A descent fruit bowl will have a mix of bananas and oranges. A very good soup pot will have everything to make you want more. So the question is what has the Central Bank of Nigeria, CBN, in its pot? Just three items, rate hikes, naira defence and then devaluation. All of these items pronto, in the minds of the apex Bank, will halt the dramatic gyration of the currency.
By Wednesday, a day after the CBN raised rates by 100 basis point to a record 13 percent, pegged the Naira at N168 to the dollar with a mid point of 5 percent, the currency laughed at the policy with a quick dance further to the south, ending the day at N182-N186 to the dollar in the parallel market and traded at N176.35 in the ‘official’ market.
The Naira’s temperament simply says rate hikes or outright devaluation is not enough and cannot be completely an effective, efficient tool for curbing the slide. It says again that you cannot simply suppress the superior asset that everyone is flocking to, in this case, the dollar. So, this is a losers move.
Indeed, what happened was that the CBN simply confirmed what many knew and knows, in other words a bold acceptance that the Naira has been over valued for a very long time.
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Come to think of it this way; even if higher interest rates were to help the cause of the Naira, what about it’s resulting output cost? This could be substantial and so what has been the relative effectiveness of higher rates and intervention, for instance, since Sanusi Lamido Sanusi. Can we conclude that this is the best optimal policy mix given the structure of the economy, an import dependent economy?
You may want to remain optimistic, but what is happening to the Naira and the economy now, is a sign of impending financial crisis. That the Naira is gyrating against the backdrop of tumbling oil price does the raise the specter. At least, it is obvious the impact of oil price drop on the government revenues and so to say the Naira is one big casualty is a statement of fact.
Again, there is a correlation to this. The Naira macabre dance began with the current oil revenue woes. In the past three months, oil revenue nose-dived over 30 percent, on the other hand the Naira lost a third of its value before the CBN response within the same period.
Potentially, the crisis in the North adds to the burden not just oil alone. Many companies have either packed up, retrenched or moved out. That is a huge chunk of the country’s productive base diminished.
The quandary as to how best to respond to the current economic situation evokes painful memories of the 2008 financial crisis. The denials today which resonates in the words of the CBN governor, Godwin Emefiele, who told Bloomberg news some months ago “there was no need to panic”, is akin to that of 2008 when government officials and the CBN lived in the euphoria that the economy is insulated from the global economy.
A CBN deputy governor, Joseph Nnanna, copied the same pattern of denial, two days after the CBN policy announcement, which effectively devalued the Naira. He said that the CBN has not devalued the Naira. So who does he think he is fooling? Or what does he want to achieve by his pronouncement. You don’t have to be a Harvard or LBS or Cambridge economist to understand what has just happened to the currency. In fact you don’t have to be an economist to know that the CBN is trying to decorate a wounded currency. This is the type of contrasting policy statements, which often unsettle the market and investors. He should know better as a former director of research at the apex bank.
I think he should view this as the first real test for the apex bank since Emefiele took over at helm. Leaning yes or no, the buck stops at Emefiele’s desk and so every policy maker including the bank must look beyond this transient moment and begin to identify trends that will have lasting significance for the economy and come up with sustainable mechanisms to deal with future acute threats. Policy makers haven’t found the type of mechanism yet to defend against any possible squeeze other than the rudimentary process-raise or hold rates and defend the Naira with the country’s reserves.
Lest we forget, the real threats don’t these days come from the usual suspect-the capital market or bond markets or oil price but from insurrectional politicians more willing and likely to undermine the tenants of fiscal responsibility.
Charles Ike-Okoh
