In the end, it would seem that the markets were not as sanguine (as was the Central Bank of Nigeria, CBN) about the implications for the economy of JPMorgan’s decision, announced last week, to phase Nigerian bonds out of its emerging markets government bond (GBI-EM) index series over two month-end rebalancing periods. This phasing out will commence by end-September, terminating on October 30, 2015. Initial reports on the markets’ reactions speak of an increase in price volatility in both the domestic bonds and foreign exchange markets.
Given that Nigerian bonds’ presence on the index provided would-be investors with the assurances of liquidity and market transparency required to put money into domestic financial assets, this move may create a financial black hole in the global markets that few but the hardiest investors would be minded to take on. Of course, with the risk premium associated with investing here poised to rise, the cost of domestic entities’ foreign debts would trend northwards. According to a recent estimate, bond yields currently are at 16.2 percent, having risen from 13.5 percent in May.
However, all of these do not answer the question: Why did the local markets go into a funk? For, in truth, they have had plenty of time to price this development in. About eight months ago, JPMorgan placed the economy on its “index watch”, because of its concerns that the CBN’s preferred response to domestic monetary conditions was making it increasingly difficult for foreign investors to understand our local market. Two things it seemed were being compromised by the apex bank’s new preference for administrative interventions in the markets: transparency, and “liquidity to transact in the Nigerian FX market”.
We do not, therefore, have a demand problem in the FX market. What we have is a supply bottleneck. And in such cases, the easiest and most transparent approach is to have the price mechanism allocate resources amongst competing needs.
In response to the decision by JPMorgan to place the country on its watch list, the CBN strengthened the very same administrative measures that lend opacity to domestic foreign exchange markets. Clarifying its stance on JPMorgan’s eventual decision to delist the country, the CBN, last week, argued its corner most strenuously. Essentially, the apex bank remains persuaded that the bulk of its challenge in the domestic FX market is the result of “the high propensity for speculation, round tripping, and rent-seeking in the market”. Therefore, it has acted, thus far, to ensure that only “genuine customers” are eligible for FX.
On balance, the CBN’s actions of recent have underscored the drift across the economy towards statist policy responses. Over the last week, my attention was drawn to a list of actions at the fiscal (or better still, federal government) level, which confirm this trend. Top on this list is the refusal to countenance the removal of fuel subsidies, and government’s decision to try running the refineries.
All of the arguments behind our embrace of dirigisme could be met, beginning with that of the central bank. At the height of its dominance of the monetary space, when its foreign reserves were boosted by strong oil prices, even the CBN estimated domestic FX needs at around US$600m daily. The only reason why much of this demand is today classed as “speculative” and “rent-seeking” is that much lower oil prices and poor management of the country’s earnings have reduced the amount of money available to the apex bank to intervene in the markets.
Arguably, the impersonality of the price mechanism threatens poor and vulnerable segments of the populace in a battered economy such as ours. Nonetheless, there are alternatives to mitigate these effects.
We do not, therefore, have a demand problem in the FX market. What we have is a supply bottleneck. And in such cases, the easiest and most transparent approach is to have the price mechanism allocate resources amongst competing needs. On the other hand, it is a measure of the sophistication of our policy planners that they would rather criminalise “speculation”.
Why, it might help to ask the CBN, does it imagine that the oil tanker segment of the shipbuilding industry globally has remained robust despite the slow growth across other sub-sectors? Precisely, because there are economic actors ready to store oil in huge tankers on the high seas in the expectation of higher prices later. I imagine that if Nigerians were somehow in charge of the global oil markets, they would have moved to punish such conduct.
That “speculators” and “hoarders” play useful economic activity is a settled conversation. Except, however, in those economies where a belief in the innate “goodness” of economic actors (often shorthand for the “current rulers”) persuades reliance on command and control methods.
The sad part of this is the difficulty in understanding why the Buhari administration, despite being privy to the many alleged malfeasances of its predecessors, is still minded to have the state in control of everything. Arguably, the impersonality of the price mechanism threatens poor and vulnerable segments of the populace in a battered economy such as ours. Nonetheless, there are alternatives to mitigate these effects. If our experience since independence teach anything, it is that handing resource allocation decisions to individuals is the surest recipe for continuing defalcation.