The independence of a nation's Central Bank is sought as a way to minimize undue interference on monetary policies, actions and initiatives. Today, the line between the executive branch and its apex financial institution is becoming increasingly grey. In developing countries, it is unclear. The timely intervention of Nigeria's President Yar'Adua to stop Nigeria's Central Bank Governor's (Soludo) proposal on revaluing the Naira, is seen as a move to avert what could have created unintended consequences on Nigeria's fragile economy.
The Naira’s denomination/revaluation while an idea that may have some merit, is not suitable for
The CBN's nipped proposal would have meant that for every deposit of say N100,000, the depositor in essence would have been notified that the amount is now N1,000. This would have unduly penalized depositors, and created a rush to withdraw and redeposit once the policy comes into effect. Unbanked Nigerians, who keep their money under the mattress or in the attic, would have waited to see what direction to take. With the confusion, Nigerian banks would have been unable to handle the withdrawal requests which in turn, would create chaos. When there is a rush to withdraw due to panic, banks fail because they are not able to meet the primary 'deposit-on-demand' policy/clause.
To improve the Naira value, CBN should focus on certain key functions:
a. Reduce the interest rate it charges other banks on loans and money advanced to the banks. Such rates should float below 7 percent.
b. Identify certain key sectors of
c. Request via shared debt/equity placement on a graduated scale investment in major oil/gas exploration and development in
d. Peg [lock-in] to a base year by equivalent subordination savings in
e. Budgetary policies should require that federal government as well as the states have balanced budget with compulsory and or mandatory 'Rainy Day Account' set at a certain percentage [floating] of its annual budget. As it is, the government operates on a 'deficit budgeting model', a sort of 'pay-as-you-go' scenario, whereby most expenses are funded as a 'Promise-to-Pay'. The uncontrolled manner whereby state governors with the state accountant generals' raise short term debts to finance certain expenses must be restricted and severely monitored. With a 'Rainy Day Account', states should be able to pay for certain goods and services without having to raise short term debts.
f. Eliminate advance payment and or mobilization fees for contracts. In the alternative, a contractor must meet the financial capability clause or go to a financial institution to finance the contract. The government should not finance contracts. Contract financing is a test of capacity, capability and performance. In other words, if a contractor cannot raise a performance bond to assure the state or federal government that the contract will be delivered, then the contractor must be deemed incapable. The attendant benefit of this is that sitting government officials that unduly award themselves contracts would now have to prove they are capable of performance.
g. Remove Advance Rent Payment. Long term obligations in the forms of level payments/annuities as represented by leases, mortgages and rents, create confidence on the present and future value of money. In
The stability of any currency is to ensure two main objectives: Create consumer confidence for locally produced goods and services and help a nation sell its export bound goods and services at a rate to earn foreign reserve. If the former is not achieved, the latter is hard to realize. The Naira should thus float along the world's major currencies at levels and rates commensurate to
Carefully crafted and monitored mechanisms that constantly check the measures against sound economic policies enable a currency to emerge as an indicator and legal tender for exchange of goods and services. Naira is on its way but not as proposed by Mr. Soludo.