Naira exchange rate, the economy and its managers

When Vice President Yemi Osinbajo went in mid-January to Davos, Switzerland, at the head of a delegation of ministers and businessmen for this year’s World Economic Forum, he apparently carried the message of remote intent concerning the economy. He told reporters that the 40 per cent gap between the official and parallel market naira exchange rates was not helpful to the country’s recovery and growth plan and as a result the Muhammadu Buhari administration was engaged in talks with the CBN on the need to close the gap “very soon.”

With the CBN governor as a key member of the National Economic Council which the Vice President chairs, the causes of separate naira exchange rates are not unknown to them both. Thus to proceed to Davos merely to display on the world stage the palpable lack of political will to tackle the domestic issue of naira exchange rate again provides concrete evidence of the IMF’s observation recently that Nigeria’s economic failures stem from willful poor management.

A few months hence, unwieldy delegations of top functionaries of the Federal Ministry of Finance and the CBN will take their turn and embark on a tourist procession to the IMF/World Bank summer meetings in Washington D.C., USA where they will make a laughing stock of the country by recounting what amounts to their collusive refusal to manage Nigeria’s ample resource endowments in a manner that benefits the generality of the people. Nigeria’s official delegations should be prevented from attending such fora forthwith and government functionaries made to focus on proper management of the economy.

A day before the Vice President’s trip, some ministries, departments and agencies appeared before National Assembly committees over the proposed 2016 Budget. Sentiments were expressed that “the CBN had put in place measures” towards improving the naira exchange rate. Finance Minister Kemi Adeosun defended the revised official exchange rate of N305/$1 as realistic. Under the managed floating exchange fixing system, the Federal Government may fix the central exchange rate periodically, but market forces should determine the ruling daily exchange rate within a band that is consistent with the CBN’s principal object of ensuring price and monetary stability in the economy.

The Finance Minister correctly identified hoarding of forex for speculative purpose as the cause of the parallel market exchange rates that are markedly different from the official rate. Sadly, among the forex hoarders are the CBN, deposit money banks, holders of domiciliary dollar accounts without time limit, bureau de change and individuals, all of whom directly and indirectly profiteeringly pad the naira exchange rate and thereby exacerbate inflation and undermine competitive domestic production.

The other day, the Manufacturers’ Association of Nigeria complained that, despite CBN’s assurance that 60 per cent of available forex be reserved for use by manufacturers, most of its members cannot access forex at the official rate from DMBs (which claim not to have sourced foreign exchange from the CBN) and so patronize the black or parallel market. Notwithstanding the formidable army of forex hoarders, the Finance Minister surprisingly stated rather naively that the parallel market would collapse “because it is not being driven by any fundamentals.” On the contrary, unless forex hoarding stops, a truly realistic and stable single naira exchange rate cannot be achieved.

Meanwhile, pending the collapse of the parallel market and based “on contemporary realities” that arose from August 2016, when the Ministry of Budget and National Planning (MBNP) produced the initial draft of the 2017-19 MTEF to January when the NASS committees’ budget meetings held, the set official naira exchange rate was depreciated from N290/$1 to N305/$1 and the inflation expectation raised from 12.93 per cent to 15 per cent in 2017. It is therefore obvious that the wished-off single digit bank loans for businesses, which MBNP canvassed before the NASS committees will not materialise.Similarly, there will not occur heightened diversification of the economy in the circumstances.

One week after Osinbajo spoke in Davos, the CBN’s monetary policy committee met but its communiqué did not give any sign that the apex bank was keen on addressing the Vice President’s concerns over the exchange rate. The false rise of the so-called external reserves (made up of wrongly withheld Federation Account dollar allocations) provides no solace in this regard because the largescale hoarding of forex remains firmly rooted. Recall that peak external reserves of over $60 billion in 2008 did not eliminate the parallel market exchange rate.

As a matter of fact, following the disbursement of FAAC allocations on January 27 not in the accrued currencies but in one lump of N400 billion (an amount that contains inappropriate technical borrowings from the apex bank in place of the withheld FA dollar allocations), Nigerians will wait in vain for the CBN to disclose it as yet secret method of “unifying” the naira exchange rate based on the central rate of N305/$1 set in the 2017 budget. However, it should be added that given the economic fundamentals (read proper transacting of available forex in the system), the naira exchange rate would appreciate over the 2017 budget exchange rate. But the effective rate could be stabilised administratively. And the much desired economic objectives would materialise.

Therefore, cognizant of the critical importance of a stable and realistic single naira exchange rate to revamping the economy and having been incessantly shown the painless approach to rapidly evolving the beneficial exchange rate by this newspaper, the Buhari administration should eschew further indecision owing to the fact that 20 months out of its tenure of 48 months have been expended and also the fact that economic measures, upon implementation, always have lagged outcomes.