I want to thank you for your dispassionate critique of my long standing proposal for a payments reform that would among other things significantly improve the Naira value, and, reduce inflation and the cost of  borrowing and also ultimately eliminate the payment of stupendous subsidies, on petrol price annually.

However, permit me to comment; on some aspects of your article;

  1. “This implies that the statutory beneficiaries, who bear these dollar warrants, negotiating from a position of strength, would demand more naira for each dollar under the liberal framework, and the banks, tempted, to increase their stock of valuable dollars, would comply!”
  • Comment:

I can understand how you arrived at the above conclusion, however, kindly permit me to say that your expectation is indeed possible, if the CBN continues to recklessly apply its modulating instruments of Cash Reserve and liquidity Ratios, which are normally adopted, as you know, by CBN, for controlling credit expansion by banks.  In other words, perceived surplus Naira liquidity that may overwhelm the Naira against the dollar in the market place, can actually, still be appropriately modulated by the adoption of compelling and supportive CRR and liquidity Ratios by CBN.

However, with much reduced liquidity in the money market, the banks will be, cautiously wary to purchase forex with more Naira, as this may jeopardize their Naira cash positions and further reduce their ability to make money from extending credit to customers or to even meet the cash demands of their customers. Besides, with the adoption of dollar warrants, the process of dollar sales will no longer be the usual ‘gbanjo’ auction, as in the previous monopolist market structure,  because, significantly larger dollar sums will be unleashed on the market simultaneously, by multiple beneficiaries of fiscal allocations. Invariably, with a market flushed with dollar warrants and reduced Naira liquidity, banks will actually be in a stronger position and it would be in their interest to negotiate for less Naira for each dollar.

In addition, under this arrangement, the dollar purchased by banks from the several beneficiaries of dollar allocations will still remain in the custody of the Central bank, rather than in the custody of banks. The system of immediately transferring custody of dollars directly to banks has evidently given rise to much malfeasance in forex transactions.

However, with the adoption of dollar warrants, banks which purchase the dollars, will only sell the dollars to customers to settle the bills of foreign suppliers of approved goods and services, by directing CBN to make remittances (from balances in their (banks’) individual domiciliary account), after providing CBN with confirmation documents, such as attested bills of laden and other such instruments, before CBN would remit the dollars in the domiciliary account of any bank to foreign suppliers of goods and services. As you know, it would be totally reckless for any bank to keep accumulating dollars and ultimately jeopardize its own Naira cash position in a money market with barely optimal rather than excessively surplus Naira liquidity, which would require mopping up at great cost.

The payment of dollar denominated allocations with CBN dollar warrants, would undeniably reduce the CBN’s need to continuously mop up so called excess Naira liquidity from the market, with such high cost that you will agree are ridiculously out of tune for risk free sovereign debts. You will readily appreciate also, that it is probably more profitable for banks to continue to enjoy such bonanza of huge interest payments from investing in risk free T/bills, than the risk of lending to the real sector at perilous rates well above 20%.

  1. “Dollar Debts: generally, developing countries are not able to borrow in their domestic currencies; and infrastructural gaps imply that they require huge dollar borrowings to buy foreign technologies to minimize gaps.”
  • Comment

I am not sure why you believe that developing countries are not able to borrow in their domestic countries. Indeed, wherever, this is so, it will be because local cost of borrowing is extremely high. Notably, however, as you know, higher rates of inflation will compellingly drive higher cost of borrowing. This is so rational!

Consequently, for the real sector to thrive successfully, and compete effectively against imports, inflation must come down to best practice lower single digit rates, so that real sector investors can borrow for not more than 5%. Furthermore, the stronger the Naira becomes, surely, the cheaper also it would be to service foreign debts.

I do not see how cost of funds can come down to best practice levels below 5%, when double digit inflation rates subsist. Similarly, I do not see inflation receding below 5%, if debilitating excess liquidity remains a perennial burden that compels CBN’s unceasing liquidity mop up, which, in turn, invariably drives up the cost of borrowing and crowds out the productive sector from easy access to cheaper funds. How can we grow jobs, when factories are closing shop?

  1. “Dollarization: floating the exchange rate would lead to massive devaluation of the domestic currency as we saw in the last attempt by the CBN to liberalize the market in 2016/2017.”
  • Comment

I am not aware that the CBN ever made any serious attempt to float the Naira exchange rate, not even between 2016 and 2017, when the Apex bank totally lost control of the forex Market. You cannot float the Naira exchange rate on a monopolistic platform.

Until, the CBN’s monopoly and structure of dollar auctions for Naira are dismantled, it will be impossible to float the Naira exchange rate. Surprisingly, some observers have commented that my proposal will dollarize the economy; this is of course, far from the truth; the economy is already consciously dollarized by CBN, with the process of constantly auctioning relatively small rations of dollars in a market that is undeniably suffocated with Naira liquidity, which is in turn, also undeniably instigated by the additional Naira directly substituted for dollar allocations by the same CBN.

Generally, monopolist market structures, create socially oppressive pressures and serious distortions in any market, and will certainly, also challenge efficient resource allocation. It is explainable that the present monopoly in petrol supply is clearly sustained by a Naira exchange rate, that is out of tune with our foreign reserves and earnings capacity. You can understand that a stronger Naira will immediately crash fuel price and make it cheaper to buy petrol in Nigeria than to smuggle the commodity to neighbouring countries for sale. In any case, deregulation of petrol price will only become realistic with a stronger Naira engendered from a liberalized forex market.

  1. “It is possible for the CBN to run simulations based on the idea, followed by a trial depending on the results of the simulation. He deserves recognition, if not an award.”
  • Comments

I will eagerly welcome any attempt at simulation of proposed payments reform. About 2 years ago, I was in the company of Dr Frank Jacob, President of Manufacturers Association of Nigeria and two others, to attend a meeting with CBN in Abuja.  Dr Sarah Alade (Deputy Governor) who was at the meeting, admitted that they were conversant with my position on a payments reform, however, unfortunately, their attempt to adopt and implement this same payments reform was shot down in 2007  by Michael Aondoakaa, who was the Attorney General during Yar Adua’s  tenure.

On further investigation (see Segun Adeniyi’s book), I found that, Aondoakaa actually  shot down Soludo’s decision to amend and print New Naira currency profile without Presidential approval as constitutionally required.

Of course, Aondoakaa was right, but the Attorney General didn’t and couldn’t have stopped the CBN from implementing any payment reform that would induce or sustain price stability in the economy. CBN’s power to sustain price stability is enshrined in the 2007 CBN Act. Sadly, however, Soludo chickened out of what was not even a confrontation and unfortunately threw away the baby with the bath water!

So you may be mistaken Mr Okafor, if you think the CBN does not understand the significance of the payments reform I have canvassed in the last 15 years. They know and I hope you don’t mind my saying so, they probably know much better than you ever imagine.

It is because they cannot assail my position without bringing to question the odious rationale behind borrowing trillions of Naira every year and simply sterilizing such funds from any useful application, especially when these loans carry ridiculously high interest rates.  It is ironical that the CBN would turn round to blame the banks for not lending to the real sector, when in fact the same CBN is the real villain.

My dear friend, believe it or not, it is an unfortunate but deliberate scam! Our people will continue to suffer if we don’t cry out.

 Nonetheless, I suggested to the CBN team at our above meeting to simulate the impact of my payments proposal on the economy to convince Naysayers about its efficacy. Unexpectedly, however, Dr Alade suggested that they will prefer that I should personally carry out the simulation and bring the result to their attention!!

As for the Award, you suggested, well my personal satisfaction would be the adoption of the payments proposal I have canvassed for over 15 years. That is all the award I want, because millions of Nigerians will climb out of poverty and Nigerian experts and families in the Diaspora will consider returning to their fatherland and contributing to its growth.

Furthermore, if the Nigerian economy is liberated, other challenged economies in Africa may borrow a leaf from our success, and more Africans can rise from the depths of poverty to relative prosperity.

Dear Mr Okafor, I have gone to such length to further explain the payments reform that I have canvassed for over 15 years, because, I think, you truly care.

Remain blessed and enjoy the peace that should accompany the Easter break.

Henry Boyo