Naira, Between the CBN’s Dream and its Nightmare, By Uddin Ifeanyi
The CBN may look to its political space for cues, but its mandate is an economic one. If after freeing the naira from current policy impediments it loses value rapidly, that would be because the economy (and the policy responses of its managers) do not yet support a currency as strong as that in the CBN’s dreams.
Three weeks after the Central Bank of Nigeria’s (CBN) rate-setting committee (the Monetary Policy Committee — MPC) shocked the markets by finally appearing to yield to a growing consensus on the need to liberalise the foreign exchange markets, all is eerily quiet on the monetary policy front. It was not always that way, though, for in the immediate aftermath of the central bank’s announcement, the “dead cat” did bounce — the stock market gained a wee bit, and the naira pared some of its recent losses at the parallel market.
Still, with little movement on the monetary policy front, all of these gains have since reversed.
How could the markets have read the central bank so wrong on a matter so crucial? For starters, the MPC’s communique at the end of its May 2016 meeting used the noun “flexibility” as a modifier of the exchange rate markets five times (in a 13-page document). So there ought, really, to be no doubting the central bank’s commitment to putting in place “a dynamic foreign exchange management framework that guarantees flexibility”.
Except of course, the central bank repeated the noun “flexibility” only as part of a process of re-assuring itself, and not the markets. Recall the saying about repeating an idea long enough in order to help belief? Or how else does one explain that no one trailed the CBN’s new commitment ahead of the MPC’s May meeting? Or that very few talking heads could make sense of the central bank’s promise to release “details of operation of the market…at an appropriate time”?
On this matter, facts may be few and spread thinly, but we do know that the CBN has been consulting widely on its plans for the new exchange rate mechanism. If we hear correctly, the market’s “transparency” and the need to deal decisively and equitably with the current backlog of unmet demand has topped the “to-do” list at these meetings. However, giving how broadly the central bank defines its stakeholder universe, and its need to consult with all its nooks and crannies, “an appropriate time” was always going to be anything from a month after the central bank announced its transition to a new market discipline to sometime next year.
If “transparency” and how to meet the large “backlog of unmet demand” in the market today are the “rock” against which the central bank has been pitched since May 24, reports out of the apex bank suggest that concerns over how much volatility will happen in the wake of a policy change (the naira could lose even more value, especially against the serious supply constraints that the CBN’s policy options to date have built up) and uncertainty over the extent to which much freer prices will “increase the supply of foreign exchange to the economy” have been the CBN’s “hard place”.
…the economy needs deep-going reforms if it is to emerge out of the doldrums that it is currently headed. Irrespective of the character of the reforms we choose, or how we then implement them, one consequence would be to wean domestic economic actors of their large appetite for imports.
The MPC, in its last meeting, described this half of the apex bank’s dilemma in terms of its awareness “that a dynamic foreign exchange management framework that guarantees flexibility could not replace the imperative for the economy to increase its stock of foreign exchange through enhanced export earnings.” Surely, this is not more than one would expect from a central bank whose current composition is the most politically attuned in recent times.
But this brings us back to a dilemma. On one hand, the economy needs deep-going reforms if it is to emerge out of the doldrums that it is currently headed. Irrespective of the character of the reforms we choose, or how we then implement them, one consequence would be to wean domestic economic actors of their large appetite for imports. This is equally a question of building domestic capacity in those sectors where the economy currently depends on imported goods, as it is about making the economy conducive to foreign businesses setting up locally to meet the needs of a large potentially rich market.
However, as we seem to have admitted in the matter of domestic fuel prices, freer prices are a key part of the structural changes that we require. What free prices do is allow resources to be allocated most efficiently.
Today, no price plays this role better than the naira’s exchange rate.
The CBN may look to its political space for cues, but its mandate is an economic one. If after freeing the naira from current policy impediments it loses value rapidly, that would be because the economy (and the policy responses of its managers) do not yet support a currency as strong as that in the CBN’s dreams. Yet, by holding off reforms to the foreign exchange market, the central bank threatens to unleash on the economy its worst nightmare.
Ifeanyi Uddin, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.