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Free-Floating of Naira: To Be or Not to Be?
Although the Central Bank of Nigeria has for the umpteenth time foreclosed the possibility of allowing market forces to determine the real value of the Naira, contrary to recent reports, experts while expressing divergent views on the subject matter, however emphasised managed floating of the local currency, reports James Emejo
Last week, the market was again awakened to report that the CBN had allegedly indicated that it would allow the naira to weaken past its official rate as it gradually unwinds its regime of multiple exchange rates.
Specifically, Bloomberg had cited data on the bank’s website as suggesting a floating of the currency. According to the report, the CBN stopped publishing the fixed naira exchange rate on its website and stating that the rate will be “market-determined.’’
It further quoted the President of Shippers Association of Lagos State, Jonathan Nicol, as alleging that the Nigerian Customs Service had also instructed importers recently, to pay for duties at a weaker rate of N326 per dollar from N306 citing a directive from the apex bank.
Already, the development had started to gather momentum and attracted accolades from a section of the public which deemed it as a right step in the right direction, before the CBN later issued a statement to refute the claim that it had decided to float the naira.
The Director, Corporate Communications, CBN, Mr. Isaac Okoroafor, had described the report as false, stressing that the naira exchange rate remained stable.
Okoroafor reaffirmed the bank’s commitment towards ensuring stability in foreign exchange market.
According to him, there has been no change in Nigeria’s exchange rate structure. The CBN has not floated the naira. The exchange rate remains stable. Speculations and reports to the contrary are false.
CBN Governor, Mr. Godwin Emefiele, had at a forum with private sector operators in Lagos recently, restated the bank’s commitment to continue to defend the naira, saying that the CBN Act demands that the bank “defends” the naira using the foreign exchange reserves.
He said: “In effect, the CBN would be disobeying the law establishing it, if it sits idly by and allow the naira to be determined wholly by the so-called market forces.
“Second, those who call for floating of the currency betray their willful ignorance of the effects of significant depreciation, however short-lived, on inflation.
“Several empirical analyses have shown that the pass-through of changes in the exchange rate on consumer prices is almost one-to-one. This implies that for every percentage point depreciation in the naira, there is almost the same rise in inflation.”
He also said policies of the apex bank in the past five years had been focused on protecting the purchasing power of the poor and vulnerable persons in the country.
According to Emefiele, the apex bank is comfortable staying on the side of the weak, vulnerable, and poor masses and protecting their purchasing power.
Emefiele had also pointed out that the task of building a stronger economy was far from complete; with the pace of Gross Domestic Product (GDP) growth still very fragile and badly lagging behind population growth rate of 2.7 per cent.
However, it would have come as a huge surprise if the CBN actually decided to float the naira, given that Emefiele had consistently foreclosed such move stressing that it was inimical to the economy.
This is because previous instances of naira devaluation had not solved the country’s foreign exchange and economic woes.
Notably, the International Monetary Fund (IMF) had been a chronic campaigner for the devaluation of the naira, arguing that the CBN ought to allow the current find its real value through the interaction of market forces.
Earlier in January, during the Monetary Policy Committee (MPC), Emefiele had rebuked those agitating for the removal of capital controls so as to allow free importation of goods, arguing that encouraging imports and free- floating the currency could be damaging to the economy.
He said doing so could lead to a currency crisis which will result in capital flight, massive depreciation and devaluation of the naira.
He had said: “First, let me say there is no capital control in Nigeria today because you cannot find a hand of CBN trying to intervene on the market for demand and supply of foreign exchange in Nigeria today.
“But normally, CBN is an independent institution, apolitical but it is also important that we should say that this matter came on the MPC meeting of yesterday and today and it is not about criticising but reassessing our position to say look, is there any merit in the need to begin to say that we should look at free-floating the currency? Or allow free import of goods that can be produced in the country into Nigeria?”
He said: “The MPC came to a conclusion that this was a wrong premise. We cannot be talking about allowing import of items that can be produced in the country today, exporting jobs in Nigeria to foreign countries and we say we have the interest of Nigeria at heart- we don’t agree with anybody.
“It is a wrong premise to say you will allow imports to just flood the country just because you want to please anybody. That is not our interest. And we have always said it that we are apolitical and remain apolitical but we would not want anybody to drag the CBN into issues that are within our remit otherwise, we would respond to it.
He said:“On the issue of free float, the MPC reviewed it and said it is as good as saying that we should go back to the eras of structural adjustment programmes again in Nigeria. The implications can better be imagined as you know. It will certainly lead to capital flight, it will lead to massive depreciation and devaluation of our currency and ultimately lead to currency crisis in Nigeria. We should all know that it is a route to perdition for whoever goes in that direction.”
In his opinion, however, Founder/Chief Executive, Global Analytics Consulting Limited, Mr. Tope Fasua, who spoke to THISDAY before the CBN refutal argued that it may not be in the best interest of the economy for the CBN to totally surrender the management of foreign exchange rate to market forces.
He said:”I still believe that most countries in the world practice managed floating. So no matter how you float the naira, you still have to manage it and keep an eye on where the currency is going.
“I do not believe that we should totally float the naira in such a way that we would lose control because again, if you look at economic complexity index and I just checked one economic complexity index where Nigeria is 124 out of 128 countries surveyed and in fact, our complexity is in the negative.
“So, if you look at the Nigerian economy against the United States economy, perhaps the naira will actually be somewhere around 2000 or 3000 to the United States dollar.
“So, are we ready for that and the effect. So beyond what some of the guys in the financial markets are doing, which I believe some of them are turned against the naira…”
According to him, if you want to float the naira, you want to actually look at what the market will determine where the value should be, you also have to plan for productivity and economic complexity.
“What the economic complexity is saying is that to a large extent is that the amount of knowledge that goes into the products we export as a country is actually so low- one of the lowest in the world. Are we doing anything to increase that knowledge base of our exports? We aren’t.
“So, we are just setting ourselves up for a free fall if we are not very careful. But it’s good that the statement has been made that they would now float the currency and to assuage the feelings of investors.
“But, mind you, we are not created to impress only investors: at the end of the day we must think about the kind of life that it would give Nigerians.
“If you look at it, since 1986, all we have ever done is to devalue and devalue and it seems to be a one-way streak.
“And if you look that the pre-colonial times when even the colonial people left, why were we left with a strong currency in that era when the colonialists managed the economy? And the moment we started actually getting into our own, we are forced to devalue.”
Fasua said: “The only way devaluation would work is if you are sure that you can actually produce the essential goods that your people would need.
“We would like to have salutary policies to that extent, otherwise, you will just drive your people up the wall and they will not be able to afford basic things of life and you don’t want to see them on the streets.
If we are not careful, if we don’t manage it well, it is the Zimbabwe or Venezuela kind of situation.”
Nonetheless, a credible source who pleaded anonymity because of his dealings with government, welcomed a possible floating of the currency.
He said:”Since 2015, there are two problems that are being micromanaged- this problem of exchange rate management or multiple exchange rates which definitely creates room for round tripping and arbitrage and subsidy.
“It is not good for the economy because the real people that will be looking for foreign exchange, it will take them months to get.
“And how do they prove their goods? When they get it at official or unofficial rate, they will price their goods based on replacement cost-effective and replacement cost is indexed based on the black market rate.”
According to him:”There is just no way you can have an economy where you have multiple exchange rate and you say there is no distortion, there is no room for round tripping and arbitrage.
He said: “We have been advocating for managed floating and managed floating is very simple- allow the market to determine the exchange rate. If you see any attempt by the market to distort the stability of the pricing model, the CBN can intervene from time to time to ensure stability- that is managed floating and that is what countries do.
“But when you have this multiple exchange rate, it is not good for the economy because the real sector that will be looking for foreign exchange will never get it at the same price and even if they get it, it will be after a long period of time.”
However, it ongoing policy initiatives by the CBN to boost local production, some of which had not yet materialised, it would be tantamount to crying for the moon to expect that the apex bank will surrender currency management to market force at this crucial point of economic rejuvenation.