Will CBN stay the course of its bold move?

CBN headquarters, Abuja

In a very audacious manner, the Central Bank of Nigeria took the bold step to free the naira to find its value in the marketplace called the INTERBANK. This, in my opinion is the best decision for the Nigerian economy.

.The best place to set prices for any commodity is in a marketplace and nowhere else. There is no reason why the naira should have different prices for the same product. The largest economy in Africa and the 26th largest in the world needs to have a convertible currency. We are one of the last few countries in the world with multiple exchange rates.

This policy, if sustained, will be one of the most important decisions the CBN will ever make. The move has removed a major subsidy that has been available to only 15 per cent of those who buy FX in this market. What that means is that the other 85 per cent already pay the market rate for their foreign transactions.

 Why should we continue to use our reserves to support the 15 per cent who in most cases are rent seekers and add very little value to the economy? The subsidy here is even bigger than the fuel import subsidy we all complain about. The impact of this move will become apparent in a few years from now, as the current multiple rates converge and become more competitive, if the CBN is able to hold its nerves and ignore criticism from self-serving rent seekers.

The move to make the naira convertible may not be able to bring the dollar rate down to N150 any time soon, because the naira is trading around its true value of N200 mark as seen from activities of the last few days.   It may even briefly go up dramatically as many users will panic and want to make hurried purchases. Even speculators will want to put even more pressure, betting on the fact that the CBN will not allow the rate to go any higher. But if we stick with it, the naira will become truly convertible and attract more suppliers to sell to the market and eventually firm up in value. A more consistent pattern will emerge soon and the economic interplay of demand and supply will gradually move the naira closer to its true economic value. This was the case with the British pound when the Margret Thatcher government first removed the fixed exchange rates. There was large capital outflow and a major devaluation for the pound sterling to the dollar. Things started to settle down again, once everyone knew there was no going back on the policy. Today, the British Pound enjoys a stable rate and attracts investors from all over the world.

Those who doubted the independence of the CBN, now have to think twice. The creation of a two-way quote at the interbank market for foreign exchange is the best way to tackle the naira devaluation conundrum, due mainly, to speculation. The next important step to establish its authority is to be uncompromising in punishing those who want to manipulate the market. The CBN should let the banks know that it will intervene from time to time but will ensure that any official dollars disbursed to any bank for any customer will continually be under investigation. If at any time there is any infraction that comes to light, the bank and the customer involved will be made to pay back twice the dollar amount involved to the CBN as fine. The company involved will be banned from ever buying official dollars from the CBN while the individuals involved in the bank will be sent out of the banking industry for good. Only in this stern manner can sanity come into the system.

If anyone thinks this is too harsh, let them ask the American and British authorities what they did to those banks and individuals caught in the “Libor Rate” rigging of last year. The first step will be for the CBN to write out clearly what these rules are, and the punishment that will be meted out to those who choose to violate them. Then, get every bank managing director to sign it and a copy pasted in every trading room so no one will be in doubt as to what the rules are and the punishment that will follow. Banks have sufficient room to profit from trading foreign exchange without making fraud a part of the system. There should be no second chances.

The one clear benefit that will come from this policy will be the incentive to produce locally. We are now in a situation where we must produce what we need, if we want to really be independent. We have shown that if we put our mind to it we can do it. The success story of Dangote Cement is a good example. We are not only now meeting our local cement needs, we are now even able to export. Our large population is enough incentive to look inwards. The importation culture we have seen in the last few years is not sustainable and the drain on our reserves threatens our future. Once we start to produce and meet local needs, we will be able to export to earn more dollars, employ more people and make our economy a more sustainable one. There are some risks in the short to medium terms, inflation will spike as we adjust to the reality of the new market rate for the naira. This will be mitigated by the generally downward trending inflation rates resulting from operating efficiencies as we plug into the advanced technologies that are making life easier daily. A push for growth will also make sure we outgrow inflation.

However, the CBN request for details on the domiciliary accounts with banks is a bad idea. Those accounts represent a window on the world for us, and a measure of confidence for those who are still tentative on the Nigerian economy, we should never allow that window to close or shake the confidence of those who want to keep money there as a half way house. It is better for the money to remain in the books of Nigerian banks and used to help manage their dollar positions than allow the money to go to foreign banks, where we will have no benefit for it. However, banks should know that official dollars cannot be paid into the domiciliary account, as this will be seen as violating the rules. We cannot embark on reforms and do a reverse, when we think things are tough. Policy consistency is key to getting economic policies right. What we need is more long-term thinking.

Ogiemwonyi, CEO of Partnership Investment, Ikoyi, Lagos, wrote in via md@partnershipplc.com