Unshackling the economy

We receive with joy the news of the release of the broad framework and guidelines of the Flexible Exchange Rate by the Central Bank of Nigeria that it promised to release at its Monetary Policy Committee (MPC) meeting of May 24, 2016. In a way, the decision to freely float the Naira came as a pleasant surprise to many watchers of the Nigerian economy as the best they had hoped for was a devaluation, which will mean further control of the foreign exchange market.

For over a year and following the crash of oil price from where the country earns over 90 percent of its foreign exchange, the Central Bank had been engaged in a largely futile battle to defend the naira it unrealistically pegged at N197 to a dollar and at the same time conserve the country’s foreign reserves. The outcome was always obvious. Despite its best efforts, the Naira continued to lose value and depreciate at the parallel market, exchanging for about N365 to the dollar on Monday June 13, before the announcement. This was inevitable since the Central Bank was unable to provide sufficient dollars at the official rate to meet the huge local demand. Consequently, inflation rose to an all-time high of 16 percent and the prices of goods and services continued to soar, deepening the sufferings of an already pulverised citizenry. To conserve the foreign reserves, the CBN banned the importation of certain items and began a regime of rationing of foreign exchange to importers. This opened the door for arbitrate and corruption where officials and those with access to the central bank obtain the dollars at an official rate of N197 while selling same for sometimes twice the price at the black market.

Meanwhile, forex flow through investments and diaspora remittances have dried up and reserves have declined complicating the forex scarcity in the country. Further, manufacturing has declined, factories have closed shops and shed jobs and the economy is also shedding hundreds of thousands of jobs as a result. Some weeks back, United Airlines and Iberia – American and Spanish carries – suspended flights to Nigeria on the charge that they could not evacuate money from ticket sales from the country. What was more, the economy declined and is just a quarter from being officially declared as being in recession – the first of such in more than a decade for the country.

In a way, this has been a very costly experiment with a ‘command and control’ economic policy of the Buhari administration. Mr Buhari came to power believing erroneously that the government can and does possess the capacity to control and run the economy and indeed, fix the prices of goods and services. But just like the experience with the fuel subsidy, the government is realising it actually does not have what it takes to control the economy.

The CBN’s decision therefore, although coming late, is a welcome development and a bold move to totally unshackle the economy and position it for recovery and growth. As some analysts have averred, it sounded too good to be true. We commend the CBN and the MPC for that bold and decisive move. However, we remained worried about the CBN’s announcement that it will intervene in the market “as the need arises.” We hope that is not another name for another form of control that has cost the country so dearly over the past year.

The decision has led to a rebound of the stock market and if followed through, will lead to an influx of much-needed foreign investments that had been held up and waiting in the wings for a favourable and more market driven forex policy. We call on the government and the CBN to stay the course and allow the market determine the value of the naira. The country and the economy definitely stand to gain from that unprecedented decision.