JP Morgan Bond Index Devaluation Blackmail

THE threat by JP Morgan Index Team, a unit of the American Bank, JP Morgan to delist Nigeria from its Government Bond Index, if the Central Bank fails to reverse all of its efforts to manage the negative effects of the sharp fall in oil prices is nothing short of corporate international blackmail.

The JP Morgan Index Team has totally refused to appreciate the fact that given the peculiar structure of our economy and the potentially damaging effects of the oil crisis, the actions of the CBN are vitally necessary.

The attitude of the Index Team clearly proves the suspicion that the real reasons behind their threat are actually different from those being canvassed.

Not only does this show how arrogant and unreasonable the international financial institutions are in defence of their interests, it is also a classic example of the insensitivity of the western financial mafia towards innovative efforts of developing countries to manage economic situations in ways that will mitigate the suffering of the ordinary people.

The interests of the financial elite and portfolio investors are always their number one priority. It would be recalled that in the wake of the steep decline in global oil prices, the Central Bank had in December 2014 introduced measures to discourage forex traders from hoarding dollars and creating artificial demand.

These measures were targeted at curbing speculative attacks against the naira by unscrupulous individuals who were bent on taking advantage of the situation.

However, in a twist that surprised many industry analysts, JP Morgan in January 2015, placed the Federal Government of Nigeria Bonds (FGN Bonds) which are included in its Global Bonds Index – Emerging Markets (GBI-EM) – on Negative Watch List.

According to the bank, the measures were an indication that the foreign exchange and the bond market were experiencing liquidity issues. Contrary to industry tradition, JP Morgan took this action without contacting the CBN for clarifications or informing the CBN of its decision.  To many analysts and industry professionals, the decision was clearly hasty and unjustified.

CBN Governor Godwin Emefiele’s responded robustly to this development to clarify the issues and reassure investors. First, he faulted the position of JP Morgan that the market was having liquidity issues and assured the availability of sufficient liquidity in the market to meet the trading requirements of both foreign and local investors in spite of the measures.

Second, Emefiele explained that the actions were taken in the light of the volatility of the exchange rate that existed in the market and the need to curtail the disturbing activities, which indicated that speculative attacks were being made against the naira.

Third, Emefiele stated that the actions were in line with its core mandate to defend the currency and exchange rate of the naira. Fourth, that the interbank market has the capacity to support the trading activities of both local and foreign investors and that at any point when the CBN discovers that the market is unable to provide the liquidity that is needed, the CBN would step in to fill the gap for legitimate transactions to go on unimpeded.

Emefiele also expressed CBN’s readiness to explain its position to JP Morgan because of its desire do all that is possible to remain on the index so as to avert the adverse effects of the exclusion on the economy.

These reasons and explanations offered by the CBN Governor are far from being frivolous and unfounded. They are strong and provide the right context for the JP Morgan Index team to understand that the actions were basically targeted at preventing speculative attacks against the currency and posed no threat to the interest of investors who depend on them for advice and that the situation is being well managed.

But in spite of this background, JP Morgan appears bent only in one direction. The bank continues to insist that the CBN must allow a free fall of the naira by floating 100 per cent its foreign exchange rate.

This stipulation is totally ridiculous and amounts to blackmail. Simply allowing the naira to fall cannot be the one and only solution to the financial problem that we face.

It is wrong of the international financial community and its agents like JP Morgan to expect our monetary authorities to just sit back and watch helplessly as the naira falls when there are clearly actions that can be taken to manage the process.

No responsible country would do that. Not even the United States of America floats its currency a hundred per cent. It will amount to a violation of the core mandate of the CBN, which is to ensure price stability and defend the value of the naira.

Defending the value of currency is a common practice of monetary authorities worldwide. Mexico in 2010, placed restrictions on the use of dollars to help its government fight money laundering and drug trade. The Angolan government has also imposed tight foreign exchange regulations to protect the local currency.

Also recently the Indonesian Government imposed foreign exchange controls against the use of foreign currencies in domestic transactions. Contrary to the impression that has been created by JP Morgan and other international media, the Central Bank Governor is not against the devaluation of the naira.

The Central Bank Governor has intervened twice since the beginning of this crisis to depreciate the naira. Today the naira has depreciated by almost 23 per cent year on year and is the highest depreciated currency in the world after Russia and Ghana.

Nigeria cannot afford to adopt the reckless sort of devaluation that is recommended by JP Morgan given economic vulnerabilities and lack of a productive base.

Simply allowing the naira to crash is like asking it to crash to its death. China recently without any prompting decided to devalue its currency. China could afford to do this because it has a very strong industrial and productive base and the devaluation would help give their goods a competitive advantage against other economies like the United States, Japan in the international market by making their goods cheaper.

For Nigeria, the case is not the same. Our economy is heavily import dependent and our exports do not amount to much. Allowing the naira to fall without managing the fall, will not give us any advantage.

Rather it will make our economic situation even worse because we would be importing inflation without the ability to gain from cheaper imports.

This is the sad but painful reality that our country is dealing with which makes the monetary policy management very difficult. What we need to do as Emefiele has variously articulated is to first build up the productive base of the economy in manufacturing, agriculture, power and other key sectors first before exploring the kind of devaluation that China and other much stronger economies can attempt.

After devaluing the naira by over 23 per cent, the CBN Governor is right to say that the naira is ‘appropriately priced’ for now because the interbank exchange rate has remained stable since February 18th, trading between the N193-N197 to a dollar band.

He is also right to argue that the parallel market is not a real determinant of the value of the naira because its relatively high rates are simply as a result of currency substitution and the activities of people who have acquired illicit wealth and are converting it from naira into dollars. Moreover, devaluation cannot be the only solution to the economic crisis that we face.

It is not a magic bullet or Holy Grail. Even after depreciating the naira, the country has to explore other options to avoid a situation where things spiral out of control and ruin our economy.

And this is exactly what Emefiele is doing. He is pruning down speculative and criminal demand for foreign exchange so as to reduce the impact on the naira.

JP Morgan Index team as a member of the global financial mafia that seeks to blackmail Nigeria into a dangerous devaluation exercise so its members can profit should note that Nigerians are smart enough to see through their scheme.

It is our hope that they would see reason with the position of the Central Bank and rescind their decision to delist Nigeria from the index. Nobody is of the opinion that being on the index does not have its benefits. It is estimated that the country would lose over $4billion dollars outflow of foreign direct investment. No one wants this to happen.

But the losses from floating the Naira 100 per cent will make that pale into insignificance. However, if they go ahead to eject Nigeria based on these unreasonable basis, Nigeria will still move on.

As important as these foreign portfolio investments are to the economy, their impact is not as strong and fundamental as that of local and international investors who have shown their commitment to the country by making direct investments in the country.

The truth is the country has benefitted more from the likes of businessmen like Dangote, than it has from some of these short-term, profit-driven portfolio foreign investors who are not willing to make deep commitments into our economy.

It is an indisputable fact that no foreign portfolio investor in Nigeria has built one kilometre or road, added one additional megawatt of electricity, or produced one kg of fertilizer. Not every investment is good.

We need to be careful. The measures taken by the Central Bank Governor so far have been bold, strategic, effective and in the overall best interest of the nation and our economy given the circumstances.

They may come at a price, but whatever the price is, I believe it is worth it. In the situation that we have found ourselves in as a country, there are clearly no easy answers.

Either way one looks at it, the fact that we cannot escape the inconvenience is clear. The actions, which Emefiele has taken, will help create an enduring macro-economic environment, which will help the Central Bank in its core responsibility of ensuring good monetary policy.

Nigerians should resist the attempts by the JP Morgan Index Team and their ilk to make our situation worse. Let’s build our productive base first before considering the kind of advice these “friends” are offering us.   • Adegboyega is a public policy analyst.