In a circular of August 22, the CBN said it injected $500 million into the forex market under a new “Foreign Exchange Market Special Auction” that is expected to complement and run simultaneously with the existing Dutch Auction System. The decision, according to the apex bank, was necessitated by the urgent need to attain the long term objective of stemming inflation and stabilizing the forex market, while maintaining positive CBN monetary policy targets. In the immediate short run, the CBN hopes the measure would check the sliding exchange rate of the naira, enhance its value against foreign trading currencies, and drive down the cost of imported raw materials.

Similarly, the CBN has announced its withdrawal of an estimated N21 billion in the Nigerian National Petroleum Corporation (NNPC) accounts from commercial banks nationwide. The move was in line with its decision to ensure accountability in sensitive parastatals and other government agencies and mop up excess liquidity.

Indeed, Foreign Exchange Market operations and achieving a realistic naira exchange rate have, for many years, remained the most contentious issues in managing the nation’s economy. Until now, and perhaps for inexplicable reasons, the CBN had left the determination of the naira exchange rate to unpredictable market forces. The result had been persistent depreciation of the value of the naira. Market operators, particularly banks, deliberately positioned themselves by relegating their traditional responsibilities to the background and, instead, plunged enormous human and financial resources into forex transactions, including round tripping and arbitrage. This explains why the CBN decided to halt the age-long irregularity through a stabilized forex market and a better valued naira.

In fact, for once in more than 20 years, the CBN has taken a bold, pragmatic step to carry out its core function of monetary policy management. The magnitude of the dollar injection ($500 million), which is well above the current demand level in the forex market, would ensure supply confidence. Likewise, the gradual withdrawal of government accounts from banks would clear the system of excess liquidity and check reckless bidding and demand for forex.

But while the benefits of CBN’s new monetary policy are yet to be felt, the Federal Government has engaged in contradictory fiscal policies that are not only highly inflationary, but completely at variance with the apex bank’s macro-economic stability target. Among the major policy somersaults is the over 44% increase in the pump prices of petroleum products announced last week by the government. The FG, according to reports, is also bent on raising Value Added Tax (VAT) from 5% to 10%. The gains derivable from forex market stability are thus waiting to be devoured by a new round of inflation, economic and other social dislocations. Such contradictions strengthen the belief of many that the FG gives with the right hand, and takes with the left; or robs Peter to pay Paul.

Indeed, it would seem that all government departments are working at cross purposes. The CBN needs the support of all relevant stakeholders in the economy if its latest initiatives must yield the desired results. Wider government fiscal policies, for instance, need to be reconciled to complement CBN’s monetary policies. It is time the FG demonstrated coherence and consistency in policy making, as well as sensitivity and responsiveness to the plights of the citizenry. The proposed increases in the pump prices of petroleum products and VAT are patently inauspicious. They should be halted to allow the economy benefit from the latest CBN initiatives.

THE PUNCH, August 31, 2005