• Main News
  • About Us
  • Contact
Premium Times Opinion
Wednesday, August 10, 2022
  • Home
  • Democracy and Governance
    • Bámidélé Upfront
    • Jibrin Ibrahim
    • Okey Ndibe
  • Economy
    • Ifeanyi Uddin
  • Issues of the Day
    • Adeolu Ademoyo
    • Aribisala on Tuesday
    • Dele Agekameh
    • Pius Adesanmi
  • Politics
    • Ebeneezer Obadare
    • Femi Fani-Kayode
    • Garba Shehu
    • Hannatu Musawa
    • Zainab Suleiman Okino
  • Guest Columns
  • Faith
    • Article of Faith
    • Sunday Ogidigbo
    • Friday Sermon
    • Elevated Sight
  • Home
  • Democracy and Governance
    • Bámidélé Upfront
    • Jibrin Ibrahim
    • Okey Ndibe
  • Economy
    • Ifeanyi Uddin
  • Issues of the Day
    • Adeolu Ademoyo
    • Aribisala on Tuesday
    • Dele Agekameh
    • Pius Adesanmi
  • Politics
    • Ebeneezer Obadare
    • Femi Fani-Kayode
    • Garba Shehu
    • Hannatu Musawa
    • Zainab Suleiman Okino
  • Guest Columns
  • Faith
    • Article of Faith
    • Sunday Ogidigbo
    • Friday Sermon
    • Elevated Sight
No Result
View All Result
Premium Times Opinion
Home Columns

As the Economy Prepares for the Winter Season, By Ifeanyi Uddin

by Ifeanyi Uddin
November 10, 2014
Reading Time: 4 mins read
0

“All is well!”, they shout. But the place smolders still. Our Emperor? In the end, not even Nero Claudius Caesar Augustus Germanicus mattered any more after the “Great Fire” destroyed Rome in 64AD.

However, Thursday, last week, the Central Bank of Nigeria (CBN) issued two circulars that were essentially a counter-refrain. Worried about the eventual pass-through of lower oil prices to the economy, the apex bank excluded funding of six import items from the official foreign exchange market. As oil prices fall in the global markets, the main pass through to the economy would include through lower government spend, and lower accretions to the external reserve (and hence a lowering of the CBN’s ability to intervene in support of the naira).

Of late, a new vehicle has been added: the response of “hot money” to the sense that the economy may no longer be able (as oil prices fall) to meet its obligations. If this “money” (largely foreign portfolio investment in the economy) then rushes for the gate, it would put disproportionate pressure on the naira’s exchange rate. All of this, the CBN may have acted to pre-empt.

There are those who would argue that oil prices are an exogenous variable to our economy. I.e. that managers of the economy cannot really do much about it. Thus, it would be in extreme bad faith to blame the incumbent administration at the centre for the current “pseudo-crisis”.

The difficulty with this spiel is that it rehashes an exculpatory argument put forward by the Shehu Shagari administration after oil prices started trending down in June 1981 in response to the glut from reduced demand and over-production. The Ibrahim Babangida administration made the same case following the sharp drop in real oil prices in 1986 (when a barrel of oil traded below US$10, from US$27).

So despite the talking up we have been subject to over the last eight years, what has changed in the structure of our economy, and in the way it has been managed? Not even the composition of our imports has, if the CBN’s list of “banned” items is any indicator. This list is educative after a different fashion. If you back out electronics, finished products, information technology, generators, telecommunication equipment, and invisible transactions from our import list, what remains? Food? (According to the CBN’s numbers, invisibles alone accounted for 51% of foreign exchange use in the first quarter of this year, falling to 49.3% by the second quarter).

Effectively, the CBN has shut demand out of the weekly retail Dutch Auction for foreign exchange. Unfortunately, an economy is like a latex balloon. You do not eliminate air by squeezing it out of a part of an inflated balloon. You only drive it into other parts. The ink had not dried on the CBN’s circular, when this effect became evident. By close of business Thursday, the naira was already exchanging at US$1/N170 on the interbank market.

What to make of this policy direction? Evidently, the CBN is no longer minded to fritter away its reserves defending a currency that has been fatally exposed by falling oil prices, and a weak domestic economy. This is not a bad thing when you consider how low the reserves have fallen. (The balance on the gross external reserve was US$38.07bn as at Thursday) But what about the naira mid-point (US$1/N155) and the 3% band around which the CBN pledged to protect the national currency? Truth is that even this was already a convenient fiction several months back.

In truth, all of this might even turn out to be a Godsend. I have always worried about the potentially adverse consequences of portfolio investors fleeing the domestic economy. But that was because I had always imagined that the CBN was going to have to backstop the subsequent demand for dollars off very scarce resources. However, a movement to market-driven rates means that fleeing holders of “hot money” would have to fund their need for dollars from the (interbank) market (and most probably take a haircut along the way).

Are we then reconciled to a depreciation of the naira? This is what we are seeing at the interbank market, despite the CBN’s regular pledge to defend the currency.

The answer to this question does not matter as much as the tone of the apex bank’s actions would in the coming days — this period would include the November 24 and 25 meetings of the Monetary Policy Committee. If the second circular issued by the CBN last Thursday is a pointer, then we ought to be concerned. For different reasons, banks keep idle balances with the CBN’s standing deposit facility (SDF) (estimates coming out over the weekend put this at about N562bn), on which they earn some return. There is a context within which it could be argued that these are potentially loanable funds, and the banks do a disservice to the economy by warehousing such monies with the apex bank.

However, this argument misses several other points, especially the ones about the capacity of the economy to absorb additional funds inflow without seeing domestic prices rise, or interest rates fall (interbank rates touched 5% on Thursday). The CBN’s recent decision to remunerate (at the SDF rate of 10% per annum) banks’ SDF balances subject to a maximum deposit of N7.5bn, completely ignores this latter point. Instead, it makes the opposite arguments that these balances constrain the financial intermediation process, and limit banks’ lending to the productive sectors of the economy.

Unfortunately, the simple truth is that the CBN just lowered interest rates and increased domestic liquidity ahead of (or indeed during) a crisis that may have called for exactly the opposite response. The mechanism of lower oil prices pass-through to the domestic economy requires that we should be seeking to drive savings up. To, in other words, increase the attractiveness of naira-denominated assets. And not vice versa.

Eventually, banks’ new liquidity will show up in the interbank bank market, where it would join in driving the naira’s exchange rate down. It would be nice then to describe bankers as unpatriotic. But it would help well in advance to recall (1) that banks’ shareholders (Nigerians, for the most part) demand a healthy return on their investments; and (2) that the CBN’s perverse incentive structure may have had a hand in determining banks behaviour.

Share this:

  • Tweet
  • Email
  • Print
  • More
  • Pocket
  • Share on Tumblr

Related

Previous Post

Emefiele Connects Finance to Development, By Chinedu Moghalu

Next Post

Combating Violent Extremism in the Sahel, By Jibrin Ibrahim

Related Posts

Trust and Confidence Building As Conditions of Good Governance, By Uddin Ifeanyi
Columns

The Policy Implications of 2021’s Low Growth Projections, By Uddin Ifeanyi

February 1, 2021
Akinwunmi Adesina: Africa’s Spotless Son, By Wole Olaoye
Columns

Iron Woman of Berlin, By Wole Olaoye

January 31, 2021
Rethinking Heroism and the Nigerian Civil Service, By Festus Adedayo
Columns

Aliko Dangote’s Costly Mess of the Libido, By Festus Adedayo

January 31, 2021
Why Lai Mohammed Must Be Fired Immediately, By Femi Aribisala
Article of Faith

Is God Invisible?, By Femi Aribisala

January 31, 2021
Religion As Africa’s Trojan Horse, By Osmund Agbo
Columns

South-East Governors: Preparing For a Post-oil and Restructured Nigeria, By Osmund Agbo

January 30, 2021
People Deserve The Coach They Hire, By Owei Lakemfa
Columns

Again, Entombed Humans Triumph Over Death, By Owei Lakemfa

January 30, 2021
Next Post
Sanusi II and the Prospects of Radical Emirship, By Jibrin Ibrahim

Combating Violent Extremism in the Sahel, By Jibrin Ibrahim

The Time To Say “No More”, By Femi Fani-Kayode

Religion, Nigerian Politics and The Grand Delusion, By Femi Fani-Kayode

Editorial

  • EDITORIAL: The Urgency of Tackling Nigeria’s Second Wave of COVID-19

    EDITORIAL: The Urgency of Tackling Nigeria’s Second Wave of COVID-19

  • EDITORIAL: Unearthing the Cogent Lessons In the NESG-CBN Economic Policy Imbroglio

    EDITORIAL: Unearthing the Cogent Lessons In the NESG-CBN Economic Policy Imbroglio

  • EDITORIAL: COVID-19: Calling On Nigeria’s Billionaires and Religious Leaders To Step Up

    EDITORIAL: COVID-19: Calling On Nigeria’s Billionaires and Religious Leaders To Step Up

  • EDITORIAL: Bichi Must Go; Buhari Must Halt Slide Into Despotism

    EDITORIAL: Bichi Must Go; Buhari Must Halt Slide Into Despotism

  • EDITORIAL: The Flaws In Governor Emefiele’s Five-Year Plan For Central Bank of Nigeria

    EDITORIAL: The Flaws In Governor Emefiele’s Five-Year Plan For Central Bank of Nigeria

Subscribe to our Opinion articles via email

Enter your email address to get notifications of new opinion articles as they are published.

Join 526,543 other subscribers

Most Popular

  • The Bad Consequences and Dangers of Adultery and Fornication (Zina) In Islam, By Murtadha Gusau
    The Bad Consequences and Dangers of Adultery and Fornication (Zina) In Islam, By Murtadha Gusau
  • Islam and the Conditions For Marrying More Than One Wife, By Murtadha Gusau
    Islam and the Conditions For Marrying More Than One Wife, By Murtadha Gusau
  • The Women Prohibited For Men To Marry In Islam, By Murtadha Gusau
    The Women Prohibited For Men To Marry In Islam, By Murtadha Gusau
  • Revisiting the Corruption Theory of A Departed Journalist, By Banji Ojewale
    Revisiting the Corruption Theory of A Departed Journalist, By Banji Ojewale
  • The Importance Of Keeping Secrets In Islam, By Murtadha Gusau
    The Importance Of Keeping Secrets In Islam, By Murtadha Gusau
  • The Qualities of a Good Leader In Islam, By Murtadha Gusau
    The Qualities of a Good Leader In Islam, By Murtadha Gusau
  • Slaughtering Animal for the New Born Baby (Al-Aqiqah) In Islam, By Murtadha Gusau
    Slaughtering Animal for the New Born Baby (Al-Aqiqah) In Islam, By Murtadha Gusau

Like us on Facebook

Like us on Facebook

Podcasts

Advertisement

Advertisement

Advertisement

  • Main News
  • About Us
  • Contact

© 2022 JNews - Premium WordPress news & magazine theme by Jegtheme.

No Result
View All Result
  • Home
  • Democracy and Governance
    • Bámidélé Upfront
    • Jibrin Ibrahim
    • Okey Ndibe
  • Economy
    • Ifeanyi Uddin
  • Issues of the Day
    • Adeolu Ademoyo
    • Aribisala on Tuesday
    • Dele Agekameh
    • Pius Adesanmi
  • Politics
    • Ebeneezer Obadare
    • Femi Fani-Kayode
    • Garba Shehu
    • Hannatu Musawa
    • Zainab Suleiman Okino
  • Guest Columns
  • Faith
    • Article of Faith
    • Sunday Ogidigbo
    • Friday Sermon
    • Elevated Sight

© 2022 JNews - Premium WordPress news & magazine theme by Jegtheme.

This website uses cookies. By continuing to use this website you are giving consent to cookies being used. Visit our Privacy and Cookie Policy.