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. __._,_.___ Messages in this topic (1) Reply (via web post) | Start a new topic Messages | Links | Members Change settings via the Web (Yahoo! ID required) Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe Recent Activity 48 New Members Visit Your Group New web site? Drive traffic now. Get your business on Yahoo! search. Beauty & Fashion on Yahoo! Groups Share style tips and advice. Dog Zone on Yahoo! Groups Join a Group all about dogs. . __,_._,___ --------------------------------- Park yourself in front of a world of choices in alternative vehicles. Visit the Yahoo! Auto Green Center. --------------------------------- Be smarter than spam. See how smart SpamGuard is at giving junk email the boot with the All-new Yahoo! Mail
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