“I am not here (in Nigeria) nor is my team in this country to negotiate a loan with conditionality….However, there could be more added flexibility in the monetary policy.” – Christine Lagarde
Christine Lagarde, the managing director of the IMF, was in Nigeria earlier this month. Following her meetings with the Nigerian authorities including President Buhari, the Lagarde was at pain to emphasize that she was not in the country to negotiate an IMF loan programme, which often includes a devaluation pill, with Nigeria.
Why the emphasis on an IMF loan programme by the MD? Flash back to 15th January, 1998. What comes to mind is the symbolic signature picture of Indonesian President Suharto signing an IMF loan programme agreement with the then IMF MD Michel Camdessus to the left, arms-folded, hovering over the president.
At the time for Indonesia, the scent of change was in the air. The IMF simply helped along in sealing it with an economic reform programme including removal of subsidies and devaluation of the Indonesian currency. As noted in the Financial Times by the then World Bank’s country director of Indonesia, the economic reform was driven largely by external agency of restraints. (http://www.ft.com/intl/cms/s/0/a0a6d928-2a90-11dc-9208-000b5df10621.html).
The symbolic captioned picture of Indonesia’s president of nearly two decades ago, which went viral during the Asian Financial Crisis, capitulating to the IMF’s MD was clearly what the current MD was trying to avoid with her Nigerian host. Of course, Lagarde was also careful to note that Nigeria needs a more flexible monetary policy.
Of course, market participants lean on rating agencies and international financial institutions including the IMF to try to persuade governments in developing countries about market-oriented policies, including a more flexible exchange rate regime.
On the other hand, President Buhari clearly indicated in his exchange with the IMF MD that Nigeria’s economic reform programme would be inward-looking and home-grown. In the context of 2016 Budget of Change presented to the National Assembly, President Buhari had also made some interesting remarks on the country’s current exchange rate regime.
In this article, we try to situate those remarks in the political economy context of the three key factors – economics, markets, and politics – that determine the choice of exchange rate regimes.
Economics, markets, and politics
These three factors impose constraints on policymakers. First, on the economic front, governments are faced with the monetary policy trilemma and its systemic constraints. Then, policymakers can only take two out of three options at any point time.
Second, in an open economy with increasing capital globalisation, markets constrain the government’s ability to conduct policy in response to economic shocks. In general, markets participants would favour a more flexible exchange rate regime with another round of devaluation, an open capital flows regime, and a higher interest rate regime.
Third, governments also face political constraints imposed by their domestic constituencies applying pressure to select exchange rates regime that favours specific domestic goals and interest groups. The dominant political interest group may favour fixed exchange rate system and the status quo, a lower interest rate and strict capital controls. It is the interface and tension between the market constraints and political constraints that lead governments to respond in a predictable manner to the structural constraints imposed by the monetary trilemma (Ben Carliner, 2005: What determines exchange rate regimes?).
Economics
In contrast to perceived wisdom, the remarks by the president appear to suggest an understanding of the economics forces of supply and demand, the implications of scarcity and the choice that it entails. In his own words, “I am aware of the problems many Nigerians currently have in accessing foreign exchange for their various purposes…these are clearly due to the current inadequacies in the supply of foreign exchange to Nigerians who need it. I am however assured by the governor of Central Bank that the bank is currently fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflow of foreign currency to help ease the pressure.”
More importantly, one of the key insights in the budget statement is the following: “The status quo cannot continue. The rent seeking will stop. The artificial current demand will end. Our monetary, fiscal and social development policies are aligned.”
There is indeed a need to coordinate monetary and exchange rate policies with fiscal policy. A flexible exchange rate and a depreciation of the naira should indeed boost government revenue allocation. However, there is no guarantee that this would generate a higher fiscal multiplier on the economy without us successfully plugging the fiscal leakages at both the state and federal levels. Furthermore, Nigeria’s high import dependency means that rising fiscal spending may just be diverted towards imports of consumer goods.
How about monetary policy? In this period of stagflation (inflation and unemployment both rising) and negative output gap (actual output below potential output), the task of the monetary authority is a bit complicated.
Temitope Oshikoya
