hair-splitting over the difference between corruption and stealing. He ended up differentiating between six and half of a dozen. Just as the World Bank could not convince him that corruption is at the root of Nigeria’s shameful primitivism, the president’s audience was as apathetic about his lame excuses.
With the CBN’s merciless grip on liquidity pushing the cost of funds in the money market through the roof and conjuring financial asphyxiation in the capital market, further tightening of monetary controls could fizzle out the nation’s ambitious economic growth.
Someone has to convince President Jonathan that the depletion of the foreign reserves is triggered by speculative attacks on the naira engendered by slush funds from government’s fiscal rascality.
No one wants to be tutored on the difference between stealing and corruption. The CBN would not need to deplete the reserves in defence of the naira if money budgeted by government is spent judiciously on the rehabilitation of decaying infrastructure.