Poor foreign exchange management by the Central Bank of Nigeria is perhaps the greatest beef that The PUNCH columnist, Henry Boyo, has against the Nigerian state. And he deserves all the sympathies and empathy he can get on this crusade of passion that he has assigned to himself. He is a consummate Nigerian patriot, no doubt.
The major regulatory objectives of the bank as stated in the CBN Act of 1958 are to: maintain the external reserves of the country, promote monetary stability and a sound financial environment, and to act as a banker of last resort and financial adviser to the Federal Government. The immediate past CBN Governor now Emir of Kano, Lamido Sanusi, streamlines it to reining in foreign exchange rate, banking interest rate and inflation rate.
Walking the tight rope of balancing the naira against other currencies is crucial. And in the matters of international finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for the other. That is, how many units of one currency will be acceptable for one unit of the other currency?
Perhaps, the simplest way to compare the value of one currency to another is to compare how many units of a commodity each will buy. The reverse way to explain this is to say that if you need N200 to buy a loaf of bread, whereas the bread vendor will gladly accept only $1 for the same loaf of bread, that suggests that one dollar is 200 times stronger than the naira. This simplistic explanation is really the size of it.
Whenever more naira is chasing the dollar, through capital flight or to buy foreign goods, the law of demand and supply puts the naira at a devaluation disadvantage. A school of thought rationalises that Nigeria, whose real sector is almost non-productive, and exports a mono-product whose price is determined, and denominated in the currency of the buyer, will have little control over the exchange rate of its currency.
This school argues that instead of acceding to the International Monetary Fund prodding to devalue the naira, the CBN should get the government to use fiscal or taxation measures to plug holes in the economy, and then allow the naira to either appreciate or depreciate, according to the push and pull of the market forces.
This school seems not to totally buy Boyo’s argument that government fiat be used to strengthen the naira against the dollar; they are free market protagonists who disapprove of paternalistic methods of running an economy. They must note however that the most dyed-in-the-wool capitalist nations tinker with their monetary policies as they also align with free market economic principles.
The West knows that capitalism will work after the state has installed adequate infrastructure and invested in new products and services, either directly or through the private sector. They also know that government must establish and manage fair rules for the economic entities to operate for profit and to pay taxes.
The CBN appears to have bought this point of view that seeks to find the value of the naira through the interplay of import and export of goods. The banning or restriction of the import of some commodities is one way the government is attempting to jiggle the dynamics of demand and supply to let the naira find its level in the basket of world currencies.
But a non-strategic approach to strengthening or weakening a currency would be foolhardy. Right now, Nigeria’s real sector is near comatose, imports more than it exports, and depends on a mono-export product. That has led the CBN to take panicky measures like banning or restricting the importation of certain commodities like toothpick.
The CBN gleefully revealed that Nigeria spent N1.8tn to import toothpick, fish, milk, textiles, rice, and furniture between January 2014 and mid- 2015, and also spent N2.1bn to import rice between January 2012 and mid-2014. After the price of petroleum fell in the international market, the CBN fixed the exchange rate of naira to the dollar at N196.5.
In further devaluing the naira in 2015, the CBN claimed it was not quite fixing the exchange rate, but merely reflecting the rate of the dollar supply in the market. Boyo will swear that was devaluation by other means. He brilliantly explained in a recent private discussion how the devaluation of the naira directly reduces the value of the nation’s Gross Domestic Product. The policymakers must invite him for a chat.
Perhaps, the government can get the IMF off its back by taking a bold bet on Boyo’s proposition, by strengthening the naira-through fiat. Then use the stronger naira to revamp the infrastructure, import conversion or manufacturing machinery, to achieve high volume production of more affordable products.
If the economy commences massive production of basic consumer items like food, clothing, housing, transport, etc., with significant local content, it will not only increase the GDP, it will help create the middle class out of the citizens as it provides jobs, and also reduce the nation’s import bills.
Some economies, like America, may devalue their currencies against foreign currencies, to discourage their citizens from buying foreign consumer goods. But this assumes that the real sector, the manufacturing sector, is producing a high volume of goods that are of relatively high or acceptable quality.
If you devalue the naira without strengthening the infrastructure and productive sector, you will increase inflation, reduce the purchasing power of the people, and deepen poverty. A viable middle class provides effective demand for goods, and increases the GDP through a vehicle called multiplier effect.
Now, those who suggest that the inadequate infrastructure should be rationed in the meantime may have a point. They suggest, for instance, that electricity should be directed to the industrial parks in cities like Kano, Aba, Port Harcourt, Agbara, Ota, Apapa, Ikeja, during the day, and redirected to residential quarters at night.
But they have assumed that industries do not work over night. They also overlook the small scale entrepreneur who works alone from home. But there is certainly a good deal of wisdom in the suggestion that funds could be directed to priority areas of infrastructure, local research into agriculture, engineering, mining and such strategic areas, and development of new products.
It is a good thing, for instance, to concentrate funds to build more roads, railway lines, and inland waterways, to move agricultural produce from the farm gate to the family dining tables at home, or to the agro-allied industries where they will be converted into more consumable version.
There is however a small household matter to consider. Some want government to reintroduce the smaller denominations namely N1, 50K, 10K, 5K, etc so that consumers are enabled to purchase whatever quantity of whatever product they will like to buy.That is certainly good food for thought.
PUNCH
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