Buharinomics: Unearthing the cause of the Naira fall.
Today, we now have a 43-year history by which to judge the Central Bank of Nigeria after the introduction of the Naira and the Naira’s performance. The CBN has not increased economic stability, business cycles have not become appreciably milder, inflation and its management are catastrophic, nor have recessions become less frequent or measurably shorter.
The Nationalist movement of the 60s & 70s that birth a lot of ideas- chief among- the introduction of Nigeria’s homegrown currency the “Naira” seems to have created more problems when measured against the challenges it was introduced to correct.
Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, Cameroon, Central African Republic, Chad, Republic of the Congo, Equatorial Guinea, Gabon and Togo felt otherwise then- rather, they stick to the 1945 colonial currency and the macroeconomic management schemes underlining its management. Today, they continue to enjoy moderate inflations and relatively healthy foreign exchange rate- which incidentally.
Why is the Naira becoming more of a problem to Nigerians?-
1. Money, in reality- is any “item” or “verifiable record” that as payment for goods and services. Remember- “Items and “Record.”
2. The currency (banknotes and coins) from the ATM is only a fraction of the total money in Nigeria. As at the end of September 2016, the value of coin printed and in circulation stands at N1.79tn or approximately 8% of the total money (N22tn) created in Nigeria.
3. if Nigeria decides to swap all banknotes for dollars, the exchange rate should be N71.6/$1 ( given that external reserves are $25bn and the value of the total currency in circulation is N1.79tn)
4. you are allowed to save the Naira note in your piggy safe- if you so elect-or take it to the bank.
5. When you deposit banknotes in the bank, you are just lending the bank your money since banks do not save your money in the vaults. The Account balance is more of an “I owe you” — IOU
6. Your account Balance is just a record of how much your bank is “oblige” to pay you. If the bank fails, your money is gone.
7. As such, Account balance are “ liabilities” of the bank, not “an asset” that could be lent out.
8. When you pay for anything- through bank transfer or electronic channels- you are only moving “your balance” (I owe you) to the merchant.
9. The Government through the National Deposit insurance company guarantees to some extent -your money.
10. The central bank also requires bankers to have a minimum amount of cash in the vault- that is called Cash Reserve Ratio.
11. if the Central Bank feels banks are very must likely to fail, the cash reserve ratio may be raised. Maybe for other reasons.
12. The Cash Reserve Ratio (CRR) in Nigeria stands at 22.5% -meaning banks are required to hold N22.5 banknotes in the vault for every N100 collected from depositors.
13. if your bank has excess N22.5 in its vault, the banks do not necessarily run after depositors.
14. Rather, bankers “create” deposits- by lending.
15. Recall, your account balance is only a record of how much the bank is obliged to pay you. How about issuing the privilege to someone else who have no cash deposit? Thus loans and credit which in itself is money.
16. As such, if banks have excess cash in its vault, it can create deposit- which is money. It is not uncommon when you hear people say- banks create money. That is the fact of life.
17. Given that only N1.7tn banknote is in Nigeria, Banks (All) can only collect/ create N7.6tn.
18. Nigeria should need approximately $25bn in foreign reserves if everyone with accounts decided to convert the Naira money into Dollars at N300/$1.
19. Assuming an investor walks into Nigeria with $50bn -and banks (all) have N1tn excess banknotes in the vaults, the banks are only allow to create deposit totaling N4.4tn — meaning the investor will have to exchange the $50bn for N4.4tn ( N88/$1)- all else been equal.
20. In Reality, total money in Nigeria today stands at N22tn- including banknotes and account balance across all banks. How is that possible?
21. Banks are allowed to swap government’s bonds for cash ( electronic cash at the CBN) -when they need it. (Open Market Operation)
22. When government over-promise and resort to borrowing heavily, they sell bonds to investors including bankers to close the budget deficit.
23. Bankers take the bonds to the central bank -using it as a “collateral” to borrow from the CBN.
24. The CBN lend to bankers at monetary policy rate- MPR+2% or 16%
25. Paying N3.6 to create N100 seems like a bargain. Given that banks only need to borrow N22.5 banknotes at MPR+2% to create N100 deposits.
26. Anytime government issues a bond of N1tn; bankers can use the “asset” to create close to N4.4tn in New money- making the Naira weaker.
Fiscal Induce Problems
Why is the Naira depreciating? Government? Bankers, Poor banking supervision? The Answer lies in between.