A renowned economist and Managing Director/Chief Executive, Financial Derivatives Company Limited, Mr. Bismarck Rewane, has advised the Federal Government to stop defending the naira, insisting that it should be allowed to find its true value.
Rewane, who made this known to Business Hallmark in an interview in Lagos, emphasised the need for the government to allow market forces to determine the true value of the crisis-hit naira.
“Exchange rate arithmetic is more like a quadratic equation. In quadratic equation you don’t have a single answer. The answer is a range. 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 equal 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”, he said.
According to Rewane, “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 when 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 you start saying you can only buy this only when you wear 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 for 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.
“I am damn certain that market never fails. I am sure that price and value will find equilibrium in Nigeria. Everybody will come to accept it
He advised the Central Bank of Nigeria (CBN) to adopt the Chinese example in its fight to stabilise the naira.
“What did the Chinese do? The Chinese first brought the currency down by 3 percent. That was a good deal for them. However, the next day, what did they do? They brought down interest rate.
“So, once you allow the currency to find its true value, you can then bring down interest rate.
“But what you are doing is using the interest rate to defend the naira. And you don’t need it. No money needs to be defended; it reflects its true value.”
“I will also come with an example: If you say the BDC rate minus ten is the rate which the CBN will sell money to everybody, if the BDC rate is N240, then the CBN will sell at N230.”
He said that speculations against the naira would die once speculators know that if they push the rate up they will buy the next day at minus 10.
“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.”
He warned against the use of the nation’s reserve to shore up the naira, insisting that it is an exercise in futility.
“First and foremost, at $46 a barrel, you are not in a position to keep the currency at the same position as it was $69 a barrel. Since President Muhammadu Buhari came in the price went up to $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, to $46 from $116. 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”, he said.