" /> Market and value will always triumph | Hallmarknews
Published On: Tue, Sep 29th, 2015

Market and value will always triumph

BISMARCK REWANE | Exchange rate arithmetic is more like a quadratic equation. In quadratic equation one won’t have a single answer. The answer is a range. In a simple equation like 10 apples equal N5, what is the price of one apple? In simultaneous equation you have two unknowns but in quadratic equation there are multiple unknowns. So, the range is that the answer is greater than or equals to. So, it is a range of answers, because you are differentiating functions.
The exchange rate mathematics is such that you have a number of options. But what you want to do is to be on the equilibrium path. To misunderstand the problem is to come up with the wrong prognosis or therapy. So, the problem is not the exchange rate, but the exchange rate determining mechanism.
If we say for example, we are going to have a formula which says the price of oil minus a certain amount of reserve cover, which multiplied by the exchange rate of the naira to determine what it is at a particular date to determine the value, let’s say N150, if we are not satisfied with N150, and we then say intervene to bring it lower, we will then sell more into the market to bring the price down to N130, depending on the capacity we have.
But without a mechanism, you cannot arbitrarily determine the price, because the price is what we call an effective exchange price between two variables. So, the moment one starts saying one can only buy this only when one wears a white shirt, the price is no longer the price. The price is that you have to factor in the price of buying the white shirt, the time you have to wait to the financial cost.
What we are saying is that we need to have a mechanism for determining our exchange rate. Once it is known, everybody will work with it.
Fear of speculation
On the fear of speculation, it will die once they know that if they push the rate up, they will buy tomorrow at minus 10. And there is a carrying cost attached to holding currencies, because you are paying about 15 percent per annum interest to borrow the naira to buy the dollar and you are getting only one percent. And the dollar will not appreciate. The only way to end speculation is to allow the market price to prevail.
Policy options
On policy options for government given the present situation, first and foremost, at $46 a barrel, you are not in a position to keep the currency at the same position as when it was $69 a barrel.
Since President Muhammadu Buhari came, prices have gone down from $69 a barrel. $69 minus 10 is 59, 59 minus 10 is 49. So, we have lost almost 30 percent of the value of the price of our product since he came in. But if you take it to July 2014, it is down 65 percent, that is from $116 to 46 dollars. We don’t have the revenue. We didn’t cause it. The markets are down. So what have we given up since the price of oil went down from $116 to where it is? All that we have given up is that we have blocked the holes for corruption and leakages.
Assuming that they were stealing $40 a barrel from $116, that leaves you with $76, from there to what we have now, we still need to make that adjustment.
Naira devaluation
The appropriate range that the naira should be devalued to is easy. If your income is down by a certain percentage, you adjust your currency accordingly. But I am not saying we adjust by 70 percent. We have done 26 percent adjustment since this thing started.
Our terms of trade have deteriorated against us by as much as 38 percent, because our import has come down, but our exports have gone down much more. Your currency adjustment mirrors the level of your terms of trade.
Again, if the government insists on not adjusting the currency it will create a gap. That gap will be filled one way or the other. Adams Smith did this centuries ago. Demand curve and supply curve, these are fundamental laws of economics. When a hypothesis becomes a law, it means it has been empirically verified, so it is not subject to any argument. If the price of any commodity increases, the demand for that commodity will decrease. If the supply increases the price will fall. If the price is not where the demand is equal to supply, a gap will be created. That gap will be filled by unhealthy and dysfunctional practices, which will distort the market and create rent and arbitrage and destroy productivity.
Single Treasury Account
Many people believe with the Treasury Single Account (TSA), we could be creating a gap in the financial system. The TSA will lead to an appreciation of the naira in the short-run because you are reducing the quantity of excess liquidity in the system. But this is a temporary measure, because eventually you will use the money from the TSA to pay contractors and the money will come back to the banking system. We must always equate an economy with a patient. If you have malaria, and you take any drug at 8a.m, you will feel strong and feel good, but in the evening when the sun goes down, your temperature increases. If you take the inadequate dose of medicine, you feel some initial relief, but the relapsing fever is often worse. So, if we take the inadequate dose of adjustment, the relapse will be much higher than we started.
JPMorgan
On the JPMorgan issue, the question is did Nigeria lobby it to include it in its bond index? No, JPMorgan included the country based on its assessment. Their index methodology is so disciplined and is transparent. If the country does not meet certain criteria, it cannot be in the index. Thirty-five emerging markets’ currencies have been adjusted. So there is nothing special about Nigeria. It takes time to accept realities. I come from the school of markets, so I believe in markets.
And one is not subordinating nationalism to the market. No! There is economic patriotism which I strongly believe in and there is economic realism. The truth is that when price adjusts to reality, production increases. And the economic well-being of the country will improve. At the end, we want to increase the Gross Domestic Product of the country, so that the welfare of the people is better off, so that people can invest and create jobs and boost economic welfare.

Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Recent posts

  • Time is ripe for rates cut, says Rewane as inflation slows further in Oct.

    FELIX OLOYEDE This is the appropriate time for the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to cut benchmark monetary rates after inflation rate slows down for the ninth consecutive time in October, said Mr Bismarck Rewane, Managing Director, Financial Derivatives. The National Bureau of Statistics on Tuesday released Consumer Price […]

  • ELAN National Lease Conference Focuses on Revamping Nigerian Economy

    FELIX OLOYEDE In furtherance of its objective of promoting the business of leasing in Nigeria, Equipment Leasing Association of Nigeria (ELAN) has concluded plans to organise the 15th Annual National Lease Conference with focus on revamping the Nigerian economy. The conference which is the biggest gathering of stakeholders in the leasing industry is expected to […]

  • Nigeria-centric restaurant, Labule, opens new outlet in Lagos

    Labule, Nigeria-centric restaurant, operated by an indigenous company, Roots Foods Limited, offering real Nigerian local delicacies in a unique environment that combines the setting of a modern quick service restaurant with that of an African setting of a local ‘buka’, has opened a new outlet on Admiralty Road in Lekki Phase 1, Lagos. The brand […]

  • Nigerian banks shine in Ghana

    By JOHNMARK UKOKO Nigerian banks have been credited with “revolutionizing “the banking sector in Ghana, due to the many innovations they brought to Ghana’s banking sector. The Ghana Deputy Minister of Trade and Investment Hon. Carlos Kingsley Ahenkorah said in Lagos that the innovation and transformation of the Ghana’s banking sector is credited to the […]

  • Ajimobi moves to save Oyo APC from disintegration

    By OLUSESAN LAOYE The seeming crisis in Oyo APC has now forced the Governor of the state, Abiola Ajimobi, to begin consultations with stakeholders to convinced members on why they must come together as a body to face the 2019 general elections, Although the internal crisis is yet to break open as the aggrieved party […]

  • YolaDisCo sale stalled as no potential buyers emerge

    By ADEBAYO OBAJEMU Two years after the core investors of the Yola Electricity Distribution Company, YolaDisCo, declared a force majeure owing to their inability to operate under the reign of terror unleased by Boko Haram, the Federal Government is yet to find any investor interested in operating the utility company, it has been learnt. In […]

  • Company Analysis: Much Ado about Seplat

      By TESLIM SHITA-BEY The oil and gas sector has had a bumpy since the beginning of 2017 with local oil major, Seplat, seeing its financials whipped raw by prior year liabilities despite rising revenues over the nine months (9M). The company in the last two years has moved from being distinctively bad to singularly […]

  • How to start a photography business

    By ZUBAIR DANIE While photography could be accounted for as a full blown course in any offering institution of learning for professionalism, the field equally provides a platform for individuals whose passion it is to project images as a form of livelihood. The socio-cultural aspect of Nigerians that play host of events like: wedding, naming, […]

  • BOFE to celebrate unsung heroes in local communities

    OluwasolaJesuseitan, a brand and advertising expert, is an advocate of sustainable brand communications. He is also the founder, Business Owners Forum Enterprise (BOFE), a non-profit making organization, which seeks to build the capacity of business owners in and around Akute, Ogun State. He tells FELIX OLOYEDE in this interview of his organization is promoting business […]

  • Lager wars: Who wins?

    By JOHNMARK UKOKO Nigeria has many lager beer producing companies, some have been in existence for over 50 years while others are quite new in existence in the country. Some of these companies that have over the years churned out millions, if not billions of bottles of beer to Nigerian drinkers are: Nigeria Breweries Plc, […]

  • Nestle sparkles in Q3 results

    By OKEY ONYENWEAKU As the packaged Consumer goods (PCG) sector struggles to stay ahead of falling consumer demand, companies such as Nestle Nigeria plc are bucking the trend of businesses with shrinking bottom lines. Indeed the multi-product packaged goods producer has seen earnings rise to mind boggling with its pre-tax profit rising by a stunning […]

  • 2018 Budget proposals renew old anxieties

          FELIX OLOYEDE   Mixed reactions trailed the presentation of the 2018 federal government budget by President Muhammadu Buhari to the National Assembly (NASS) last week. Public policy analysts have expressed moods from the congenially positive to the outright incredulous. The staggering N8.6 trillion expenditure plan is one of the most audacious in […]

  • Anambra 2017: Obiano battles for life

    By Obinna Ezugwu The time has finally arrived. On Saturday the people of Anambra State will head to the polls to either renew the mandate of the incumbent state governor, Chief Willie Obiano who is running for a second term in office, or elect fresh hands from among other prominent contenders, including Mr. Oseloka Obaze […]

  • (Editorial) CBN’s BVN distraction and matters arising

    Nigeria’s fiscal and monetary authorities have a frustrating way of responding to the seizure of private assets; they typically gloat with glazed eyes over private citizen’s money ready to pounce on the cash like a pack of hyenas starved witless. The recent order by the Central Bank of Nigeria that customer accounts that are not […]

  • 12 Yoga tips for beginners

    The popularity of yoga has soared in the last decades, and it seems that every other friend and acquaintance of ours is already practicing it. But don’t let it fool you into thinking it is easy: yoga is quite challenging, especially for beginners. The good news is that there are some practical tips to make […]

  • Finally, embattled IGP, Ibrahim Idris, appears before Senate

    The Inspector General of Police, Ibrahim Idris, has arrived before the Senate ad hoc committee set up to investigate the allegations and counter-allegations between him and Senator Isa Misau. The IGP was accompanied by his lawyer, Alex Iziyon (SAN) and Special Assistant to the President on National Assembly Matters (Senate), Senator Ita Enang.   Details […]


Visit us on Google+