Godwin Emefiele, CBN Governor

The CBN governor committed to maintain stable naira rate in June 2019; he should explain what went wrong!

By UCHE CHRIS

When Mr Godwin Emefiele, the CBN governor was handed his second term of office in June 2019, many people applauded President Buhari for recognizing performance and merit. Most people believed that he had done creditably well in his first term and deserved an encore especially given the fact that his two immediate predecessors were denied such privilege. And Emefiele himself was bullish about the renewed confidence in him and boasted confidently about his vision for the industry and economy.

Well, less than a year on, he would perhaps, be wishing he had gone after the first term because I believe he would have declined the reappointment if he knew what lay ahead. As it now looks he will go down in history as the man who killed the naira under a president that once vowed he would not preside over the death of the naira during his 2015 election. The sad lesson for Emefiele and the rest of us to learn is to sometimes say no to what seemingly looks good, and to leave the stage when the ovation is loudest because life is so dangerously unpredictable that only the stupid is often wise in hindsight.

Second-quarter GDP report has brought us back to the reality of our past foolishness and Emefiele’s growing headaches. The good news is that we have come to the end of our delusion and self-deceit of pretending that we could live inside our secluded world, where we determine how we do our things regardless of what the world around us is saying. With the arrogance of indulgence over, it is now time to come to our senses and settle for the work of realistically managing the economy and the exchange rate of the naira.

The Central Bank of Nigeria, CBN, is already waking up to some of this responsibility but in a far weakened position; and things may have to get pretty worse before it ever gets better. Truth is that the bottom has not to be seen or reached for the naira. We have been digging in the hole and the challenge now is to stop digging and try to find a way of coming out.

Naira’s sad fate goes back to the Dutch Disease or Resource Curse situation where commodity export promotes overvaluation of the currency, which discourages other exports and local production, and favours import and ostentatious lifestyle and consumerism. It is as simple as that and there are ample examples globally from which to borrow. Indeed, the phrase Dutch Disease refers to its source – the law of the first mention.

In the first part of this article, it was argued that economics is about the short and long terms; bad economists only consider the short term, while the good ones consider both. But in most cases – which explain the reason economies are in trouble – policymakers and political leaders prefer the immediate result because it makes their life and job easier and safer to the detriment of the entire economy and general interest.

In the specific case of the naira rate, we add this: The subject of economics comes down to this: Demand and supply. All the perplexing complexities and technical verbosity involved in the economic analysis have one objective: balancing demand and supply to achieved defined and desired goals expressed as stable price. Experts may dismiss and derogate this explanation is simplistic and elementary, but it doesn’t matter; with all their expertise, we are in this mess.

The complications in public economics are from vested interests – attempts to balance interests and even advance or protect them. Without such interests, demand and supply rule economics as in individual life and business. In managing the naira over the years, we have disregarded this elementary principle of economics based on demand and supply. All CBN governors since the oil booms in 1973 have focused on demand management with little consideration to supply, of course, in the misguided belief that it does not matter since oil will continue to flow.

But the consequence is this: No matter the inexhaustible level of the resources, consistent demand pressures would eventually affect supply negatively; and any shortfall in supply changes the price balance or equilibrium, causing it to rise. This has been the dilemma of the Naira; and it is not the problem of the naira but that of policymakers and their bad economists who looked only at the immediate consequences of their actions, not minding what would happen in the day like now, because every action has a consequence – short and long term – and the determination of the time lag or duration is not within our power; only time can tell, as they say.

Was the present challenge inevitable, yes; and was it avoidable yea. It was our indifference to the inevitability of this consequence that has caught up with us. We have lived like the grasshopper, and we have to pay the price. Nigeria imports virtually everything under the sun and no country, individual or family can do that consistently without getting into real big financial trouble. But that is exactly what we have done over the years.

In 2011, the IMF warned Nigeria over its fiscal and monetary policies in respect of the naira exchange rate, which seemed to be conflicting in objectives and hardly capable of resolving the deep economic issues facing the country. They called on Nigeria to redefine and restructure its policy framework and direction to address its growth and investment challenges.

However, then CBN governor Emir Lamido Sanusi defended the government policy, a position he has repudiated after leaving office. He had argued contrary to the views of the IMF that conflicting objectives in central banking are not unique to Nigeria. In an interview with CNBC Africa on Monday, 21st February 2011, he said:

“Oil prices are up; output is up, the demand for reconstruction and rehabilitation of structures is not where it was, the power reforms are going on, so we do not see any fundamental reason at this point for an oil-producing economy when oil prices and output are going up, for us to depreciate or devalue…  All talk of inflation targeting in the Central Bank of Nigeria is prohibited so long as I am Governor.

“First of all, there is a question of the serious limitation of monetary policy. A lot of the components of inflation in Nigeria are structural. We are an import-dependent economy; we import inflation through imports of food and energy.”

Sanusi spends $36 billion defending the naira while Emefiele has spent $34 billion by 2019. Between them, that is $70 billion in eight years – this amount can pay of our entire foreign debt. Tragically and ironically, we are no longer able to fund even normal dollar requests, not to talk of defending the naira.

Now, investors unable to repatriate their funds from the country; CBN is now fire-fighting and desperate panic has saddled itself with all manners of policies such as verifying prices of imports, excluding from bidding for forex on behalf of their customers etc. What next will it do?  And why are we doing this now; why didn’t we do it 10, 20 or 30 years ago? There is only one direction for the naira now – south.

The economy is plagued by four deep-seated problems of high inflation; weak growth, low forex inflow and rising interest rate due to illiquidity to save the naira. In all this, the naira will be the ultimate victim. There is no way out for the naira, especially in the absence of enabling policy and structural reforms that will alter the direction of the economy. Even with such reforms as a single exchange rate market, incentivizing private investment, tackling insecurity, removal of subsidy, passing PIB, etc. it is still not a tea party and will take some time.

As Mr Bismarck Rewane, CEO, Financial Derivatives, said last week, we are in a race against time and “everything has to be done as if it is yesterday”. Well, you can judge whether this is the characteristic of this government. No. What is more important to it is the Water resources bill!