Managed float system: CBN lies again
BEHIND us are the elections to the arms of government that are vested with authority to ordinarily shape the economy for the better.
So it is proper to redouble the 14-year-old patriotic campaign to position the national economy for rapid growth that reflects the country’s ample resources, accelerated development and manifest prosperity.
To date, the economy has remained abnormally stunted for four decades under the strangle hold of faulty fiscal and monetary measures.
Contrary officially cooked-up feel-good economic data being constantly bandied are themselves officially debunked by their twin feature of non-inclusive growth.
Amidst the bloodshot eyes, loud gnashing of teeth and excruciating groans of operators in the real sector of late, the CBN Monetary Policy Committee member-at-large sees in the undated press release by the apex bank that is captioned “Closure of The CBN RDAS/WDAS Foreign Exchange Window” (it was made public on 18/2/2015) another exhibition of the CBN’s penchant for purposely rewriting aspects of the discipline of economics in an attempt to justify the abandonment of the apex bank’s economy-nurturing statutory mandate in favour of the willful destruction of the national economy in collusion with the Presidency and the Federal Ministry of Finance (FMF).
The opening paragraph of the press release reads: “The managed float exchange rate regime, which the Bank had adopted following the liberalization of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate.”
No, embedded in that sentence are three false claims. Firstly, since the cessation of the Bretton Woods system of fixed exchange rates in 1971, the CBN has adopted at different times various exchange rate fixing methods.
These include naira exchange rate based on a weighted basket of currencies of 12 main trading partners and later rates fixed by administrative fiat, RDAS, WDAS, interbank forex market (IFEM) that excluded direct supply of public sector forex, the explicitly named autonomous forex market (AFEM) and the second-tier forex market (SFEM).
All above named exchange rate fixing methods are individual rivals to the managed float exchange rate regime (MFS for short). The MFS has not been implemented at any time since the open but clearly defective forex markets made their debut following the adoption of the Structural Adjustment Programme in 1986.
The second embedded falsehood embodies ‘the liberalization of the foreign exchange market’. As the shortcomings of the defective exchange rate fixing methods adopted so far slowly float to the surface with time upon being applied, the CBN has been interchanging them. Before the latest closure, the DAS had been applied on at least three previous occasions.
Forex market systems that exclude direct supply of public sector forex are not liberalized, but hamstrung. And they are sure to fail as experience has shown.
Thirdly, the claim of success in ensuring exchange rate stability for the most part does not stand because there existed multiple exchange rate regime.
In addition to the closed RDAS/WDAS, there were the interbank and bureau de change rates. The latter two maximized nominal profits by depreciating the former’s naira rate which served as the official rate. The setting required constant intervention by the CBN (which is not a primary market player in a liberalized system) in order to keep the RDAS/WDAS rate unchanged for any length of time and thereby sustained an artificial official rate which merely oiled currency speculation. There did not exist any genuine stability.
Expectedly, the sham façade of official rate stability collapsed as soon as CBN-withheld Federation Account forex receipts began to plunge in the wake of falling crude oil prices. Hoodwinking the public, the CBN rested the RDAS/WDAS yet again.
Openly counting the searing price of its wrong choice of exchange rate fixing methods before adopting another wrong method, the CBN shed torrential crocodile tears in the press release as follows: “…the Bank has observed a widening margin between the rates in the interbank and the RDAS window, thus engendering undesirable practices, including round-tripping, speculative demand, rent-seeking, spurious demand and inefficient use of scarce foreign exchange resources by economic agents.
This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public”.
Can the CBN deny that the shortcomings have always been present in the system in significant degree, which was collusively overlooked, provided there was withheld forex to squander?
It is therefore not surprising that the usual cheerleading commentators on monetary measures, who explained that the closure of RDAS/WDAS and the devaluation of the naira signified CBN’s exercise of independence, have noted that the decision would only temporarily reduce rather than extinguish the short- comings that have forever bedevilled the naira exchange rate.
And not long after, in Communiqué No. 100 of its March meeting, “the MPC expressed concern about the wide divergence between the interbank and the bureau-de-change exchange rates, which provides an avenue for arbitrage and speculative activities in the market”.
Now, which previously failed method will the CBN foist on the country next?
To lie by mis-designating the rival RDAS/WDAS as MFS after the former had proved to be the conduit for dissipating the country’s forex was an undignifying instance of giving a dog a bad name in order to hang it. The CBN has been doing its utmost best over the years to avoid implementing the latter highly-beneficial exchange rate fixing system.
Let us remove the thick veil. The CBN knew full well that the devaluation of the naira by some 22 per cent from its value in early November 2014 was economically ruinous but trickily pinned the blame falsely on the MFS in order to mislead the public and thereby side-step the insistent calls for the adoption of the MFS.
While the apex bank chose to go in circles and artfully interchanged one inappropriate naira exchange rate fixing method with another previously failed method down the years, the CBN succeeded in exposing for the discerning to see its willful disregard for its principal objects, particularly that of ensuring price and monetary stability.
The CBN thereby shirked its bounden duty of creating the preconditions for attaining the fundamental objectives of national prosperity and a self-reliant economy, among others, as enshrined under Section 16 of the 1999 Constitution as amended.
Needless to point out, the independence of action sought by, and what was granted to, the CBN was/is not licence to flout the CBN’s mandate or to mismanage the national currency or to impoverish the Nigerian people.
As a matter of fact and contrary to the preferment of the apex bank, the managed float exchange rate fixing system underpins the success of the world’s leading economies.
Besides a whole host of other benefits (these will be discussed in a future article), the MFS eliminates the shortcomings and lamentations in the earlier excerpts, which were brought upon the country by CBN’s choice (albeit at the goading of the Presidency and FMF) of inappropriate exchange rate fixing methods over the years.
The colluding saboteurs of the national economy, namely the Presidency, FMF and CBN, should realize that throughout the world, not a single successful economy has been built on lies.
•Ojomaikre is a Visiting Member of The Guardian Editorial Board.
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