Wednesday, August 03, 2016

Floating the Naira Without a Life-jacket
By Naphtali Iringe-Koko
Nigerian Guardian  
03 August 2016  3:20 am

The stack reality about the oil and gas industry in Nigeria is that because it has been grossly mismanaged by past governments and the resources have not been channelled into development (diversification and infrastructure) there are no other options available to the country other than to continue to depend on the flow of oil. Hence we cannot afford to accommodate any temporary interruptions be it deliberate or a natural cause. The economy, the naira and citizens are currently the victims of short sightedness and poor planning. The government is therefore forced to float the naira prematurely to attract foreign investors.

A market-determined naira exchange rate is a rate determined by demand and supply forces. Adopting a market determined naira exchange rate means that the naira will be allowed to float and swim with or without support. Currently the economic fundamentals are very weak due to gross mismanagement in the past and also due to current disastrous crash in world crude oil prices. Turbulence no doubt will be expected as the naira floats and swims in waters infested with sharks. For the naira to survive the current challenges, the CBN must have a plan B. The CBN needs a level of commitment that has not been achieved before.

As has always been the case in the past due to the pressure mounted both locally and internationally, the CBN finally caved in to a new naira forex policy which resulted in outright devaluation of the naira by over 40% on the first day of implementation. (197/$ to 282/$). The move was hailed across the globe (eg Lagos, London, New York, Johannesburg etc). Multilateral organisations for example the IMF, the World Bank and some rating agencies were not left out. I have always held the view that the naira has “stakeholders overload” each with varying interests and agenda.

Devaluation cannot impact positively on an economy that is grossly unbalanced. Floating the naira is not the only attraction to increase investors’ appetite for Nigeria as investment destination. Other areas that can be critical to investors in their choice of Nigeria as investment destination include, the passage of the PIB, ease of doing business, lower interest rates (local investors), fight against corruption, power, diversification of the economy, essential infrastructure and security etc.

Some analysts and IMF have complained that the CBN was slow in adopting and implementing the new forex policy. I completely disagree. In an economic environment where the fundamentals are virtually weak, allowing the naira to float without adequate preparations would be suicidal. In fact, it is my thinking that the naira should have been allowed to remain at the capped rate of N197/$ with tighter controls pending the commencement of the implementation of the 2016 capital budget and social palliatives to take effect before going ahead with a policy that wiped out over 40% of the naira value on the first day of implementation.

Some delay would have also enabled the CBN to put in place some rules and structures to curtail the inflow of hot money that could freely enter and exit at will with devastating impact on the fragile economy that we are fighting to protect.

Floating a country’s currency is usually a major event and is based on long term strategic plan where the various outcomes, outflows and inflows of economic and social benefits are predicted in advance by applying appropriate advanced forecasting economic models. It is a major project and it is expected that both controllable and uncontrollable variables will be encountered. It is a decision made based on uncertain estimates about the future. It requires appropriate risk management strategy to stem surprises in the course of implementation. This process takes time and CBN should not have been stampeded into taking action by stakeholders with diverse interests and agenda.

The CBN should have also taken time to conduct a study on the so called foreign investors and the depth of their appetite for choosing Nigeria as their investment destination and of course have a rough idea of the value of naira that would satisfy their appetite. There is a Yoruba adage which states that “It is more difficult to wake-up someone who is pretending to sleep than the one who is actually sleeping”.

I hope we are not waiting on investors that are pretending to sleep. Citizens would have also benefited if the CBN was able to put in place rules in respect of old stocks that were purchased at the capped forex rate of 197/$ that would have ensured that the FIFO (First In First Out) rule was applied in the mark-up (pricing) to moderate the surge in prices (inflation) which was attributed to mark-up based on new forex rates eg 282/$ across the board.

A former Chief Economist of the IMF, Frank Rogoff stated that “The IMF may have sometimes tilted too far towards benign neglect as countries prematurely liberalised markets for short term capital movements before the internal regulatory structure was put in place to handle them”. Joseph Stiglitz, a Nobel prize winner, whose book Globalisation and its disillusionment with the IMF/World Bank consensus, argues that “excessively rapid financial and capital market liberalisation was probably the single most important cause of the Asian crises.

China escaped the Asian crises because of its strict control on its currency (Yuan). You cannot buy the local currency unless you had good reason to do so. Western European countries did not fully liberalise controls on capital account movements (particularly short-term ones) for decades after the Second World War. Most of them liberalised gradually after reaching a certain level of wealth and stability, and mostly only well into the 1980s and 1990s.

I support market driven economy but my worry is that its implementation in Africa is likened to children who are forced to grow up before they are ready (before their time). What hope is there for the people if what matters most is market economy? What hope is there for compassion in a world of endless competition?

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