On the naira (1)

When I first read Karl Max’s 1867 seminal book “Das Kapital,” which is also titled “Capital: Critique of Political Economy,” I had to sometimes pinch myself to be sure that I was actually reading a book by an author that is widely regarded as the father of communism. A good example is the following excerpt from the book.

We know, however, that, the values of commodities remaining constant, their prices vary with the value of gold (the material of money), rising in proportion as it falls, and falling in proportion as it rises. Now if, in consequence of such a rise, or fall in the value of gold, the sum of the prices of commodities fall or rise, the quantity of money in currency must fall or rise to the same extent (Max, 1867, The Medium of Circulation section).

With such orthodox economic suppositions, Mr Max could very well have presented himself as a free-market capitalist and we would be none the wiser. But we know different. Mr Max’s socialist ideas were largely about how to reduce inequality, even as he was clearly well aware of the suboptimal trade-offs with efficiency that they would require. Socialist ideas are ultimately moral.

They are not economically sound. We all know how the tightly controlled economies of the East ended up. The Soviet Union became just Russia, and China embraced capitalism. This brief exposition of Max’s ideological contradictions is a good foundation to start our discussion on the current state of the naira and the broader Nigerian economy.

This brief exposition of Max’s ideological contradictions is a good foundation to start our discussion on the current state of the naira and the broader Nigerian economy

I’ve heard suggestions about how a ban or restriction on domiciliary accounts will help stem the weakening of the naira. The arguments underpinning them are not robust. The main thesis of the argument is that many domiciliary account holders are “shorting” the naira.

That is, they are hoarding hard currency in the hope that the naira will weaken further. But are these shorts in the macro sense? They are not. Bear with me. When Nigerians use the naira to buy hard currency for their domiciliary accounts, what are the flows? Better still, is there any cross-border flow involved? No.

Money simply moves between accounts within the economy. The transactions have zero impact on the balance of payments (BOP), which is the total receipts from countries abroad net of total payments to other countries. In other words, there is no new foreign receipt or external payment from the average Nigerian “speculator” changing his naira to the US dollar, say, for keeps in his domiciliary account.

Read also: CBN approves rewards scheme for merchants, users of eNaira

Let us illustrate with an example. Suppose a local currency speculator – a vulcaniser, kiosk owner, or bus driver, say – buys $100 from a bureau de change (BDC) operator to fund his domiciliary account in the hope that the naira will weaken even more. What has happened?

To use an allegory, the $100 has simply moved from one pocket to another of the same pair of trousers, which the owner still owns. And it is precisely because of domiciliary accounts that the CBN is able to know each time the owner of the pair of trousers moves money from one pocket to the other, as well as when he hands the money over to another person, to pay for goods purchased abroad, for instance.

So when some suggest restrictions or bans on domiciliary accounts, they are effectively suggesting that those trousers should have smaller pockets, no pockets at all or that only certain people should have trousers with pockets.

Who loses in that case? To be clear, the CBN has not suggested in any way that it is entertaining these unorthodox and ill-advised administrative ideas.

The same argument applies to the restrictions on cryptocurrency transactions. Hitherto, the CBN was able to effectively surveil crypto transactions, being as they went through the banking system without hindrance. Since the CBN’s ban on the facilitation of cypto transactions by banks, the central bank’s ability to monitor them has been constrained.

Yes, it is still able to detect them, but only after some effort, whereas hitherto transactors were the ones that declared their intent themselves. It is probable that the CBN leadership doesn’t mind this, being as the inconvenience that the ban imposes on crypto users, who still use the banking system surreptitiously, might suffice as a deterrent to the average poor Nigerian from indulging in crypto transactions.

But shouldn’t the broader objective of the CBN be to ensure that all hard currency earned by Nigerians pass through the Nigerian financial system without hindrance insofar as they are not proceeds of criminal activity? Is that not the only viable and sustainable way to ensure that the foreign exchange market is amply funded?

If you are a wealthy Nigerian or thriving local business involved in international trade, you will really just prefer to avoid all the hassle.

This is why many wealthy Nigerians and successful businesses keep and maintain foreign bank accounts, as they enable them have hitch-free access to their hard currency earnings for transactions. And when they do repatriate part of the foreign earnings back home, they do their utmost to get as much value for them in naira, which is only possible in the black market at the moment. But this needn’t be so.

The central bank’s goal should be to incentivize the repatriation of hard currency proceeds of exports, as well as remittances from abroad. The CBN is well aware of this imperative, as it has instituted incentive schemes for the purpose. But it should not have to engage in as much exertion if it simply allowed market participants to decide the exchange rate, being as these schemes are effectively a selective pricing of the naira.

Well aware that many a wealthy Nigerian or business would find a 411-415 naira exchange rate to the US dollar sub-optimal, the CBN has been rewarding every $1 remittance or export proceeds that come through the official FX market with a premium on top of the tightly controlled official exchange rate, which are effectively upward adjustments of the exchange rate for these special cohorts.

Yes, there have been incremental hard currency inflows owing to these measures. But they pale in comparison to the economy’s potential, since much more still go through unofficial channels, where better value can be garnered.

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