Chizea: As Central Bank missteps on currency

THE screaming headline from a report by Bloomberg on recent developments in the Nigerian foreign exchange market leading to the organization pointedly wondered aloud if the new Governor of the Central Bank is really his own man! An unbiased assessment of this sweeping pronouncement will be to ask if this conclusion is not rather hasty, brash and probably thoughtless. We accept that the morning can show the day, but Emefiele for goodness sake has just been given a five-year tenure as the Governor of the Central Bank and he will be nine months in the saddle by March 3, 2015 having assumed office on June 3, 2014 and therefore, inasmuch as one would expect to receive feedback on performance continuously but not to reach such a far-reaching and damning condemnation. My immediate take is that most of these foreign interests based publications would often make a judgment based on their experience and following their tracking of particular developments reach and advice on expected outcomes and often economic agents proceed to take positions based on such sentiments which often prove costly when not borne out in reality. The Governor in this respect had pointedly warned speculators to be wary that with him, they stand the chance of having their fingers burnt if they persist in speculating with the exchange rate of the Naira. It is not unlikely that some wagers have taken a bet that the official rate of exchange of the Naira will at this time settle well above the 200 Naira mark and not unlikely have lost their bet which might be the reason for this rushed castigation.

    This report by Bloomberg makes the observation that the Governor of the Central Bank is stemming currency declines in a manner that could damage the government of Africa’s biggest oil producer and economy ahead of the March 28, 2015 elections. It is claimed that the Governor is putting off painful adjustments until after the elections. Those who have tracked the outcome of the meetings of the Monetary Policy Committee would attest to the fact that the Committee has conveyed the unmistaken impression of the independence of its membership as they take decisions otherwise some of the recent decisions taken by the Committee ran contrariwise to the publicly advertised position of the Governor at his confirmation hearing. One recalls here that the Governor during his confirmation hearing clearly decried the prevailing high interest rate in the economy as anchored by the Monetary Policy Rate then at 12 per cent and took a stand against devaluation of the Naira as he correctly argued that considering the undiversified nature of the export base of the country that devaluation is an ill wind which will not blow the country any good. But much to the surprise and consternation of most compatriots, the meeting which followed the commencement of the fall in oil price saw the Naira devalued officially by 8 per cent with the MPR increased by 100 basis points. This of course must not be interpreted to mean that the focus has been abandoned.    What has happened is just a detour to avoid a looming obstacle on the route to the preferred destination. But no doubt, if the Governor had his way he could at best have delayed such a decision from taking place so early in the day. But the decision of monetary policy committee should not be unduly circumscribed by individual views no matter how dominant. What is paramount and must not be compromised and must, therefore, be prioritised is the overall interest of the macro economy and the wellbeing of a generality of the Nigerian population.

    Therefore, it is only fair that the MPC should be given the benefit of the doubt if following their last meeting on February 4, 2015, it took bold decisions with regard to the relevant macro variables. And if the Committee was overly concerned with regard to how its decision would impact the anticipated elections, it would not have contemplated a devaluation of the Naira and a hike on the MPR on the eve of the elections. The Committee under this Governor enjoys and jealously guides its autonomy as it discharges its assigned mandate.  And pray, how can not allowing the Naira to go on a free fall be adjudged as attempting to damage the government of Africa’s largest oil producer?

   We have made this point ad nauseam that devaluation of the Naira is not the panacea that will solve the problem of this country. Allowing the Naira to massively depreciate or go into a free fall will only compound the problems of the country. We must not pretend that we do not have experience in this regard. In September 1986 when the Second Tier Foreign Exchange Market (SFEM) was introduced, the Naira in that market depreciated from the rate of 22 to 86 per dollar. Even though the so called First Tier was retained for some preferred expenditure heads which provided opportunity for rent seeking behaviours, this amounted to a devaluation of a whopping approximately 300 per cent!

   We should pause to ask what followed. The impact was immediate, sudden and devastating. I remember then that I was in the process of assisting my late father refurbish his house and had just finished fixing the louvres on the ground floor window at Asaba and by the time I came back a few weeks later to fix the same louvres on the top floor not only was I unable to afford the quality of the one I had earlier fixed on the ground floor; even at that I had to struggle to be able to afford the asking price. And since then the First Tier market had been abolished and rates harmonized and we never got back to any rates below 86 Naira to the dollar since then! And as the rate of exchange of the Naira continues to come under pressure at the interbank market despite the best effort of the Central Bank, there are vociferous calls right now for further devaluation to narrow the gap between the official and interbank rates. There is no doubt that most of these decisions which ‘Economists’ take are often taken to be seen to conform; to be correct as evidence is often not aligned with the projected expectations. My take is that we devalued when we did because that was the received wisdom as we reacted to the unfolding emergent scenario and we hiked the base interest rates because we targeted the overseas portfolio investors to stem the rate of reverse flow as we increased the returns on Naira denominated asset to compensate for the looming risk occasioned by the falling oil price.

    There is also always this rush to compare with other countries. And it was observed in the same report: ‘ While oil producers with falling exchange rates from Russia to Malaysia have avoided imposing currency controls, Emefiele’s measures cut daily trading of the Naira to less than a tenth of the previous level.’ But the question begging for answer is whether we are not comparing oranges and apples? Was the Ruble not almost a convertible currency? But let’s look at the impact of the falling oil price on the Russian economy; the Russian Central Bank raised interest rates by 6.5 per cent to 17 per cent hoping that such a move would stem the falling exchange rate of the Ruble. With inflation rate at 9.1 per cent; the highest level since 2011, there was panic buying as those holding the Ruble rushed to buy up durable consumer goods. It got so bad that the Russian President, Vladimir Putin threatened that Russia will abandon the Dollar which would result in trading partners not having any choice but to accept the Ruble! It is obvious, therefore, that the Nigerian experience is a child’s play.

   And what is this fascination and almost nostalgic feeling for the immediate past Governor Lamido Sanusi?  During his tenure, a major achievement he recorded was maintaining the stability of the exchange rate of the Naira against the backdrop of a MPR that remained at 12 per cent for a period of over two years. He did everything and took steps to defend the exchange rate of the Naira and he never had to cope with this sort of emergency of rapidly falling oil price and considering this posture, if he had to he wouldn’t have allowed the Naira to go into a free fall as it is now being recommended. It is, therefore, unfair and most certainly premature to begin this early to pass a judgment of lack of independence on the part of Governor Emefiele. He should and must be given a break please! 

• Dr. Boniface Chizea wrote from Lagos