Business
Trailing the CBN for profit
By TESLIM SHITTA-BEY
The friskier the central bank gets about inflation the higher interest rates ride and the stronger the naira gets. But of course this is the hair-brained economist’s conventional wisdom that rarely pans out.
In the last nine months the CBN has wrapped muscular arms around money supply growth but this has not stopped the naira tumbling in foreign exchange markets. Between June 2014 and March 2015 the naira dipped 19 per cent in foreign exchange markets as investors and speculators scampered for scarce dollars. Notes Imperial Finances, Chief Operating Officer, Rotimi Ogunwale, ”the foreign exchange market suddenly became a one way bet. The naira was primed to slide into a sewer. You had to be either mentally deranged or intellectually challenged not to sell your naira position to run dollars”. Maybe so, but the results of the recent Presidential election held in March threw a wrench into the markets internal logic and perhaps the pretensions of currency traders.
Within a week of the announcement of President Muhammadu Buhari as winner of the Presidential election, the naira helicoptered from N220 to a dollar in parallel markets in February to N 190 to a dollar by the first week of April 2015.
The appreciation had little to do with market fundamentals but had more to do with the instinctive response of traders to reduced election anxiety and the sale of dollars by politically exposed persons (peps). The market still retains a weak underbelly influenced by the actions and inactions of the CBN.
In months ahead Godwin Emefiele, the CBN boss’s, winks and nods may prove decisive in determining the short term direction of the naira. It seems safe to argue that the naira will face continuous pressure throughout the year regardless of CBN’s efforts at demand management. Parallel rates will worsen as December approaches with manufacturers and retailers trying to stock up for year-end sales.
But of equal importance is how the CBN responds to the new government’s fiscal preferences. This would be crucial to economic stability over the next five quarters or fifteen months. Tight –fisted fiscal administration combined with hawkish monetary policy would choke off both growth and inflation. While one could spell disaster the other could turn either way.
Raging inflation could push short term growth forward but it would also decimate the value of the local currency. An annual inflation rate of 9 per cent per annum would cut the currency value in half in roughly eight years.
This means that the President could destroy the value of the currency by fifty per cent in his two terms of office. However, the converse argument is that slightly rising inflation could actually be good for the economy if it encourages gross domestic production and creates jobs that keep the wheels of industry turning.
It is a safe bet that the CBN would keep a tight rein on money supply and interest rates would therefore remain in double digits for the rest of the year with two major consequences; manufacturers will have a hard time sustaining last year’s profit figures while bond investors will experience higher yields as bond prices tumble in other words this is not the best of times for either equities or bonds.
Should Nigerians, therefore, allow the CBN inflate the economy to bring down rates and spur growth? Perhaps not. Unfortunately, President Buhari’s economic czars are going to have to make do with only the fiscal arm of macroeconomic policy.
The economy cannot, in its present state, afford an inflation hike that could easily spiral into a Zimbabwean-style price rout. Maverick economist John Kenneth Galbraith, in his best -selling book ‘The affluent Society’ noted that more often than not governments fixation with prices and controls, ”deal with symptoms rather than with causes. To use them is to juggle with the thermometer, not the furnace”.
Nigeria’s raging furnace appears to be its appalling domestic productivity. The nation has a relatively low productivity base with a gross domestic output per person at $3,184.6, behind Algeria at $5,361.1, Namibia at $5,719.6, and South Africa at $6,477.9 in 2014. Falling exchange rate, higher inflation (projected to settle between 10 and 10.5 per cent), and rising interest rates would make things worse in the last quarter of 2015 and the first half of 2016.
The task before the new government is to turn things around; a large number of local economists are of the opinion that to create a competitive investment environment the government must restore dignity to the nation’s work ethic and expand economic production and the growth of real sector of the economy which would translate into the advancement of the capital market.
The All Shares index (ASI), a measure of stock market performance, has since the beginning of the year lost -13.04 per cent of its value and has dropped by a further -22 per cent since August 2014. This means that on average investors have lost about a fifth of the value of their equity portfolios over a twelve month investment period.
For investment analysts the art of trailing Central Bank policies and interpreting the apex Banks body language may help in predicting market trends, but of greater importance is the ability of market analyst to preempt the administrations fiscal direction.
Indeed following the CBN may be a clever gambit, but going forward in the months ahead, following President Buhari’s fiscal policy managers may prove to be a whole lot better!