Buhari and Zuma should speak cautiously on the economy

Nigeria’s President Muhammadu Buhari should probably not make comments about monetary policy. His public declaration of his aversion to naira devaluation in late December 2015 made it quite clear the Central Bank of Nigeria (CBN) was no longer independent. Not that this was news. But at least, in the past, some pretensions were made about the CBN being independent. Under former governors, Charles Soludo and Sanusi Lamido Sanusi, the CBN became a significant power centre, a development that pleased investors but outraged incumbent presidents. So, even when the right thing is eventually done – that is, devalue the naira and ease foreign exchange restrictions – investors are still going to wonder whether monetary policy decisions are now really taken at monetary policy committee (MPC) meetings or at the State House. This logic has some basis.

There is little doubt that were President Buhari to order a naira devaluation this moment, CBN governor Godwin Emefiele would not hesitate to do as he is told. This is not healthy. And it has to change. Most of the Buhari administration’s economic goals – diversify the economy, reduce import-dependence, et cetera – can be easily done by simply tweaking one variable: the naira. Were it allowed to find its equilibrium level, in this case the price at which demand for foreign exchange would reduce enough to equal scarce supply, Nigerians would adjust their tastes for foreign goods with dispatch. Local manufacturers would have no choice but race to meet the subsequent increased demand.

A major concern for President Buhari on naira devaluation is how it potentially increases the costs of servicing government debt, based on his comments in December 2015. A depreciating currency almost always results in higher inflation for an import-dependent economy. As interest rates compensate for price risk, borrowing costs tend to follow in tandem; albeit higher interest rates reduce the discounted value of one’s indebtedness. In the Nigerian case, this concern is needless. Nigeria earns crude oil revenue in US dollars. It can service its foreign debt using those earnings. For its naira-denominated debt, its position is better enhanced if the naira is appropriately priced as it gets more value from its dollar revenue. For instance, the CBN sold about $16.4billion to banks and bureaux de change (BDC) operators between March 2015 and December 2015 at an average rate of 197 naira, totalling 3.2trillion naira. This is 16 percent less than the 3.7 trillion naira it could have earned had it sold the dollar at the average BDC rate of 226 naira during the period, which is actually lower than the then widely believed equilibrium rate of 250 naira. The 500billion naira loss is enough to fund the planned social assistance programme for 2016. In an article last week, Nigeria’s finance minister signalled the likely devaluation of the naira in the not too distant future, perhaps at this week’s MPC meeting. Still, the likely steady devaluation approach would probably be inadequate. If Nigerian authorities are really determined to diversify the economy and reduce the country’s import dependence for the most basic commodities, it must devalue the naira sharply.

The monetary policy committee of the CBN meets on 25-26 January and is expected to keep its policy rate unchanged at 11 percent, based on the consensus view of analysts. That consensus view is not data-dependent, however. Analysts have simply come to the conclusion that the CBN is deliberately dovish, a point Governor Emefiele made only too clear when the MPC took the counterintuitive decision to actually cut interest rates in November 2015at a time that prices are rising. With expectations that inflation would continue to rise – and mostly above 9 percent, the upper end of the CBN’s inflation target band – for most of 2016, the data-dependent view would be to actually tighten monetary policy. The CBN’s view is that the economy needs to be stimulated hence its expansionary stance. With inevitable naira devaluation imminent, the risk of inflation rising above 10 percent in Q2 2016 is significant. Clearly, were the CBN not to act to stem these price pressures, the headline could be higher. Considering that the CBN has not been perturbed by inflation being above 9 percent since June 2015, inflation targeting is probably no longer a priority for the Bank; at least, not within the current official target band. This haphazard and unpredictable manner of conducting monetary policy is injurious to the economy.

The MPC of the South African Reserve Bank (SARB) also meets this week, on 26-28 January. It would be taking place a few days after the World Economic Forum (WEF) meeting in Davos, Switzerland. The SARB’s MPC members are probably glad President Jacob Zuma did not appear at an earlier scheduled WEF panel event hosted by a South African media organization. After what analysts and investors believe was an attempt by President Zuma to unduly influence the South African Treasury by replacing the widely respected finance minister, Nhlanhla Nene with an inexperienced hand, mainstream South African media has been unforgiving. In the aftermath of that event, the Johannesburg Stock Exchange lost $10.2 billion in just two days. President Zuma’s subsequent indifference to the enormity of his error – even after he rescinded his decision and brought in a “new old hand,” Pravin Gordhan, as finance minister – also fuelled a lot of investor concern.

The South African rand depreciated by as much as 9 percent during the first trading day (11 January) after he remarked that markets overreacted to his decision. Had President Zuma appeared on the panel, he would likely have been asked about this and he probably would have answered in a similarly defensive manner. This would have riled investors further, an occurrence he and his officials are keen to avoid. The SARB would have had little choice but to hike rates by 50bps or more had that happened. There are analysts who still believe the SARB may actually tighten rates as much this month. This is based on the outlook that inflation would likely rise above 6 percent – the upper bound of the SARB’s target band – in Q1, as the rand likely remains weak and drought effects become more acute.

However, with rating agencies all but decided on a likely downgrade of South Africa to junk status should growth deteriorate further, it is unlikely the SARB would not want to help keep growth up to the extent that it could. So even as the rand has deteriorated significantly since the New Year, the view one takes is that the SARB would likely only hike by 25bps to 6.5 percent at its MPC meeting this month. In an interview at Davos, SARB governor Lesetja Kganyago alluded to this possibility. Markets reacted sharply afterwards, however.

Bottom-line, President Buhari of Nigeria and President Zuma of South Africa should probably rely more on guidance from their officials before making statements on the economy. Recent comments by Nigeria’s Vice President Yemi Osinbajo at Davos – who arrived late to the WEF session that President Zuma excused himself from, indicative of a last-minute invitation– suggest there has been a change in tact. When talking about the CBN these days, Vice-President Osinbajo and finance minister Kemi Adeosun now ensure to point out – if only publicly – that their comments on monetary policy are based on feedback from the central bank. It is not unlikely that President Buhari was made to realize his earlier error.

Although the South African media raised their voices again to criticize President Zuma for not attending the main event he was scheduled for at Davos, one’s take is that he probably decided to take the advice of his officials who must have reasoned it would be safer if his appearances were in controlled environments and his speeches scripted. Instead, finance minister Pravin Gordhan did an issues briefing on the South African economic outlook, which to one’s mind was reassuring, frank and very calming. And truth be told, Pravin Gordhan would only succeed as finance minister to the extent that he gets support from his principal, albeit he is probably now the most powerful finance minister South Africa would ever have.

 

Rafiq Raji