Dear Sir,
I listened to you and the “Freshly Pressed” team this morning, on your position regarding the President’s stance on the exchange rate. While I appreciate your position(s), I would like to say that I disagree with the current stance of the President and the CBN with every fibre of my being. I will do my best to explain the reasons why I disagree so sharply below.
1) My first grouse is with the President’s insistence on making “ownership” pronouncements on what should be totally within the purview of the CBN. Monetary policy is the work of the CBN, and its operational independence is enshrined in the CBN Act. Increasing independence of central banks from political influence is a global trend (which has been adopted because we’ve tried everything else), because its important for Central Banks to be able to make policy decisions which may be immediately unpopular, but are in the long-term best interests of the country.
However, when the President to repeatedly makes statements to the effect that he will not allow devaluation, he sends a clear signal that the CBN is entirely under his control and creates a situation in which local and international investors have no confidence in the ability of the CBN to make independent decisions. To worsen things, Garba Shehu recently stated that the President and the CBN Governor meet on a weekly basis (or sometimes more often) to discuss the economy. Whatever for?! Should the CBN not make decisions independent of the Presidency? Now, please understand that I am not against the President expressing an opinion on monetary or foreign exchange policy. However, it is incomprehensible that he continues to make statements to the effect that he directs monetary policy.
I fully believe that the President is wrong on this, and he is destroying confidence in the economy, slowly but surely. And we, the citizens, will suffer for it.
2) I believe that Nigeria needs to allow the forces of demand and supply to determine the value of its currency. Forget the IMF and whatever “agendas” they may have, they are only echoing what any informed economist will tell you. What does it mean to allow market forces determine the value of the currency? Let the banks and other authorised dealers trade freely in FX. Let them buy from whoever wants to sell at the best market price. Let the CBN stop trying to constantly intervene by selling at a fixed price to a limited number of players. What is likely to happen then?
a. Those who earn USD and those who have been hoarding it for the last year will try to sell on the open market, the banks who need USD will concede to buy at rates higher than the official market price, and the exchange rate will drop well below the current official rate of N200/$1. However, because there will be freer exchange, the price will eventually stabilise (I suspect, at a better price than N300/$1).
b. The speculators (who only buy for future profit) will fall away, knowing that there is no value in buying to hoard, since everyone else can get USD.
c. Non-oil earners of USD will feel comfortable selling their dollars on the official market, because they will get a fair price for it. If they do not feel they will get a fair price, they will either: i) hold the USD abroad; or ii) Hoard to sell at exhorbitant black market rates.
d. The ridiculous margin between the official and parallel market rates will thin out.
3) So where will these dollars that will stabilise the market come from? I will try to name a few, based on my personal knowledge and experience:
a. Non-oil exports (cocoa, hibiscus, cashew nuts and other commodities). Don’t turn up your nose, Nigeria made $1 billion in Nov. 2014 from these sources. However in Nov. 2015, the revenue from this source had collapsed to $244 million.
b. Foreign long-term investment. I work as an investment banker and I know that many companies who have raised expansion capital from abroad, are now looking for means to bring in the foreign capital at black market rates. However, I guarantee you that when they need to pay remittances on those monies, they will seek to obtain money from the CBN window. So why not unify those markets?
c. Foreign short-term investment. Investments from abroad (in Nigerian shares and government debt instruments) have collapsed to the lowest level in the last five years. Why? They have no confidence that if they bring their monies in, there is a transparent system which will supply them with USD to get their monies back. They also worry about the prospect of a devaluation after they make an investment (which will cause a loss).
d. Religious tourism and Nigerian churches which have parishes abroad. I have been told that banks are complaining that this source has dried up as well.
e. Private oil companies seeking to sell their dollar earnings to meet financial obligations in Naira. These companies used to sell USD at the end of every month for that reason. In the last 6 months, I can’t remember any sale by the oil companies.
f. Human ingenuity. Nigerians will realise that one way to make money is to find a way to earn dollars, so they’ll seek any means necessary to earn that cash. We could actually start an export boom.
g. Remittances. Nigerians abroad will send more money home for projects and upkeep of family members. Why? More Naira for their dollars. Remittances amounted to $21 billion in 2014.
4) In my opinion, we can and should end this CBN subsidy of dollar users, because we need our USD for more important things. And in any case, being a fast-growing economy, Nigeria will always need to import lots of things. What we should be focused on is trying to increase and diversify our export revenues, not trying to reduce imports. I have never heard of a company which became successful solely by managing its costs downwards. Companies succeed by growing their revenues and managing their costs, and that’s what we should do!
5) By allowing the Naira float, frivolous demand for USD will also drop off. Folks will (in street talk) “borrow themselves a brain” and change their spending habits in favour of local substitutes where possible, so the pressure on the exchange markets will reduce. What happens today is that the official market serves as a subsidy market, so people go and queue there to get USD for importation of frivolous products, which they could buy locally (of course, if they have any USD of their own, they will sell on the parallel market). If there was only one, non-subsidised market, there would be less imports, because the price would be higher. Local substitutes would boom and guess what, we could actually attract foreign investment to expand those local businesses who need to meet increased demand (again, more dollars).
The entire point is to allow markets reward and punish people for their economic behaviour. The FG’s stance seems to say “we are government and therefore, prices must bow to our command!” That’s a joke. Prices only truly respond to markets, because when it comes to those things which affect their wealth positions, people generally act intheir own best interest. So why not focus on using markets to drive behaviour, rather than trying to force behavious when all the economic factors say otherwise?
My two cents on this issue. I feel the President is very wrong on this and if he continues for much longer, I will not vote for him or his party in 2019. This is not how to run a modern economy.
For an opinion similar to mine, please see Feyi Fawehinmi’s article in the link below.
Have a great day.
Babatunde Ajayi holds a Master’s degree in Finance & Economic Policy and currently serves as Head of the Corporate Finance Team at Investment One Financial Services Limited.
END
Do we really have a Central Bank?
A CBN that can release millions of US Dollars in suitcases while preaching “Cashless” cannot in reality be called a Central Bank. A bank whose directors own Bureau de Change and sells forex to these BDCs cannot in reality be called a Central Bank.
While the theories and reasons presented above can hold water in other countries where people are professional and shy away from conflict of interest in the performance of their national duties, the same, sadly, cannot be said for our country.
Our bankers are unprofessional in their quest to amass profit. They encourage round-tripping and money laundering. Surely we have a peculiar situation requiring unusual solutions. Therefore, the president would continue to have my support on his solution to our present currency crisis. The bankers may cry to high heavens, but their intervention in this regard is self-serving.
Mr Ajayi in as i respect your opinion i stand to disagree with you to a large extent. We all need to understand just like Uncle Jimi said this morning on Freshly Press that over the years different administrations/regimes have devalued the currency and it landed our beloved country no where simply because we run a mono economy. I believe that the solution to our economic quagmire of dose not solely lie on devaluation but proper regulation of the FX market and diversification of our economy. Also the Govt has to come with a top notched economic policy that will encourage our manufacturing sector to produce more. For instance power is a very key factor of production which is within the power of the govt to make it available to this sector and the country at large. Until govt fixes the power sector, the manufacturing sector will not fulfill its potential of meeting local demands.
Until we move from being a consuming nation to a producing nation DEVALUATION will NEVER help us.