Hey fam, apologies for my inconsistencies, its really a struggle holding down a 9-5 job, blogging and managing other personal projects. But hey it’s really no excuse, I am working on balancing all my commitments effectively and become a more consistent blogger from this quarter of the year, so wish me luck ūüôā

So last week the CBN Governor announced that we are adopting a floating exchange rate regime as opposed to a fixed one (save for some 41 items that can’t access dollars officially). What this means simply is that the CBN would no longer be responsible for determining the exchange rate of the naira but this would rather be determined by the forces of demand and supply. So what are the implications?

naira-notes-650x400

First, we can finally expect that the foreign exchange scarcity we have been experiencing for the better part of the year may finally come to an end. Second, after the initial adjustment phase, we should expect to see less fluctuation in the value of the naira (emphasis on less, I would explain that latter). Third and in relation to the previous point, less fluctuation would increase the confidence of both local and foreign investors. Nobody wants to invest in an economy where the value of their assets changes everyday, hopefully this will stem the amount of capital flight we have also witnessed this year. Fourth, depending on how we approach our attempts at economic diversification, this devalued Naira can make our exports more competitive in the international markets but given that some local manufacturers still have to get inputs from abroad, it is not clear what the net benefits will be, as imports are now expensive. Fifth, instead of using our already limited and shrinking foreign reserves to defend the naira, the government can channel these funds to other productive sectors of the economy.

Conversely however, this will lead to an increase in the cost of imports¬†and a consequent rise in prices of goods and services. However, given that for all practical purposes the Naira had already been devalued anyway as ¬†most people could hardly access dollars at the official rate , there may not be any significant increases in the costs of our goods. Second and in relation to the point I made in the previous paragraph¬†given that the value of the naira would now be determined primarily by the forces of demand and supply and would no longer be fixed, we should still expect to see some fluctuations from time to time but probably not as volatile. But there’s no need to panic, as there are provisions within the new policy which empower the CBN to step in if the fluctuations become severe or if the market begins to produce undesirable outcomes.

Given the potential benefits of this new policy, the question becomes why did we have to wait for so long to do this? why did we have to allow loads of SMEs to close and for thousands of people to be laid off? I think this is where the real lessons are  to prevent us from having to go through this quagmire again.

First, President Buhari is not an Economist and has no business interfering with the CBN…same goes for any other President¬†

Anyone who followed the entire debate must have seen the president’s ideological and somewhat emotional attachment to keeping the value of Naira as it was. He repeatedly said ‘I will not kill the Naira’ even though the Naira was already dead and buried¬†¬†even though every economic indicator showed that the rate¬†was clearly unsustainable.Not only does he not have the academic qualifications to make such a call, he was overreaching his powers by interfering in the affairs of the CBN. ¬†This is precisely one of the reasons why theoretically Central Banks are supposed to be independent, so that the¬†preferences of the leader do not undermine the economics of monetary and exchange rate policies. Of course in reality, given that Central Banks are political constructs, they are not always fully independent even in advanced societies. But they still try to maintain the illusion of the Central Bank’s independence rather than outrightly undermine¬†the institution and its Governor-which is what Buhari did to the CBN and Godwin Emefiele. This is bad behaviour and should not be repeated going forward.

Second, when it comes to devaluation or exchange rate policy, its really all about the politics

Apart from the President’s ideological and emotional attachment, the political implications are super real. First , it will be always be remembered that it was under his administration that the value of the naira to a dollar fell from about 197 to about 300. This is quite ironic and even funny given that he famously said during the campaign that he would make 1 naira equal to a dollar. Trust, the PDP to leverage this effectively in the 2019 elections. Also, devaluation means higher costs of imports and consequently higher prices and hardship for people; this is probably what he was trying to avoid so that it doesn’t affect his popularity.

But this stance was grossly ill informed and had real costs for Nigerians. First, the¬†fall in demand/price of oil is not just a temporary lull in the market as¬†experts forecasts that there are no signs it will rise soon, at least not to the previous $100/120 mark. This is not surprising when you consider increase in shale oil production in the US, stagnation in China’s economic growth and the switch to alternatives sources of energy in various countries. Second, defending the naira meant depleting our limited reserves which they could have used in other productive sectors which may have partially offset the costs of devaluation had they agreed to it.

Given the level of popularity and goodwill he enjoyed upon assuming office, he could easily have agreed to a new exchange rate regime in his first month and put the blame on the previous administration. It would have been easier for voters to forgive him and he would have saved us all this suffering. But now jobs have been lost and he is becoming increasingly very unpopular even among his supporters.

Third, it is about time we have a discussion on what the actual role of the state should be in our development

I can’t help but say it one more time that the President has absolutely no business meddling with exchange rate policy; we have mechanisms and institutions set up for that purpose and they should be left to do their job. ¬†First, a fixed exchange rate regime is already a form of non-market intervention, as the prices are not determined by demand and supply. This is already an inefficient model and recent events have shown how unsustainable it is for our economy. Second, given ¬†the inefficient nature of the former exchange rate regime, having the President consistently insist on a particular exchange ¬†rate, distorted it even further. It is clear to see how excessive state intervention perpetuated this crisis. I emphasise ‘excessive’ because state intervention in itself is not bad, however what matters more is the nature of its intervention. If the intervention is not to enhance the functioning of markets or to correct market failures; it is best for the state to mind its own business.

Finally, we really have to intensify our diversification efforts

Changing our exchange rate policy is by no means a silver bullet to our economic woes. The best our new regime can do is to stabilise the economy but it would by no means significantly increase our foreign exchange earnings, so long as oil is still our main export product or lead to an appreciation of the Naira.The only solution is to actually diversify, increase the value-added to our locally manufactured goods and make our exports more competitive. This is therefore where the real work is and should be the major priority of this administration within the next 3 years.

Advertisements