It is at times like this I wish I paid more attention in first year economic policy classes… What I dislike is the inconsistency in decision-making by the CBN Governor. His most recent declaration on his stance on the naira, is “…that the naira could be allowed to devalue if oil prices and foreign exchange reserves continue to fall and monetary intervention attempts are exhausted.” (Sanusi Oct 7 2011). Sanusi’s conditions for devaluation will not be met, as they are a paradox: Naira will fall if reserves and oil prices continue to fall, now reserves will fall because our reserves are denominated in US Dollars (we all know what’s going on in the US economy).The naira investment in the Yuan is potential double dipping as they Yuan is somewhat pegged to US dollar. Regardless of what happens the weakness in the dollar means that our reserves will continue to fall (now at $32 billion).
Eight months ago Sanusi very adamantly argued against the Naira devaluation, after the IMF advice to devalue; IMF highlighted that for two years, Nigerian inflation has been in double digits and monetary policy and depletion of our reserves was not adequate. It is interesting how Sanusi’s tone has changed regarding the exhaustion of monetary policy, and the need to devalue the Naira.
Flashback to February 2011
“I am strongly against the IMF’s call for the devaluation of naira. As a matter of fact, the naira is already technically devalued. We don’t have the capacity to withstand a devalued currency. A country that does not produce anything cannot afford to devalue its currency. We are not self-sufficient,” Sanusi (February 2011).
The key reason why Sanusi did not agree with the IMF, was because Nigeria is not an export oriented economy (major reason for devaluation is trade protection). The conditions he highlights have not changed, so how can we afford to devalue our currency now?
Three key question to think about:
1) Is the Naira too weak to justify the given exchange rate?
2) What will happen to our foreign reserves? Are reserves best spent propping up the naira?
3) Why can we not diversify our reserve holdings for higher yield?
Has there been any positive monetary policy changes post February to reduce inflation? The answer is yes as Sanusi has increased the MPR rate, have we seen the effect of this, probably not yet but policy changes require timelines for assessment. Things outside our monetary policy such as the volatility of oil prices and the global pressure on the US dollar are thing which perhaps Sanusi did not consider in February. Sanusi should provide an 8 month assessment report on efforts introduced by the CBN and reasons why they have not be adequate to support the currency.
Flashback to 1999- Lessons to be learnt from history
“We foolishly listened to them when they asked us to devalue the naira. Now, we don’t have a middle class. What we have are the very rich and the very, very poor. No nation can develop without a middle class,” Former Justice minister Chief Richard Akinjide (1999 on IMF devaluation advice)
Macroeconomic stability comes at a PRICE- LOW Growth will make us unattractive to foreign investors which will reverse the thrust of the effort and result in FLIGHT of capital. Flight of capital from our dwindling financial markets (forgive this flighty statement) and flight of any FDI for our infrastructural demands. When should we be prepared to sacrifice stability for growth?
Sanusi should be focusing on the following in the next few weeks and working with the Minister of Finance on the following:
1) How to get the governors to contribute to the SWF
2) How to DIVERSIFY our current foreign reserves from US treasuries into perhaps commodities
3) How to promote new budgetary guidance/ education to house members before passage of next budget
4) How to work with new commerce minster on different ways to promote and protect trade
5) How to monitor constant Interest rate management
6) How to invest a larger proportion of reserves in a commodity such as GOLD, which is a safer haven asset with the persistent dollar weakness
7) How to send a message out to foreign investors that his policy making is CONSISTENT and not desperately reactionary
Let’s watch and see what will happen on Monday with the emergency MPC meeting!!