How to save the Naira
Our naira was once the pride of us Nigerians. Not anymore. Our national currency has been on a tailspin, much of it of our own making. While it is officially changed at 350 to the dollar, in the parallel market it has been going for as high as 480. The premium between the official and parallel market rates has opened room for arbitrage and rent-seeking behaviour. And we are yet to see the worst of it. We have come to this sorry state due to a combination of folly and lack of rigour in policy thinking and action.
Under IMF guidelines, countries reserve their own sovereign prerogative in terms of which exchange rate system they choose to adopt. Exchange rate regimes are of 3 principal types – fixed exchange rate, floating exchange rate and the managed float. Nigeria officially operates a managed float exchange rate regime. This is a midway system between the fixed exchange rate and the floating regime. In the managed float, the monetary authority allows some flexibility in the exchange rate, while intervening from time to time to ensure that gyrations are kept to a minimum.
We live in an increasingly open global macroeconomic environment. This means that exchange rates are often subject to both internal and external pressures that push them in different directions, both upwards and downwards. Such volatilities have increased since 1971, when the world moved away from the Bretton Woods gold-dollar standard to the era of free-floating exchange rates. Nigeria has not been immune to those influences. In the 1970s the naira exchanged 1:1 with the dollar. Today, it exchanges at over 300 naira to the dollar. The naira has been progressively devalued over the years. And we have not seen the end of it yet.
In the literature, several factors influence exchange rate movements. These include: interest rate dynamics, current account deficits, political stability, macroeconomic growth, recession, inflation, the level of government debt, the current account and the balance of trade, change in national competitiveness, activities of financial speculators, market sentiments and government intervention. When the fundamentals are right, capital tends to flow in from abroad, pushing up the exchange rate. When such fundamentals deteriorate, the opposite tends to happen, with deleterious impact on the exchange rate.
Economic science shows that a stable exchange rate is good for the economy and good for welfare. Countries that have maintained stable exchange rates have done better in international trade. These include Japan, Switzerland, Canada and Norway. China has deliberately kept its Yuan low by purchasing US treasury bills.
Restoring stability in the exchange rate requires addressing the fundamentals of the Nigerian economy that have placed downwards pressure on the naira. This is not to say that a high exchange rate is necessarily a good thing. In fact, a low exchange rate will tend to be positive for stimulating non-oil tradables. What is essential that the exchange rate remain stable over time so that business, investors and traders can anchor their rational expectations over time.
Going forward, I propose seven pathways by which the CBN could stabilise the exchange rate.
First, reform the CBN to re-focus on its institutional core mandate. The best central banks in the world are not those that attempt to do anything and everything under the sun; rather, it is those that focus on the area in which they have the best comparative advantage. The CBN must re-focus on its core mandate. Re-focusing on the broad mandate requires reinventing the apex bank as a developmental catalyst like such banks as Singapore, Malaysia, Chile and Uganda that have been veritable vehicles for development and national transformation.
Second, undertake a strategic corporate diagnosis of the organisation. We need to look at the overall structure, organisation and functioning of the institution in light of its mandate and its capacity to fulfil that mandate. This also involves undertaking a human resource audit to link staff to specific jobs with a view to assessing adequacy of numbers and qualifications linked to tasks and responsibilities. For example, the current structure may be quite unwieldy and administrative and financial controls may not be adequate. We should also look at salaries and compensation with a view to re-invigorating the institution and restoring staff morale. This also includes looking at what is happening in the 36 branches. I would strongly recommend setting up a Department of Fiscal Affairs with the express purpose of working more closely with the Finance Ministry and Presidency to proffer quality advice on the economy and public finances. I would like to see a Senior Branch Economist in each of the Branches. Their role will be to assess economic and financial developments in each of the States of the Federation with a view to advising the State Governments on public finance and debt. We need a reinvigorated CBN that is a knowledge institution benchmarked against the best central banks in the emerging world: Singapore, Malaysia, Philippines, Mexico, Chile, Uganda and South Africa.
Thirdly, we need to take urgent steps to lower interest rates in order to re-boot the economy. In a time of recession, keeping the MPR at 14% is certainly not the best way to work our way out of recession. The Manufacturers’ Association of Nigeria (MAN) and no less than the Finance Minister herself have pleaded for a downward revision of the MPR. We must support lower interest rates so as to re-boot growth and restore recovery. The argument that we are raising interest to attract foreign investors is pernicious. Courting hot money is not particularly ingenious in these circumstances. Monetary policy must aim to address the fundamentals of the Nigerian economy not fair-weather investors from abroad.
Fourthly, we need to improve on the security features of existing notes to discourage counterfeiting. There is anecdotal evidence that counterfeiting is becoming a major problem. An estimated 25 percent of the naira in circulation is probably counterfeited currency. The precipitate fall of the naira and the fact that some of the neighbouring countries that generally accepted naira no longer do so shows we have a big problem in our hands. We can modify existing naira denominations but put in new security features that will make counterfeiting near-impossible. Such technology exists, such as in the high physics of holography and the use of other anti-counterfeit technology. We can learn from Sweden, Russia, Philippines and Hong Kong, whose currencies are among the most difficult to counterfeit in the world.
Fifth, and next to the preceding, we should put in place a blueprint and roadmap to make the naira a semi-convertible international trading currency. In the 197os, our currency had such a status. Our Muslim brethren who went to pilgrimage to Mecca and Medina could use naira in doing some of their transactions. Nigerian naira was enthusiastically welcome by Asian electronics sellers at Liverpool Street Station market in the heart of London. Ditto for many of our ECOWAS neighbours from Cotonou to Abidjan and Ouagadougou. We must bring back the glory days of the naira. We have our doubts, learning from the difficulties faced by the Euro in Western Europe, that regional integrated currencies will be workable in the future in Africa. We must therefore strive to make our naira the de facto currency of ECOWAS, and going forward, the continent as a whole.
Sixth, we must reposition CBN to be more creative in financing the real sector. In today’s Nigeria, financing has become the biggest problem for businesses, apart from electricity and infrastructures. We need more bold approaches to financing agriculture, manufacturing and infrastructures and SMSEs at rates of interest that are affordable. Our commercial bankers have departed from the Old Religion. They have become Shylock lenders that look after their own narrow interests, first and foremost, rather than the interests of their clients, let alone the economy as a whole. We need a new approach based on a new culture of banking that is truly professional and patriotic.
Seventh, and finally, we must upscale the level of accountability within and outside the apex bank. Often in the past, the CBN has behaved as though it were a government-within-a-government, with little or no accountability to its key stakeholders. In prosperous democracies, central bank independence has become the norm. But the wisest central bankers have always understood that autonomy is not a licence to behave in irresponsible ways. The best central bankers know that such autonomy is based on delegated authority: it was given by the good grace of parliament, and, in future, parliament in its wisdom may decide to withdraw such delegated authority. It therefore behoves monetary authorities to act with a high level of maturity, accountability and discretion. For example, at least twice a year, CBN must bring itself before parliament to explain its policies and seek for guidance. This is what the American Federal Reserve does before Congress.
Today, we face what some would term a ‘perfect storm’. The issues facing our economy go way beyond mere issues of the exchange rate. They centre on repositioning of Nigeria away from the rentier state paradigm to that of a technological-industrial economy with an increasingly diversified base. We must take the first steps to bring about a massive agriculture-based industrial revolution in our country. We must reform our public institutions and effect a change in the collective mindset. We must also support the administration in the war against corruption to its logical conclusions while plugging the leakages that have haemorrhaged our public finances for decades.
I often ask myself how things would be if we could use a combination of carrots and stick to persuade some of our countrymen and women who have squirreled away more than US$200 billion in offshore accounts to bring it back and invest it in this beloved land of our forefathers.
Greater coordination between the monetary authority and fiscal side is vital. There is only one Federal Government and an autonomous CBN is a part and inseparable parcel of that government. They cannot be seen to working at cross-purposes. More than any other institution, the CBN will have to play a central role in that transformation. It will have to reinvent itself as a developmental central bank; a forward-looking knowledge institution that ensures a stable and prosperous economy, with a stable currency that is increasingly convertible under conditions of low inflation and full employment.
Obadiah Mailafia