CBN: Promising what it can’t deliver?

The Central Bank of Nigeria has been struggling to shore up the Naira with limited success. It keeps assuring us not to panic; that it is on top of the situation. A better example of wishful thinking may be hard to find because in truth its powers are very limited indeed. Given the continuing decline […]

The Central Bank of Nigeria has been struggling to shore up the Naira with limited success. It keeps assuring us not to panic; that it is on top of the situation. A better example of wishful thinking may be hard to find because in truth its powers are very limited indeed. Given the continuing decline in oil earnings and our huge appetite for imports, foreign trips, health tourism and other dollar-denominated expenses its interventions would continue to have limited impacts. There is an urgent need for a new approach consistent with economic trends, current realities and policy imperatives.
The Bank has been under tremendous pressure recently and not just because of scandalous allegations of funding Goodluck Ebele Jonathan’s failed comeback bid. The exchange rate of the Naira remains the most disturbing to Nigerians, especially the business class, crashing as it did from N165 to about N240 to the US Dollar in the parallel market due to the twin effects of massive looting of the treasury, financing of campaign spending as well as the collapse of crude oil prices. The CBN has found itself with limited foreign exchange to keep propping up the Naira and has resorted to the timid response of banning the use of its Dollars to import certain items.  It has since restated its resolve not to allow the Naira to slide any further.
Which brings to mind a recent court case in neighbouring Ghana where one John Ephaim Baiden, a legal practitioner, was so frustrated by the management of the country’s exchange rate that he filed a suit in March last year asking the country’s Supreme Court to issue an order of mandamus on the Bank of Ghana or its governor and the board of directors to provide a stable currency, and a change from a floating rate regime to a fixed regime or a reasonable adjustable peg regime. He also wanted an order on the Bank to abrogate the country’s dual exchange rate, and institute a single exchange rate system; and, in addition, to provide Ghana with a 1:1 (or nearer) relationship with the leading global reserve currency (the dollar) as was the case in 2007. Predictably, the Supreme Court, in a unanimous decision, held that it lacked the jurisdiction and the competence to pronounce on the matter.
Presided over by Mrs Justice Sophia Adinyira, the Court, while appreciating the plaintiff’s concerns and even personal losses, held that it is still not the “proper forum for the plaintiff to ventilate his frustration” and, accordingly, threw out the writ.
Just as in Ghana, our quest for a stable currency is left to the Central Bank. But do these central banks really have the powers to do much? Despite what they themselves may pretend, their options are really limited; all they can do is to tinker with the machine, under severe structural and (very often) serious political constraints. In our case, the CBN seems trapped in Economics 101, limiting itself to the basic question of supply and demand. Hitherto castrated by an overbearing Minister of Finance and Coordinator of the Economy, and too timid to tell the Presidency that more serious measures and better coordination is necessary it keeps merely responding to changing oil and gas market forces. And don’t even start me on that toothless-bulldog called the National Planning Commission! The exchange rate policy goes beyond CBN.
The Naira is bound to remain under serious pressure because those we would want to buy goods and services from want payments in a currency they themselves can use to purchase other goods and services they require. We cannot pay them in Naira. Since we export very little besides oil and gas, and prefer to import everything else, we must either produce more exportable goods and services or we must cut our imports. There are no two-ways about this. More oil, gas, solid minerals and agricultural raw materials exports would offer only temporary respite. Their demands are unstable, and are gradually declining with better technology. Their prices are subject to the vagaries of the market. The only road to economic salvation is manufacturing. When we refine our petroleum, produce our machinery and spare parts, locally produce our chemicals and other intermediate inputs, make our cars, clothing, medicines, electronics and other goods we would no longer need to demand for more and more foreign exchange. The naira would then become a strong currency; even our neighbours would start hoarding it to buy Made-in-Nigeria goods and pay for our services.
Okay, so the CBN is reluctantly waking up to the fact that unrestricted laisser-faire cannot work. It is mercifully banning 41 items from being imported with our officially sourced FOREX, and promising to add more to the list. This is good, but not enough. Our officials and industrialists are also talking about poor infrastructure. Our economists focus on obstacles like rigid labour laws, legal constraints on land acquisition, and the ‘difficulties’ of doing business. These are all important and we must try to resolve them if manufacturing is to succeed. They are necessary measures, and they may make it easier to “do business” ; but are not sufficient to cause manufacturing to happen.
The revival of manufacturing in Nigeria, as in most developing nations, demands radical changes in monetary policy, exchange rate policy, trade policy, and industrial finance, along with the strategic coordination of all four. It also requires a return to industrial planning with a long-term perspective, often termed “industrial policy”, which was at the foundation of successful industrialization throughout history, despite all the neo-liberal folktales we are fed with daily.
Monetary and exchange rate policies are in the domain of the CBN, and it is not doing enough. Interest rates are too high for serious investors and these rates, along with the sharp practices of the banks, discourage borrowing and even encourage default. Trade policy is under the jurisdiction of the Ministry of Trade which is busy hobnobbing with importers to secure presidential “waivers”, and tax holidays, and is unable to check dumping from China and India. It does not even seem to understand that the WTO rules have options we have a right to resort to if we want to encourage our local industries. Development finance, sufficient and long-term funds at realistic rates, is the responsibility of the Ministry of Finance, though the CBN is intervening somewhat. While these divisions of responsibility exist in most countries, we succeed or fail to the extent that the Government (through Planning Commission?) coordinates and harmonizes industrial policies across these ministries, departments and institutions.
The value of the naira, access to foreign currencies, and the exchange rate policy generally are dependent on overall policy thrust of a government and we should stop fooling ourselves by thinking it is the sole preserve of CBN, and can be determined solely by its policies. The naira will remain fragile without an industrial policy. Making it artificially too strong could also end in disaster. Even then, not everyone would agree that the naira is too weak. If you sell in dollars and pay your expenses in naira, you would prefer a very weak naira indeed. For all policies there are winners and losers. The question is; what is in the interest of the vast majority?