Re: Nigeria’s woes deepen as central bank missteps on currency (2)

We have made this point ad nauseam that devaluation of the naira is not the panacea that will solve the problem of this country. Allowing the naira to massively depreciate or go into a freefall will only compound the problems of the country. We must not pretend that we do not have experience in this regard. In September 1986 when the Second Tier Foreign Exchange Market (SFEM) was introduced, the naira in that market depreciated from the rate of 22 to 86 per dollar. Even though the so-called First Tier was retained for some preferred expenditure heads which provided opportunity for rent-seeking behaviours, this amounted to a devaluation of a whopping approximately 300 per cent!

We should pause to ask what followed. The impact was immediate, sudden and devastating. I remember then that I was in the process of assisting my late father refurbish his house and had just finished fixing louvres on the ground floor window at Asaba and by the time I came back a few weeks later to fix the same louvres on the top floor, not only was I unable to afford the quality of the one I had earlier fixed on the ground floor, I had had to struggle to be able to afford the asking price. And since then the First Tier market had been abolished and rates harmonized and we never got back to any rates below N86 to the dollar since then! And as the rate of exchange of the naira continues to come under pressure at the interbank market despite the best effort of the CBN, there are vociferous calls right now for further devaluation to narrow the gap between the official and interbank rates. There is no doubt that most of these decisions which ‘economists’ take are often taken to be seen to conform; to be correct as evidence is often not aligned with the projected expectations.

My take, if you ask me, is that we devalued when we did because that was the received wisdom as we reacted to the unfolding emergent scenario, and we hiked the base interest rates because we targeted the overseas portfolio investors to stem the rate of reverse flow as we increased the returns on naira-denominated assets to compensate for the looming risk occasioned by the falling oil price.

There is also always this rush to compare with other countries. And it was observed in the same report: ‘While oil producers with falling exchange rates from Russia to Malaysia have avoided imposing currency controls, Emefiele’s measures cut daily trading of the naira to less than a tenth of the previous level.’ But the question begging for answer is whether we are not comparing oranges and apples? Was the ruble not almost a convertible currency? But let’s look at the impact of the falling oil price on the Russian economy.

The Russian Central Bank raised interest rates by 6.5 per cent to 17 per cent, hoping that such a move would stem the falling exchange rate of the ruble. With inflation rate at 9.1 per cent, the highest level since 2011, there was panic buying as those holding the ruble rushed to buy up durable consumer goods. It got so bad that the Russian president, Vladimir Putin, threatened that Russia would abandon the dollar which would result in trading partners not having any choice but to accept the ruble! It is obvious therefore that the Nigerian experience is a child’s play.

And what is this fascination and almost nostalgic feeling for the immediate past CBN governor, Lamido Sanusi? During his tenure a major achievement he recorded was maintaining the stability of the exchange rate of the naira against the backdrop of an MPR that remained at 12 per cent for a period of over two years. He did everything and took any steps to defend the exchange rate of the naira and he never had to cope with this sort of emergency of rapidly falling oil price and, considering this posture, if he had to he wouldn’t have allowed the naira to go into a freefall as it is now being recommended. It is therefore unfair and most certainly premature to begin this early to pass a judgment of lack of independence on the part of Governor Emefiele. He should and must be given a break please!

Boniface Chizea