The net effect is that the
economy has slowed down and nearly grinding to a halt. Companies are
retrenching staff as they cannot produce. Unemployment and social misery is
rapidly compounding and will compound in an accelerated fashion if the current
policy is not reviewed. Unlike the good intention professed by the President,
Nigerians are not the ones benefiting from this current fixed exchange rate
policy but few Nigerians who are privileged to allocate or get dollars at
official rate who are making huge fortunes on dollar price arbitrage. It should
be emphasized that unlike President Buhari would have wished, that even those
who get the dollar at N196, if they ever really do any manufacturing or
trading, are not pricing their inputs and final products at N196 to a dollar.
Every business is pricing their input at close to parallel market rates to
determine their final shelf and market price. Imported inflation is
skyrocketing and may continue to do so in accelerated fashion. In essence, the
federal government’s good intention of taming imported inflation by legislating
an exchange rate has not materialised. Our current fixed exchange rate policy
is therefore like an ostrich that buries its head in the sand or can be described
as an attempt to hide behind a finger. The ostrich that buries its head in the
sand does nothing really to manage its danger but engages in a self-delusion
that it is doing so.
The indices of the test of
the current policy are clear. It is not working. Output is down, inflation is
rising and unemployment is beginning to accelerate as companies close down or
rationalise operations. Investment confidence has been eroded leading to
massive capital flights. In a country that need foreign direct investment to
support its low capital formation and national savings, current monetary policy
flip-flops and uncertainty have not helped investor confidence. The negative
trajectory of the growth of our foreign reserves now at USD28billion, its
on-going rapid erosion due to attempts by the reserve bank to artificially
defend the naira at its overpriced value further erode investor confidence and
increases uncertainty concerns of investors who will either wait for the dark
clouds to settle or fly with their capital. It should be emphasized that
investors are less concerned about exchange rate or value than with the
uncertainty of where the exchange rate will be tomorrow. No-one does anything
when everyone is uncertain. The economy slows down and unemployment accelerates.
Meanwhile, speculators continue to bet against the currency of a country with
eroding trajectory of reserves, front loading and amplifying demand for forex
and further driving up differential between the official and the parallel
market.
We join the call for the
naira to be floated but with some exchange controls that ensures that
short-term arbitrage players have little incentive to bet against the naira. A
dollar that is priced close to its equilibrium price and market value will
reduce artificial, speculative and front –loaded demand. During a fuel scarcity
problem, every car with a half tank who can still run for another week goes to
queue up for fuel, amplifying demand and compounding the fuel scarcity problem.
A floated market determined the naira-dollar rate that ensures that, “anyone
who can pay will get” will eliminate speculation and front-loading. A floated
exchange rate policy will also mitigate significantly the uncertainty concerns
of investors reversing current capital flight while stemming the erosion of
foreign reserves. The national treasury will also be boosted by a dollar that
is priced at its true market value to the naira. The rent seeking and arbitrage
margins on the dollar sold through the official market will be eliminated as these
arbitrage differentials come directly into the national treasury boosting
government revenue at this critical time of fiscal constrain.
A floated exchange rate
policy will improve output and get more people back into jobs. A floating
exchange rate policy supported by prudent fiscal management including the
privatisation of refineries to bring investors who along with the Dangote
refinery in the pipeline, will produce petroleum products locally, will
eliminate the huge pressure on the dollar by petroleum importers, which could
even strengthen the naira.
What are the downsides of a
floated exchange rate? A floating exchange rate policy may imply that the naira
to the dollar rate will become significantly higher than the current N196 in
the near term. The fact however is that only few privileged elites and their
businesses get the dollar at current official rate. Most Nigerians buy and
price their production input at parallel market rate. The Nigerian economy
cannot lose what it does not presently have in real terms in a strong naira. A
floated naira with exchange controls that mitigate against short-term arbitrage
incentives, where speculation and front-loading are eliminated may actually
settle at a rate better than current parallel market prices. The choices before
us are simple. An illusory strong naira that only a few privileged Nigerians
get at official rate with declining output and rising unemployment or a naira
priced at its relative real value with increasing output, investment and rising
employment.
It is important to stress
that there is no painless monetary policy option on the table for Nigeria at
current low oil prices, especially for a country that has squandered its
previous oil windfall savings. A Buhari government with its strong patriotic
credentials and integrity has the goodwill to take tough economic decisions and
get the buy-in of the Nigerian people.
As it dilly-dallies
however, running away from tough economic conditions, with declining economic
output and rising unemployment, it begins to inevitably lose the goodwill that
it seeks to protect. This government or ruling party has only a two-year window
to fix the economy and present its economic management credentials to Nigerians
as it seeks re-election in the last two years of its administration. It risks
boxing itself into a corner as current monetary policy are largely palliative,
attempting to provide symptomatic relief for a patient whose fundamental
underlying condition is rapidly deteriorating. The patient does not have to get
into intensive care before the right medicine is administered. It may be too
late. There is a “fierce urgency of now” to act with more flexible economic
policies. We wish President Buhari well. (Guardian)
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