Africare- NewPublications <[EMAIL PROTECTED]> wrote: Date: Sun, 26 Aug 2007
15:39:48 -0700 (PDT)
From: Africare- NewPublications <[EMAIL PROTECTED]>
Subject: Fwd: New policy may not strengthen the naira - former CBN director
Date: Sun, 26 Aug 2007 16:16:39 -0400
Subject: New policy may not strengthen the naira - former CBN director
THE NATION
'New policy may not strengthen the naira - former CBN
director 26/8/2007
The new policy talked about by the governor of Central Bank is only new
now, it has not been a new thing. I remember that at the Nigerian Economic
Society (NES) meeting at Shiroro Hotel in Minna, Niger State in 1990, my group,
worked on how to solve this problem of naira nose diving. An idea came up: why
can't we not have another naira, as we did in 1984, a new naira which will
actually exchange for the old naira. At that particular time, the rate of a
dollar to naira was N8.0378. That was what naira was exchanging per dollar.
So, the new naira note will now be exchanged for the old naira. So, that was
the idea. But you see another discussion that came up is this: is it not better
to look at what caused the nose diving of the currency?
Perhaps, a better answer could be found there. And then we discovered that it
is due to fiscal profligacy of the government; government spending too much
more than what it can generate in form of revenue. You see, the simple quantity
theory of money in economics actually states that, when you are pumping out
more money than the level of domestic transaction, the price will go up, the
exchange rate would fall. And that's exactly what happened. You see, most of
the time, when the legitimacy of government is doubted, it may never be able to
go ahead to tax people, because people will not pay tax. So, what they
(government) only does is to use another approach of taxation to get money from
the people.
How?
They pump more money into the system. And when they pump money into the
system, with the same level of goods and transaction remaining constant, then
you have actually deflated the value of money people are holding. If I'm having
N100 with me before and I can buy 100 goods but when more money is available in
the system say about N200 with the goods level remaining at 100, that means the
money will be able to buy 100 goods. at the rate of N100; I will now only be
able to buy just 50 as against the 100 at the initial stage. So, you have taxed
me by reducing the value of the money I'm holding by half as a result of
government pumping money into the system.
Most of the time, government uses the instrumentality of going to the Central
Bank to borrow money from the public, via Treasury Bill. When they buy or they
wish to buy from the public, at a specified rate and the public is not willing
to buy the government instrument, that's the Treasury Bills, then the Federal
Government mandates the Central Bank to buy same. So, when the Central Bank
buys for the Federal Government, what do they do? They credit the account of
the Federal Government and at the end of three months, when the Treasury Bills
mature, the Federal Government will pay back to Central Bank that bought for
it. The Central Bank will collect the money and pay the public that bought
Treasury Bills including interest. Now the interest on treasury bills at times
can be as high as a very huge money and at the end of the year, that interest,
which is now called operating surplus, will now go to the account of the
Federal Government. So, government now instructing the
Central Bank to sell Treasury Bills for them so that they can get money from
the public, it is the same government that is now having access to the interest
that is being collected. That is cheap money.
In economics, we call that money creation. There have been a lot of money
creation into the system over a long time through the use of Treasury Bills.
Now if Solodu goes ahead to implement this programme, what is the evidence that
the government will caution itself and it will not spend too much again as to
be able to lead to another depression that may lead to the devaluation of the
naira, there is no evidence. You are familiar with the Nigerian environment.
Look at the number of past state governors that have problems now, spending
anyhow, people carrying lots of money outside the country. So the spending may
likely continue. So that method (the new policy regime) may not be able to
solve the problem of naira nose diving. That may not be the solution. So that
is my fear. Unless you caution the government that is actually the originator,
the formulator and then the implementor of this policy, in terms of the value
of the money going down, we will never be able to use
that method which Soludo is talking about to be able to get an appropriate and
good value of naira.
Is this policy driven by what other countries have done?
That some other countries are doing some of these things, is not an
indication that you can do it. I'm privileged to know this because of the
ECOWAS assignment ont my hand. I have been able to travel across the West
Coast. I just came back from Bamako, a country inside the desert. There is no
lightout, water is flowing, their roads are okay. The productive sector of the
economy is working whereas the productive sector of the economy over here is
not working. We only rely on money that is coming from oil. What about if the
oil money drops again? That is what we are talking. Some of these countries,
they don't witness the kind of things we witness over here, it's unfortunate. I
don't even know where the impression that we are the first in Africa came from,
because what makes somebody to be first is the kind of welfare the citizens
enjoy, not the Gross Domestic Product (GDP) that only goes to a few hands. The
economy is rich alright, but the money goes to a few hands. If you
look at the World Bank indicator, you discover that the per capital income of
Nigeria is far lower than those of these neighbouring countries we are talking
of. I have been to Ghana for more than three or four times now, on this my
ECOWAS assignment and I discovered that there is no lightout in Ghana, their
economy is working far better than that of Nigeria. So they may be able to
actually implement some of these policies. Over here, it's one day of light,
one day of darkness and you want to implement this kind of a bold programme?
What should the Federal Government do?
The government needs to look at some of those pre-conditions that will allow
certain policies to work rather than actually bringing in the policy because
other people are doing it.
They cannot be wiser than God that said that light is the first thing before
any production. Other countries have light and therefore they produce, even at
night. Over here, even in the day time, you don't have light, everybody goes to
the petrol station to fuel their cars and equally buy same into the jerrycans
to power their generators at home and offices because of the erratic power
supply. This is terrible at this age. Our independence has not actually allowed
us to be independent of all the rubbish after all. even in the earlier years of
independence, we enjoyed light more than this, then where are we going.
How feasible is the policy?
You don't solve a problem by symptoms and signs, you solve it by addressing
the fundamental cause. That somebody is having headache does not mean that the
problem is headache, there may be a very great disease that headache is part
of. I'm not a doctor, but I know that there are signs and symptoms, of certain
diseases.
But if we are treating signs and symptoms we have forgotten the fundamental
cause of a particular sickness, you don't solve the problem of a sickness like
that. You can't get a correct diagnosis if you only pay attention to the signs
and symptoms. So I think members of the Think-Thank should be able to go and
think and find out the fundamental cause rather than addressing what other
people are doing, which is the face-value option.
I think they have been able to fashion out a good policy but they need to
actually work with information because if this thing fails, that would be the
greatest tragedy of this country. Money is not needed by anybody, we don't need
naira, we don't need dollar, money is merely a medium of exchange. You want to
eat, you take it out and somebody accepts it and gives you food, you want to
dress, you take it (money) out and give to somebody and he gives you a dress
and so on. If you put money in your mouth, you don't enjoy it. you only enjoy
it, when you use it (cash) to obtain what you want. But when the confidence in
that money is lost, people will prefer trade by barter.
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