The Economist and CBN’s ‘toothpick alert’

A SCATHING assessment of the CBN’s strategy for managing the increasing pressure on the Naira exchange rate was recently published by The Economist, a UK based internationally respectable magazine.

The Economist report titled “Nigeria’s Currency: ToothPick Alert” has clearly drawn the ire of the management of the Central Bank of Nigeria. Even if CBN chose to dismiss the title of the report as harmless satire, the author clearly pulled no punches in its scornful portrayal of the interventions of our Apex Bank in the foreign exchange market as akin to that of a bungling clown.

The unnamed author, for example, describes the process of choosing the 40 imported items, which the CBN recently excluded from access to official foreign exchange, as “if the hit list was drawn up by someone wandering around a home and a building site and randomly pointing at items”.

The story further embellished the image of CBN as a comic delight, when it inexplicably gave prominence to Indian incense and toothpicks, as some of the banned items, while forex prohibition for rice and tinned fish importation, which consume more forex appear as an addendum to the less basic items earlier listed.

Nonetheless, the report considers the official forex ban on tinned fish and rice as a counterproductive measure “for a country that does not produce enough of these things to feed itself, but no matter,” the anonymous author cynically noted, “Nigeria must be shielded from foreign sardines”! The writer’s choice of sardines and toothpicks as its perceived spearhead of threats to Nigeria’s security is probably an attempt to ridicule the futility of CBN’s exclusion of those 40 items from official forex sources.

Furthermore, the author, with an air of presumed superior wisdom, also warns with apparent altruism, that CBN’s attempt to “puff up the Naira’s exchange rate could cause untold harm to Nigeria’s economy, “as “Emefiele’s policy would (inadvertently) precipitate higher inflation and further weaken the Naira.”

The report’s coup de grace, however, is the brazen condemnation of Emefiele’s managerial incompetence when compared with the performance of the former CBN Governor, Lamido Sanusi who, according to the writer, “was the toast of overseas investors until he was sacked for exposing corruption by Jonathan’s government.”

The author of “Toothpick Alert”, is consequently perplexed at Nigeria’s odd preference since, according to him, “if investors (overseas) do not have confidence in Emefiele as successor, which, would have been the worse option for Nigeria: allowing erstwhile Governor Sanusi to serve another four years or undermining the independence of the Central Bank by sacking him.”

In spite of the clearly rambling, unedited colloquial presentation of the report, the no holds barred frontal attack may inform that the author possibly has an axe to grind with Emefiele as CBN Governor.

Alternatively, the author may know next to nothing of the structure or the primary drivers and brakes in the Nigerian economy. What is clear from The Economist story, however, is the overriding message that investors want more Naira depreciation, so that speculative overseas investors can readily expand their portfolio of Nigeria’s listed equity and government’s lucrative securities for less dollar values.

In pursuit of this objective, The Economist is ‘righteously’ alarmed that “instead of allowing the Naira to devalue” (the writer probably means depreciate as a currency does not unilaterally devalue itself) “the Central Bank is trying to defend the Naira rate by blocking imports.” The author’s superficial understanding of the cause of the Naira’s unending depreciation is possibly an indication that he or she is clearly oblivious of the devastating impact and cause of the poison called “Excess Liquidity” on the Naira and the Nigerian economy.

Evidently, our seemingly unyielding burden of excess Naira supply is clearly responsible for the continuous slide in the rate of our national currency, because much more Naira endlessly chase dollar rations in the market.

Nonetheless, indeed an understanding of this primary causative factor of Naira depreciation would still be outright discounted as useless input, so long as the actual object of The Economist story is to robustly serve the interest of “blood thirsty” external sponsors and speculators who want to make whoopee on the back of a battered Naira, notwithstanding the deepening poverty and social dislocation that come with Naira devaluation and from forex inflows which seek short term bonanza profits from the Nigerian securities market.

It is difficult to understand why the managers of our economy eagerly bend over backwards to attract such portfolio investors, in spite of the surplus idle credit capacity in the domestic money market.

It is deceit for anyone to claim that the current low price of crude oil is directly responsible for a weaker Naira. Indeed, if such relationship is true, then the converse must also be valid; in other words, if crude prices should rise above $100/barrel, for example, Nigeria will earn more revenue and the Naira should presumably be stronger; but surprise, how come no such major appreciation occurred in the Naira exchange rate, when crude oil price exceeded $140/barrel with regular output well above two million bpd, while Nigeria’s so-called ‘forex reserves’ exceeded $60 billion.

Sadly, even if the language of ‘Toothpick Alert’ was mundane, with an analysis that lacked depth, CBN’s immediate rejoinder was an unnecessarily effusive and self-deprecating response against a clearly cynical attempt to deliberately ridicule the efforts and strategy of the apex bank in managing the Naira exchange rate.

Surely, the strategy of reserving scarce forex reserves for a nation’s relatively critical sectors, which The Economist scorned, has in fact proved successful in several countries and encouraged local production and import substitution which also promote increasing employment opportunities.

The preceding narrative should not for one minute suggest that CBN is on track with regard to appropriate Naira pricing. Clearly, so long as the critical indices of CBN’s monetary instruments (inflation, cost of funds and exchange rate) remain out of gear, the exclusion of forex for rice and a host of other intermediate raw materials will certainly induce a general price rise, and also widen the gap between the parallel market and the official Naira exchange rate, to unfortunately make the content of ‘Toothpick Alert’ a prophetic report.

Nonetheless, this need not be so if CBN management finally accepts that our exchange rate dilemma will not be resolved by mere lip service to the role of demand and supply as the critical determinants of the constant intense pressure on the Naira exchange rate. Surely, the current process of monetising distributable dollar revenue sustains our economy’s albatross of Excess Naira supply forever chasing dollar rations in the market.

Consequently, so long as the disenabling burden of untamed Naira surplus is sustained, not even hundreds of billions of ‘forex reserves’ will arrest the cascading tumble of the Naira exchange rate and the attendant disastrous consequences for our economy and our social welfare.

However, the adoption of dollar certificates for the monthly allocations of dollar denominated revenue will certainly reduce Naira liquidity while conversely, instigating relative dollar surplus to produce a stronger Naira; indeed, such a temporary paradigm shift in the market was undeniably responsible for the ‘crash’ in dollar exchange rate to N190=$1, i.e. well below the official interbank market exchange rate of N197=$1 during the elections in April this year.

Sooner than later, the CBN will be forced by unfolding realities to admit that the monthly substitution of Naira allocations for dollar denominated revenue remains the major threat to the Naira exchange rate and our national security. • Boyo is a public finance analyst.