BusinessDay

On the naira (2)

I like the very succinct description of the printing of money by a central bank in the 2022 book “The Currency of Politics: The Political Theory of Money from Aristotle to Keynes” by Stefan Eich, an assistant professor of government at Georgetown University.

While he was really just recalling an explanation by Ben Bernanke, the former chairman of the Federal Reserve, the American central bank, he put it so elegantly in a sentence without any loss of substance as follows: “Pressed to explain whether the $85 billion bailout of the insurance giant AIG in March 2009 put taxpayers’ money at risk, Federal Reserve chairman Ben Bernanke famously described the sublimity of conjuring money out of thin air: the Federal Reserve had simply credited AIG’s account with nine zeroes (Eich 2022).”

I am noting it here ahead of our discussion (probably in part 3 of the column series) on the CBN’s developmental financing efforts since the start of the Covid-19 pandemic. But first, let us conclude on domiciliary accounts and our hard currency troubles.

 

In the Nigerian case, the popular and nostalgic desire for a strong naira has political motivations, what we might call “naira populism”

Any member of the elite calling for a ban on domiciliary accounts should first give up their foreign bank accounts and assets. If a bank says they have no dollars for your naira, how do you fund your domiciliary accounts? If domiciliary account holders buy dollars from the black market that the CBN does not sell to, how is that a problem? The irony of all these is that the solution these members of the elite are suggesting targets the “nobodys” changing $100, £150, etc. They are not the problem. The real culprits are in power and wealth.

A state governor will successfully change his or her naira to dollars at a moment’s notice. Which law will stop his or her excellency? The CBN sees the flows. They know the ‘big man’ culprits. But yes, go after people with N10,000, N50,000, etc looking for dollars in the black market; which some do just for ‘vibes’ (“I get dom account na”); as per the local parlance. The only other avenue for retail cross-border movement is via dollar cards, which are regulated.

Besides, the CBN has put in tight rules for physical hard currency cash over-the-counter transactions. And there is already a cap on cross-border naira for hard currency transactions. If hard currency is crossing the border, the CBN is at the gate. And anyone who does cross-border hard currency transactions will tell you the CBN is a very effective border guard. Evidence? I’ll answer rhetorically: why do the wealthy elite keep the bulk of their hard currency holdings abroad despite the varied courting efforts by the CBN to encourage otherwise?

What I can’t really fathom is why the CBN couldn’t simply say viz. Look, we will not sell hard currency to anyone, we will keep it in our reserves account, you can buy and sell hard currency as much as you like, at any price that you like, insofar as you do it through the banking system.

Oh yes, the naira will strengthen after a short while in the aftermath. I’m almost sure of it. Well, no one will tell you to drink ‘akamu’ instead of bread, ‘eba,’ ‘amala,’ and ‘tuwo’ instead of Uncle Ben’s parboiled rice, and so on, when the price of imported wheat and rice become prohibitive. You want a smartphone? A top-range one? No problem, buy it at the market price. Why should the CBN subsidize such luxury items for anyone?

Read also: On the naira (1)

But the CBN cannot hope to do so adminstratively, as its experiment of the past 7 years show. And before we start talking about how these are all liberalist free-market economic ideas (look at Ghana, some will argue), we should not forget that we implemented them successfully in the past, with good results to boot! The Lamido Sanusi-led CBN made it clear you could come in and out with your hard currency as you please. Its confidence was rewarded.

Some might argue that that is a unique case. What about Egypt, which suffered $20 billion in hot money outflows in early 2022, as the Russia-Ukraine conflict put portfolio managers in a panic? Well, it is suffering some pain. But it is getting help from the IMF and others. Besides, foreign portfolio investors will keep in mind that should they be interested in Egypt again, they will be able to go in and out without hindrance.

In the Nigerian case, the popular and nostalgic desire for a strong naira has political motivations, what we might call “naira populism.” The average Nigerian believes a strong naira is a good thing, a sign that the economy is strong, and things are good. Well-educated politicians, who know that to be misleading, still go ahead to campaign with the false narrative of a strong naira, and when in government, when they would definitely have known even better, still go on to insist on it.

But there is also a self-interested reason: Power. Keeping the economy tightly controlled allows those in government to wield the powers of their offices for political benefit. Patronage, that is. Don’t forget that the authorities never really pursue those in government who exchange the naira for hard currency in the billions. Ever heard anyone in government and their friends complain about not being able to convert naira to dollars? If you have, let us know.

And it is these members of the elite that are able to then transfer their hard currency holdings, whether legitimately earned or otherwise, to foreign bank accounts abroad or simply as cold hard currency cash in their home and office safes. I wonder what other benefits those private jets provide their owners. All that luggage space must be to transport ‘garri’ perhaps.

Those who are really shorting the naira are those with the means, influence and political clout to convert billions of naira to dollars at subsidized rates and successfully move the hard currency abroad in cash or through transfers for expenditure, savings, or investment abroad. Is there a system imaginable in the Nigerian context that will successfully rein in the elite from doing this? I doubt that very much. Not for a very long while, at least.

The only way to make everyone pay the right price for a commodity, currency, good or service, is to allow market participants free rein. If the CBN worries about its hard currency reserves being used for unproductive purposes, it should experiment with not selling to anyone for a while, allow market participants to source for and determine the price of hard currency themselves, and see if the market will not rebalance successfully. The challenge is often that the CBN is never able to do so because of potential political pressure.

Besides, no institution likes to give up any of its powers. Instead, all sorts of unsustainable innovations are introduced around the problem. As our ongoing experience continues to show, they never really work. There are centuries of economic history that show what will work and what will fail. And every time, over and over again, time after time, when unorthodox measures that are not grounded on robust research and experience are introduced, they almost always fail.

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