I am a big fan of The Matrix. Not the rectangular array of numbers in mathematics but the movie about machines who enslave humans and turns us into batteries while convincing us to accept it because we don’t really know believing that the world, we think we live in is real whilst in reality it is a dream. If you have not seen the movie then you really need to re-evaluate your life choices. One of my favourite scenes in the movie is the part where Morpheus (one of my favourite characters) offers Neo (the “actor” as we say in these parts) a choice in the form of two pills which he could choose to swallow. A blue pill and a red pill.
On the one hand he could take the blue pill and forget everything he had learned, waking up as if from a dream, and continuing to believe that the world he thought he lived in was the real world. On the other hand, he could take the red pill and learn the truth about the actual real world. The world in which the machines had taken over and in which most humans had been turned into batteries. For Neo there was no middle ground. No delicate balancing act. It was a stark choice with consequences. Blue pill or red pill.
In some sense policy makers, especially those at the central bank, face the same choice. Except that in this instance the choice is between the economy and the exchange rate. I know. I hate to be the one to write yet again about the exchange rate, especially since we still have not really gotten over all the debates, we had in 2015 and 2016. But it is what it is. Policy makers have a choice between the economy and exchange rates.
On the one hand they could choose to forget about the exchange rate and let whatever happens to it happen. This in turn means that they do not have to set monetary policy for the exchange rate. Things like raising rates to attract portfolio funds become redundant and policy makers can focus on keeping inflation in check. Keeping inflation in check is the ideal scenario when it comes to what monetary policy is best for the economy. I know some of you will shout “but the exchange rate affects inflation” and yes it does but hold on. Are those big exchange rate to inflation spikes because of exchange rate changes or because of the failure in attempts to keep the exchange rates fixed?
On the other hand, policy makers could choose the exchange rate. Choosing in this sense means doing everything to keep it stable. Raise interest rates to attract foreign capital. Sell special securities to foreign portfolio funds. Implement all sorts of policies to restrict access to foreign exchange. Implement all sorts of rules around the purchase or sale of foreign exchange. All with the goal of keeping exchange rates fixed. Of course, while all this may keep exchange rates fixed temporarily, they all tend to be bad for the economy.
And so, we have our own version of the blue pill versus red pill choice. Historically, we have usually chosen the fixed exchange regime choice. Not always but most of the time. Under the current regime we have chosen the fixed exchange choice for sure. I know the authorities will say there is no proof of them fixing the exchange rate, but they are not fooling anyone. That choice has of course been typically negative for the economy. To make matters worse we try to switch from blue pill to red pill and have occasional devaluations. But then we typically go right back to our choice of the exchange rate again. As the central bank’s reserves tumble towards the psychological 30 billion US dollar line the noise around devaluation is getting louder. Some are saying second half of this year while others suggest we may get to 2021. But perhaps the debate should not be about whether to devalue or not. The debate, in my opinion, should be on if we should choose the economy or the exchange rate. That debate should be rather straight forward but once you add politics into the equation then it becomes a bit more problematic. Somehow, we always seem to end up at politics.
NONSO OBIKILI
Dr. Obikili is chief economist at BusinessDay.
