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The CBN needs its credibility reinstated 03 Aug 2015

The Monetary Policy Committee (MPC) decided to leave policy rates unchanged when it met last month. Decisions that leave things as they are have characterised MPC meetings in the past 16 months. Yes, the policy-setting committee of central banks often leaves rates unchanged. But this is usually for economic reasons, and because of the need to have previous policy changes to permeate the system.  
    
On the recent occasions that the MPC meetings of Central Bank of Nigeria (CBN) have upheld previous decisions, it has been for reasons hardly economic. At The beginning of this 16-month period, the MPC meetings of March and May 2014, which were led by then-Acting CBN Governor, Sarah Alade, basically held off decisions. The plausible reason was that decision time should shift until Godwin Emefiele resumed as governor in June. This lacuna was created by the ill-advised sacking of the bank governor Sanusi Lamido Sanusi (now Emir of Kano), three months to the end of his tenure, by former President Goodluck Jonathan. A symbolic respect for the independence of the central bank should have restrained the former President; but it didn't.

But instead of the decisiveness that was anticipated, equivocation has been noted with CBN policy stances under Mr. Emefiele. The evidence is not further than the management of the exchange rate which has turned the local currency rather poignantly as a political tool.

Last November, the CBN devalued the naira by 8.3%, by moving the dollar exchange rate from N155 to N168 at its biweekly currency auction window. This move quickly paled in consequence in the face of political risk-induced demand pressure for the dollar as the 2015 presidential election drew near. Also, the price of crude oil had started to tumble after the government of the day had failed to build an appreciable level of reserve savings in the long period of high oil prices.

These left the CBN with only two options. Further devaluation of the naira or imposition of capital controls, since dollar reserves bulwark for the naira was lacking. To both, the CBN said no; for no other reason than political expediency. But later, in February, it decided on a tactical reversal of its stance on further devaluation. The CBN closed the Retail Dutch Auction System (RDAS) where it sold dollars at below-market rates, pledging to provide dollar liquidity only in the interbank market going forward. But with that decision, the naira effectively devalued by 17.8%, since the dollar was pegged to N198 exchange rate at the interbank market. And much later in June, the CBN imposed de facto capital controls, by banning sale of foreign exchange at the interbank window for importation of some 41 items. The policy effectively transferred demand from the interbank market to the parallel market, where the naira has depreciated by 20% in six weeks of placing the ban.

There is hardly any iota of credibility left for the CBN with regard to its foreign exchange policy. Even now, the chaotic foreign exchange markets vacillate towards two extremes.  On one side, the law of demand and supply dictates a new equilibrium price of lower naira value. On the other side, President Muhammadu Buhari seems to want an exchange rate that is determined by fiat, having followed up his dollar-naira parity campaign promise with his approval for the sale of dollar at N160 to the 2015 Christian pilgrims. Oddly, Emefiele's CBN seems to be keen to reconcile the conflict.

The central bank is by no means the only problem with the naira. Indeed, the CBN is victimised by some of the factors that undermine the national currency. These factors include the requirement for monetary policy and the governor to be subservient to the president, especially when the incumbent is seeking re-election.

The naira reels under a broadly dysfunctional and muddled policy canvass. There is a constitutional provision that forbids the country from saving. All government revenue are meant to accrue to the federation account where it is to be shared by the three tiers of government. Therefore, the Excess Crude Account into which oil receipts above the benchmark price accrues is deemed illegal. Instead of constitutional amendment to back the saving, the system rather panders to the illegality of withdrawing and sharing money from the ECA without appropriation. Confronted with the illegality of fiscal saving and the illegality of sharing money without appropriation, both executive and legislative arms of government settled for the latter. President Buhari is not likely to depart from this anomaly with his approval of the withdrawal of $1.7 billion from the ECA in June to assist state governors – who don't believe in fiscal saving – to defray salary arrears of civil servants in their states. Even now, the sovereign wealth fund we managed to create through an act of parliament is still considered an illegality that must be dismantled and the meagre $1 billion in it shared.

Policy coherence to drive a functional and stable naira exchange rate is a major challenge the  country faces. The fallen value of the naira generates furore even in the policy circles that want dollar financial flows that will invest in naira assets. That is a contradiction. A weaker local currency provides asset price incentive for foreign investors. What is risky is if the currency is unstable, yielding continually to downside pressures. It is even more risky if the currency is held up in the air at the tip of a pin like the naira currently is. A precipitated fall like we have had since last November would inevitably result. This explains why foreign investors want to see the naira hit rock bottom before they come in after their panic exits ahead of the last election.

Also, it is not unusual for policymakers to aver that the poor masses would suffer from lower naira value. In other words, a stronger naira would help alleviate poverty. This is fallacious. High living standards cannot be sustained by an overpriced currency. The poor are poor because they don't have money. A stronger currency would even be scarcer for the poor. But if a weaker currency attracts foreign investment and also encourages domestic investors to produce for export – because their products will be competitive in foreign markets – then the poor can benefit from domestic employment boom by getting a job and having money to spend. While the prices of foreign inputs for domestic production would be high in this scenario, this can be compensated by domestic efficiency factors, including investments in infrastructure and innovation processes.

If indeed the country desires a strong currency, which is neither good nor bad in itself, we must evolve transparent and accountable fiscal management. Part of what is priced into the naira value currently is uncertain fiscal governance. It is also crucial that the credibility of the CBN is reinstated. One way that will not happen is to sack two CBN governors back-to-back. But the current governor would have to prioritise economic, and not political expediency, and show he can lead an independent Central Bank of Nigeria.