Ultimately, then, whereas in the short-run the ability of the apex bank to keep the markets funded would matter a lot, everything, thereafter will hang on the willingness of the managers of the economy to implement rational economic policies… Can they? Not on the balance of evidence so far. This evidence is two-fold.
For the second time in as many months, I find myself in near complete agreement with the policy thrust of the incumbent administration.
One may cavil at the elaborate procedures and processes with which the Central Bank of Nigeria (CBN) girded its announcement, last week, of its introduction this morning of a freer market in foreign exchange transactions in the country. For the truth is that too many rules often have the unintended consequence of increasing operators’ administrative costs, and thus favouring big hitters in the market.
In a market with too few players, therefore, just a few big hitters are enough to raise the spectre of price collusion. Better therefore to favour process transparency and a competitive market over one where a plethora of rules, intended in all honesty, to set market players on the straight and narrow, instead end up compromising the system.
But, like I already acknowledged, this is merely to gripe — at least for now. On balance, as with the freeing last month of pump station prices for petrol, the apex bank’s decision to allow the price mechanism a bigger role at the interbank foreign exchange market does several things. First, it frees up scarce public resources. In the one case, it was the unconscionable amount of public funds that was supporting “subsidies” to fuel importers, which on all accounts was simply ill-concealed baksheesh.
The workings of the “subsidies” in the foreign exchange markets were better concealed. Argued as part of a concern with allowing essential imports into the country, and keeping inflation down, it simply moved public money, this time in dollars and associated “hard currencies”, into the hands of a select few who then, on the basis of anecdotal evidence simply re-sold at the black market for a premium. Even if we ignored the gossip on main street, and agreed with government that all the subsidised funds went into imports, then the fact that most such importers marked their re-sale prices to the black market rate was problematic at best.
Problems still remain with the plans for opening the interbank foreign exchange market today. A lot will be hanging on the availability of dollar liquidity. And as we speak, only the central bank may provide this. Giving the central bank’s commitment to meeting obligations from past due letters of credit, and when you remember that IATA alone puts its members’ sums in this regard well past US$500m, then, the initial intervention by the apex bank in the markets may not be lesser than US$1bn, if the market is not to gum up on its first day.
Does it matter that the yield on most financial instruments are currently negative? I’m told not. But should it matter that, on account of this low yields, the naira is no longer a store of value? I hope so.
Unfortunately, given the central bank’s poor monetary policy record over the last 18 months, it may have to do this with a lot of conviction and persistence for a while yet before the markets take it seriously on this policy twist. Three sources of supply will matter for the medium-term success of this policy. First, is the huge amounts of dollars reportedly ferreted away by well-to-do nationals in private vaults. Second is the return to the market of foreign portfolio investors. Third, is the mainstreaming of personal home remittances.
All of these sources are fraught, though. Arguably the biggest let, is the paucity of estimates on their sizes and the frequency with which they will enter the markets. Then there are the less obvious problems. Depending for instance on how clean the domestic supply is, the government’s ongoing anti-corruption campaign may impede the transition of “hard currencies” from private vaults to the autonomous markets.
Personal home remittances, on the other hand, may be less robust than they were before the global economy entered the “new normal”. And with domestic securities dropping out of indexes such as JP Morgan’s for emerging market government bonds (Morgan Stanley Capital International [MSCI] is, reportedly mulling the exclusion of the Nigerian equity market from its MSCI’s Frontier Markets index), we ought to worry over how strong the number of sub-investment grade investors out there with appetite for the country’s securities is.
Does it matter that the yield on most financial instruments are currently negative? I’m told not. But should it matter that, on account of this low yields, the naira is no longer a store of value? I hope so.
Ultimately, then, whereas in the short-run the ability of the apex bank to keep the markets funded would matter a lot, everything, thereafter will hang on the willingness of the managers of the economy to implement rational economic policies.
Whereas, most estimates of the real effective exchange rate of the naira put it in the US$1/N250 range, the assumption in putting these estimates together is that all other things are equal. They usually are not.
Can they? Not on the balance of evidence so far. This evidence is two-fold. Begin with the reluctance we have seen so far to embrace market solutions. Add to this, reports that the CBN may have sweetened the federal government’s acceptance of a float by suggesting that the naira would somehow end up at the US$1/N250 range after this policy may have settled. Then end with the continued ban on the 41 industrial items from admission into trading on the reinvigorated interbank market.
Whereas, most estimates of the real effective exchange rate of the naira put it in the US$1/N250 range, the assumption in putting these estimates together is that all other things are equal. They usually are not. So this should remain a heroic assumption until policies match our wishes. The 41 industrial items, incidentally point out how long it may take for the Buhari administration’s policies to match our wishes.
Barred they may be from accessing foreign currencies at the interbank market. But banned they are not — at least not yet. But the market reports that importers able to bring these items in without recourse to the official window have had difficulty obtaining the CBN’s authorisation on the requisite documentation. Yet the economy is awash with these imports — just a little bit more expensive.
Porous borders and venal watchmen. These ensure that banned goods come in with no receipts going to government’s already parched purse.
My main argument? We cannot continue to make laws that we cannot, or do not intend to enforce.
Ifeanyi Uddin, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
