In 2016, while Central Bank of Nigeria (CBN) governor Godwin Emefiele was trying unsuccessfully to ease pressure on the naira by chopping down trees in Wuse, Abuja which allegedly sheltered black market money changers, his colleague in Lebanon was trying out a different kind of experiment with a similar end goal of boosting the value of the Lebanese pound.
Despite the geographical distance and difference in corporate backgrounds separating them, the ensuing catastrophic failures of their approach to central banking would eventually serve as a lesson in what not to do when wielding the sort of power that a central bank holds over an economy. On the one hand was the $400bn African behemoth determined to tackle its exchange rate woes by pointing a (literal) gun at the measurement mechanism, and on the other hand was the beleaguered Gulf minnow trying to achieve the same effect by artificially weighting the scale with a nudge and a wink.
Emefiele’s latest regulatory flight of fancy involves closing naira accounts of foreign remittance services, artificially throttling the supply of naira into the economy and mandating all foreign remittances to be paid out in dollars – to recipients who do not have dollar accounts
Riad Salamé’s ‘financial engineering’ – A Central Bank ponzi scheme
Salamé’s 2016 solution was as simple as it was brilliant. The problem was that the Lebanese national currency was tanking, which was hurting its import-dependent economy significantly. To mitigate the effects of the pound’s eroding value, the Lebanese government could create policy to boost productivity and exports, possibly also leaning on diplomatic relationships to cultivate new export markets to bring in precious forex. Of course this method had no guarantee of success and – to put it lightly – production is hard! So Salamé chose a second option.
Under his watch, the Banque du Liban (Lebanon’s central bank) created a so-called “Financial Engineering” policy to attract vast amounts of USD deposits into Lebanese banks. As a banker quoted in Saudi24 News said, “When you deposit USD, we give it to the central bank. We don’t know what they do with it, but you get 15 percent interest on your money, paid in USD.” What inevitably resulted was that without anyone quite understanding exactly what “financial engineering” was, investors from Lebanon, the Gulf region and as far afield as Southern Europe and Africa were attracted to this Lebanese central bank yield bonanza.
The government soon began proudly boasting that the Lebanese banking sector had over “$170 billion in deposits worth 3 times Lebanon’s GDP.” Buoyed by this apparent sea of dollars in the country’s forex reserves and resultant confidence in the Lebanese economy, the government obtained political mileage and the country’s economy recorded a boom driven by real-estate and retail. The good times were rolling – for all of about 3 years.
In 2019, everything changed when the exchange rate suddenly fell off a cliff – recording a 5x divergence from the official rate – and questions began to be asked.
It turned out that “Financial Engineering” in fact was nothing more than your garden variety ponzi scheme. The Banque du Liban was in fact taking in USD deposits from investors and using that money to pay old investors their double-digit returns – the world’s first central bank ponzi scheme. Up to half of the stated forex reserves, it turned out, were completely fictitious – Salamé effectively created a fake USD balance out of thin air.
Today, Lebanon is every bit the mess it was pre-2016, and worse. “Financial Engineering” might have been a brilliant short-term solution in the world of a statism-obsessed central planner, but in the long run it ended in a maze of lawsuits, ruined lives, large scale emigration and ultimately a fundamentally broken country.
Emefiele holds a gun to forex’s head
Something nobody can accuse Salamé’s Nigerian colleague of is being in any way subtle, understated or elegant in his approach. While Salamé’s approach to artificially massaging the value of his country’s currency upward was the central banking equivalent of borrowing money to pay for a meal at an expensive restaurant along with a rented tuxedo and limousine, followed by a night at a 5-star hotel to get a damsel into bed with him, Emefiele’s approach is far less elegant.
Following on from his tree-chopping exploits in 2016 – which amazingly enough failed to yield any results – Emefiele’s latest regulatory flight of fancy involves closing naira accounts of foreign remittance services, artificially throttling the supply of naira into the economy and mandating all foreign remittances to be paid out in dollars – to recipients who do not have dollar accounts. The reasoning is as simple as it is achingly stupid – artificially increase the amount of USD held in the banking system by holding on to remittances while
making people jump through unrealistic hoops at peak annual remittance time, and at the same time make naira scarce.
In so doing, the NGN-USD exchange rate will “appreciate” on paper – probably going as high as N410 by year’s end. At this point, the Nigerian government will then loudly proclaim victory over its imaginary enemies who are hell-bent on getting the central bank to float the currency. This will of course be in line with Major General Buhari’s vow to resist “murdering the naira,” as he once famously described it, in his characteristic gloriously profound ignorance.
Apart from the elegance (or lack thereof) around their respective approaches to playing dishonest games with currency valuations instead of carrying out responsible fiscal policy, the only other difference between Salamé and Emefiele is that the former is already seeing the full effects of his woeful failure as Lebanon literally falls into pieces with every passing day. Young Lebanese graduates now dream of moving to countries like Cote d’Ivoire to have any chance of a future because Lebanon, to all intents and purposes, is dead.
As for Godwin Emefiele?
Tick-tock…
