The Central Bank of Nigeria (CBN) is becoming increasingly isolated by its voodoo tactics of managing the exchange rate of the naira. J.P. Morgan flagged off the campaign in September when it moved to expel Nigeria from its government bond index.
The lender’s complaint was that the exchange rate of the naira was not a true reflection of the purchasing power of the Nigerian currency. J.P. Morgan therefore complained about the alleged lack of transparency in the management of the exchange rate of the naira. The lender rose to a spirited defence of the holders of Nigeria’s sovereign debt instruments.
It argued that the artificial strength of the naira was inhibiting the yield of Nigeria’s debt instruments. J.P. Morgan and many eminent watchers of the Nigerian foreign exchange market
believe that if the artificial demand obstacles on the path of the exchange rate of the naira were removed and the currency allowed to find its level in the open market, the naira might be trading at anything from N220 to the dollar.
That would give the holders of Nigeria’s sovereign debt instruments more yield on their investments. Many had criticized J.P. Morgan’s hard stance on Africa’s largest economy as being unnecessarily meddlesome. Even President Muhammadu Buhari is solidly behind the apex bank in its voodoo tactics of managing the exchange rate of the naira.
The president told news men on the sidelines of a recent function in Paris, France that it was not healthy to devalue the naira.
The truth however is that the current exchange rate of the naira in the semi-official market at N197 to the dollar is not a true reflection of the purchasing power of the Nigerian currency. Last week the emir of Kano, Muhammadu Sanusi, the immediate past governor of the CBN joined the growing Babel of voices against the apex bank’s life support on the naira.
Sanusi was not particularly interested in what happens to the holders of Nigeria’s debt instruments.
He is worried about the local consequences of keeping the naira artificially strong. The apex bank in its infinite economic wisdom has however admitted the simple economic logic that no one can control interest rates and exchange rates at the same time.
The monetary policy committee (MPC) of the apex bank drove home that point when in its last quarterly meeting it retained the monetary policy rate (MPR), at 13 per cent. MPR at 13 per cent is a disincentive to low interest rates. It is used to defend the naira. Even as the apex bank moved to ease its stranglehold on liquidity as government withdrew its funds from commercial banks, it only grudgingly dropped the cash reserve ratio (CRR) from 31 to 25 per cent.
Industry watchers had expected CRR to drop below 10 per cent to ease the regulator’s merciless grip on liquidity and breathe a measure of life into the economy. The apex bank’s merciless grip on liquidity is all designed to reduce the quantity of naira chasing the few hard currency it its dwindling foreign reserves. The option to the current stance of the CBN on the exchange rate of the naira is to ease liquidity and allow the naira to glide down.
Inflation rate would cross to double digit as the naira glides down. But the economy stands to gain from that development. Economists are always at war with themselves. They hardly agree on many issues.
However, just about every economist agrees that growth can be attained when inflation rate is allowed to rise by a few notches. The MPC recently warned that the economy was sailing perilously close to recession and that steps must be taken to stimulate growth to avert disaster.
There is no way the CBN can stimulate growth with its stranglehold on liquidity which has driven lending rates above 30 per cent for high risk borrowers who are the engine of growth. The CBN has scrapped its official window in the foreign exchange market and allowed the inter-bank market to double as official market.
It responded to the flurry of demands in the inter-bank market in the absence of the official market with myriads of administrative obstacles against demand. The high interest rate is designed to defend the artificial exchange rate of the naira. But the time has come when the economy must be stimulated even at the risk of inflation rate rising a few notches.
That can only happen if the naira is allowed to glide down with the easing of liquidity and lending rates. Small and medium enterprises, (SMEs) which are the engine room of growth are currently priced out of the money market by high lending rates. Banks that are willing to do business with them sell funds to them at anything from 35 per cent.
That explains the high rate of business failure in that critical segment of the economy. The current lending rate is a huge disincentive for the stimulation of growth that the CBN needs to halt the impending recession.
Growth could only occur on the back of a weaker naira. Some of the naira’s life support should be yanked off to stimulate the growth that would naturally strengthen the naira.