…the rational response to rising prices is either front-load spending (driving prices up further), or look for safe haven assets (like the U.S. dollar). Both responses put further downward pressure on the naira. Why not, therefore, seek to strengthen the naira as a store of value, even as we free the market for trading in it?
The Monetary Policy Committee (MPC) meets today and tomorrow amidst a growing consensus on its impotence in the face of the major economic pressure points facing the economy. The economic policy dilemma is simple. How do we square negative output growth, on one hand, with rising domestic prices, on the other? But the tools with which to address this problem introduce an almost Manichaean, “either or”, quality to the choice of appropriate policy responses.
According to this characterisation of the problem, it’s either the MPC — the Central Bank of Nigeria’s (CBN) main monetary policy vehicle — opts to deal with rising prices (by tightening monetary conditions) or prioritises output growth (by pursuing more accommodative monetary policy). Up to this point, not much is amiss. Until the point is admitted that unlike those economies where the monetary policy function’s continued support of economic growth contributed to the exhaustion of available policy instruments, the CBN’s attenuated options are an idiosyncratic outcome. The result of a local failing.
For the clearest evidence of this, look no further than how it has managed the foreign exchange markets, thus far. We all complained that the naira peg up until the recent liberalisation was not only expensive (we were running down a difficult to replenish national resource by providing it at bargain basement prices to select economic actors), but did not make for proper policy (despite arguing this position on the grounds of holding domestic prices down, the consumer price index was single-mindedly heading in one direction: northwards). Eventually, the CBN conceded the logic of this argument, and purported to adopt a flexible exchange rate architecture.
This has been anything but, as most banks’ treasurers would tell you. Simultaneously as “bid” and “sell” quotes were “freed” at the interbank foreign exchange market, caps were introduced on “spreads”. In other words, whereas I could theoretically buy at any price, I could only sell at a pre-defined mark-up. Inevitably, in the wake of the interbank foreign exchange market’s “liberalisation” prices clustered eerily around a new mid-point.
In the CBN’s reckoning then, a properly functioning market is not a tool for more efficiently allocating goods and services, especially scarce ones.
Undoubtedly, then, the CBN has done everything to ring-fence price movements in the new interbank market in a way that has the echo chambers wondering how much basic economics the apex bank is familiar with. On Friday, last week, the latest instalment in the saga came when banks were directed to sell foreign currency proceeds from Western Union-type transfers to bureaux de change.
Obviously, the CBN’s goal (or hope) is that additional liquidity from this new source should help support the naira’s exchange rate at the parallel market. By extension, a better performance of the naira at the parallel market should narrow the premium between this (“black”) market and the interbank one, making it easier for the CBN to get away with the diverse price support schemes it has put in place since it decided to “free” the interbank foreign exchange market.
In the CBN’s reckoning then, a properly functioning market is not a tool for more efficiently allocating goods and services, especially scarce ones. However, given the diverse interests in play in any market, it is also not easy to have the CBN subvert the market in pursuit of preconceived goals, while yet describing such a beast as “free”.
Nor, for that matter, is it immediately obvious that the goal to which the CBN has undermined the free functioning of the market — a preferred exchange rate for the naira — is the one likeliest to stand the economy in good stead.
For in truth, the gain from higher domestic savings is larger than that from lower government borrowing costs, especially when all of government’s borrowing is for current spending.
Aside the much advertised penchant of the Nigerian for imported goods (truth is that there are really few locally produced goods), most of us today confront a painful reality: our nest eggs are being wiped out by rampant inflation. What to do? The CBN, and the federal government would prefer that as patriots, we do nothing.
However, the rational response to rising prices is either front-load spending (driving prices up further), or look for safe haven assets (like the U.S. dollar). Both responses put further downward pressure on the naira. Why not, therefore, seek to strengthen the naira as a store of value, even as we free the market for trading in it?
If this requires that the real return on naira-denominated assets will rise, and along with it government’s cost of borrowing, then so be it. For in truth, the gain from higher domestic savings is larger than that from lower government borrowing costs, especially when all of government’s borrowing is for current spending.