Policy stability key to Naira exchange price discovery

BY VICTOR OGIEMWONYI 

Victor Ogiemwonyi, a retired investment banker, sent in this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com

More than any other factor, Nigeria’s monetary policy stability will play a major role in price discovery for the Naira. The Central Bank of Nigeria (CBN ) has decided on floating the Naira, and thus leaving it to market forces. It must stay the course long enough for all the factors that will stabilise the Naira to play out. No matter the pressure to change course, the CBN must resist the temptation for quick fixes and focus on always making the policies clear and consistent.

They must ignore the activities in the Black market that represent a very small portion in the market. They should instead focus on monitoring the new market for Naira and ensure that bad actors are quickly identified and penalised. When a culprit is identified, they should be shamed and fined up-to 10x the profits made on the transaction. This will drive home the message.

Liberalising the transacting in Domiciliary Accounts in banks will eventually diminish the Black market. We saw this in 2014, before the disastrous policy of the last administration, in interfering with the operation of the Domiciliary Accounts in banks, which served no purpose.

It was reported at the time that deposits in Nigerian banks for this account reached $26 billion at some point. This was more than half of the official reserves of the country at the time. What this means is that these private dollar deposits took pressure away from the CBN for small dollar payments — for things like paying school fees, travel and medical expenses, etc.

The disruption of this huge source of forex, undermined the confidence of these dollar depositors and had severe implications. Nigerians who were now getting used to transacting with their Domiciliary Accounts got a rude awakening. Many Nigerians at the time, had abandoned foreign accounts ownership, a positive for Nigeria, until the u-turn on the policy. When you create fear and uncertainty, bad things happen. By the time the CBN woke up to its foolishness in this policy reversal, all the deposits were gone and they never came back.

The $26 billion was a source of FX supply and subsidy to the economy. This added private supply of FX took off pressure from the CBN and its growth would have provided a permanent cushion to the CBN FX reserves and blunt the rise in Naira exchange rates.

If the current policy is maintained long enough, there will be gradual growth of FX inflows from exports, as many will focus attention on earning FX, that will also result in increased productivity in all the areas that have export potentials.

Increased productivity in our economy is important in stabilising the Naira. One of the  major issues affecting the Nigerian economy is the low productivity and inefficiencies which affect the value of the Naira. Accelerating productivity in production and exports will eventually stabilise the Naira exchange rate, create certainty, and bring back foreign investors.

No foreign investor will invest in a place where there is uncertainty in policy and unstable exchange rates where they cannot plan, whether it is a Direct Foreign  Investor or a Portfolio Investor, they will want predictability and consistent policies for their planning. Once policies are aligned with best practices and consistent, the economy will improve and GDP growth will be enhanced.

People should worry less about whether the Naira exchanges for N1000 or N700 to the Dollar, the more important goal is stability of the rate.

In the 1980s, the Japanese currency, the Yen,  exchanged for up to ¥380 to the $1 — at some point, it was also the glorious years of the Japanese economy, when their car manufacturing companies, Toyota, Honda and electronics company, Sony, took on the world. The Japanese ¥ will eventually Exchange in 2019 for ¥97 to $1, currently at about ¥137 to $1 — changes occur as the economy makes changes. The rate of exchange is irrelevant in the long run as in everything economics.

The Nigerian economy is potentially a $1 trillion economy. It is being hampered by wrong policies, inconsistencies and poor management of our resources. Waste in government alone can add four percent to five percent (4% to 5%) to our GDP if the government becomes serious about cutting waste.

Inflation is the major issue now, we must aim to outgrow it.

The Asian Tigers as we came to know them in the 1980s, used this strategy successfully. They ignored inflation in the immediate, and focused on growing their economies.

Our current inflation rate at 22 percent tells me there is plenty of growth we are not harvesting.

I have always seen inflation as a proxy for growth, we are leaving on the table.

Our current GDP at about four percent and inflation at 22 percent tells me, we have 18 percent potential growth for our economy, because inflation rate is the aspirational growth potential of an economy. We are currently not harvesting all the potentials in our economy.

There is no better time for the right policies to be implemented and sustained, than now.

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