The economy hits critical point in FX management

Last week finally pushed the Naira/Dollar exchange rate closer to N1000 to the dollar. Most people who spoke to me all seemed understandably scared, they fear we are going to run into a currency crisis.

I have always been a long term advocate of letting the naira find its value in the market and I have not changed my mind.There are all sorts of problems  with allowing  market forces work to find the true value of the naira; but we have to get to a point where the cost of buying dollars will change our economy for good. That is how the laws of economics work. lt will be worse before it gets better.

We are at that critical point now. To be able to harness the gains, we must stay the steady course. My contribution to the FX debate since the new unification policy was put in place, was an article I wrote, a few weeks back, where I stated that the challenge now was to maintain policy consistency. That is what I am still reiterating. The only thing we have to fear is fear as President FDR Roosevelt once said. If the CBN gets into panic mode and does anything other than letting the naira find its value, we will get into a bigger currency crisis, that will do even more harm.

We should not worry about what the naira exchanges for, even at N1,500 to the dollar. We should worry more about what it can purchase locally. For context, the South Korean currency, the “WON”, exchanges for 1,320 to the dollar as I write. Why should you expect the WON to exchange for that much, despite all its industries, productivity and strong GDP and with a population much less than Nigeria, yet we are expecting Nigeria’s non productive economy to exchange its naira for less. It is irrational to expect our currency to out-perform our economy.

Our American Nixon moment.

On August 15, 1971, President Nixon of the United States, severed the link between the US currency, the dollar and gold. In effect, he declared that the dollar will no longer be backed by its gold reserves but by the American economy, which he claimed was stronger than any other economy in the world. It was a gamble, but it worked. More than 50 years later, the dollar is the dominant currency in the world, and has nothing backing it, but the American economy.

Let the Nigerian economy back the naira even though I am not saying we have much of any economy now; we will have to grow it, because the potentials are there. We are currently the largest economy in Africa. China was poorer than us relatively, given their population in 1970. We should work toward an economically driven naira currency value.

It will be painful for five years, because we left it too late. All the defending of the naira the CBN has done with our dollar reserves in the last 10 years, was a pure waste. It is never late to be right. If we pursue this policy diligently, we will forever be off the yo-yo rate fluctuations the naira is currently experiencing.

Let dollar demand destruction complete its course.

The artificial lifestyle of consuming foreign goods when we are not productive and we do not export much, must gradually change. We must allow importation to moderate itself. The higher demand for FX will eventually weaken, when we are unable to afford some of the things we buy with FX now, the demand and supply for FX will align.

We are spending money to educate our children abroad, spending what we can use to improve our own educational institutions locally. We neglect investing in our healthcare because we can buy it abroad. When most of the people can not go to the US or the UK, they do the cheaper option of India. We spend billions of dollars every year to import petroleum products, because we chose to neglect our refineries at home. If we want any development here, we must focus on developing our local industries.

The irony is that those who benefit from the little FX reserves we generate, represent a very tiny percentage of the population.

Any industry that cannot find alternatives, for most of its raw material here, is not ideal for our economy. The only known efficient allocator of resources is price. Let higher prices determine who and which industries get FX.  Anyone or entity paying anything outside of the market price for FX is being subsidised, and we have come to know, that is not good for any economy, especially when we become dependent on it.

As importation gradually goes down, local manufacturing will take up the gap and even the replacement, that may be inferior now, will eventually improve in quality and competition with other local manufacturers, will force them to make better quality goods.

Higher local currency receipts as we exchange dollars for naira, will also make more money available to the states and local governments to share, thereby re-distributing the new naira wealth to areas where development will be nearer the people. We are already seeing this happen in the last few months.

The Nigerian policy making and reforms to get the naira stabilised must start from creating a good enabling economic environment. Inconsistent policy making must stop. Regulators in every aspect of our economy must be made to understand that their role is that of enablement for the area they regulate, not to constantly play police.

This will result in rapid growth for our economy. We will need double digit growth for the next 10 years. This is the only way to reduce the current massive unemployment and create wealth that will lift our people out of poverty.

We already have all the positive factor inputs to enable this: fertile land for agriculture, a large population for a self-sustaining market to support whatever our industries produce, and a large literate labour market, that can easily be skilled up.

We must also address the soft issues of heavy investment into education, healthcare and the present challenge of security. We must fight corruption head on, it has corroded every sphere of life in our country.

Some immediate steps that may help.

The fact that the black market has now gained over N200 premium to the official rate at the I&E window, at the FMDQ, since the alignment with the black market rate in July, tells me the market in that window is not an efficient allocator.

I will advocate that the CBN should impose a N200 premium on any price determined at  the I&E window daily, until it aligns its price with the black market rate, which the people seem to perceive as the real market. This will be a way to quickly find out who the real economic users are for FX.

The CBN should come to an arrangement with all the Deposit Money Banks, to lend it all their current holdings in domiciliary accounts, to be used to settle verified backlogs. Something tells me the media reported backlogs have some fluff that need proper verification. The banks must be incentivized to do this, at rates to be agreed. The CBN will also accommodate this as FX holdings for the banks. The  CBN should allow them, value quarterly balances with the CBN at whatever the current rates are, for reporting purposes. The CBN should also guarantee to the banks, they will be ready to provide it, with liquidity to meet depositors’ requests, at any time so there is confidence for depositors.

And finally, the CBN must find a way to rid the economy of the excess liquidity floating around, which is also the reason for the unquenchable dollar demand.