By Olu Akanmu
Whereas the Nigerian monetary authority fixed the official
exchange rate at N196 to a dollar, there is today a near 50% differential in
the parallel market rate to the official rate.
The fact that the exchange rate is not market determined, that the price
of the dollar is not determined by the equilibrium of demand and supply means
significantly that the dollar is officially priced far below its true market
value. The incentive for rent seeking and price arbitrage, given the increasing
differential has never been stronger. We are back in the days of essential
commodity or import license where you don’t need to work hard anymore to make
huge fortunes. All you need is to have the connection to be allocated dollars
in the guise of a legitimate transaction. A manufacturer can potentially make a
quick 30% return in one month on her dollar allocation and do not then need to
go through the trouble and risk of running a factory, importing raw materials,
producing and distributing her goods, all which will give her a 15% profit margin at
best in one year. Meanwhile factories are closing down, as genuine businesses
who need the forex cannot get dollars and the lucky ones who get forex
allocation are quietly changing their business model from manufacturing to
round-tripping their dollar allocations.
The net effect is that the economy has slowed down and
nearly grinding to a halt. Companies are retrenching staff as they cannot
produce. Unemployment and social misery is rapidly compounding and will
compound in an accelerated fashion if the current policy is not reviewed.
Unlike the good intention professed by the President, Nigerians are not the ones
benefiting from this current fixed exchange rate policy but few Nigerians who
are privileged to allocate or get dollars at official rate who are making huge
fortunes on dollar price arbitrage. It should be emphasized that unlike President
Buhari would have wished, that even those who get the dollar at N196, if they
ever really do any manufacturing or trading, are not pricing their inputs and
final products at N196 to a dollar. Every business is pricing their input at
close to parallel market rates to determine their final shelf and market price.
Imported inflation is skyrocketing and may continue to do so in accelerated
fashion. In essence, the federal
government good intention of taming imported inflation by legislating an
exchange rate has not materialized. Our current fixed exchange rate policy is
therefore like an ostrich that buries its head in the sand or can be described
as an attempt to hide behind a finger. The ostrich that buries its head in the
sand does nothing really to manage its danger but engages in a self-delusion
that it is doing so.
The indices of the test of the current policy are clear. It
is not working. Output is down, inflation is rising and unemployment is
beginning to accelerate as companies close down or rationalize operations. Investment
confidence has been eroded leading to massive capital flights. In a country
that need foreign direct investment to support its low capital formation and
national savings, current monetary policy flip-flops and uncertainty have not
helped investor confidence. The negative trajectory of the growth of our
foreign reserves now at USD28billion, its on-going rapid erosion due to attempts
by the reserve bank to artificially defend the naira at its overpriced value
further erode investor confidence and increases uncertainty concerns of investors
who will either wait for the dark clouds to settle or fly with their capital.
It should be emphasized that investors are less concerned about exchange rate or
value than with the uncertainty of where the exchange rate will be tomorrow. No-one
does anything when everyone is uncertain. The economy slows down and
unemployment accelerates. Meanwhile, speculators continue to bet against the
currency of a country with eroding trajectory of reserves, front loading and
amplifying demand for forex and further driving up differential between the
official and the parallel market.
We join the call for the naira to be floated but with some exchange
controls that ensures that short term arbitrage players have little incentive
to bet against the naira. A dollar that is priced close to its equilibrium
price and market value will reduce artificial, speculative and front –loaded
demand. During a fuel scarcity problem, every car with a half tank who can
still run for another week goes to queue up for fuel, amplifying demand and
compounding the fuel scarcity problem. A floated market determined naira-dollar
rate that ensures that “anyone who can pay will get” will eliminate speculation
and front-loading. A floated exchange rate policy will also mitigate
significantly the uncertainty concerns of investors reversing current capital
flight while stemming the erosion of foreign reserves. The national treasury
will also be boosted by a dollar that is priced at its true market value to the
naira. The rent seeking and arbitrage margins on the dollar sold through
official market will be eliminated as this arbitrage differentials comes
directly into the national treasury boosting government revenue at this
critical time of fiscal constrain. A floated exchange rate policy will improve
output and get more people back into jobs. A floating exchange rate policy
supported by prudent fiscal management including the privatization of
refineries to bring investors who along with the Dangote refinery in pipeline, will produce petroleum products locally, will
eliminate the huge pressure on the dollar by petroleum importers , which could
even strengthen the naira.
What are the downsides of a floated exchange rate? A
floating exchange rate policy may imply that the naira to the dollar rate will
become significantly higher than the current N196 in the near term. The fact
however is that only few privileged elites and their businesses get the dollar
at current official rate. Most Nigerians buy and price their production input
at parallel market rate. The Nigerian economy cannot loose what it does not
presently have in real terms in a strong naira. A floated naira with exchange
controls that mitigate against short term arbitrage incentives, where
speculation and front-loading are eliminated may actually settle at a rate
better than current parallel market prices.
The choices before us are simple. An illusory strong naira that only few
privileged Nigerians get at official rate with declining output and rising
unemployment or a naira priced at its relative real value with increasing
output, investment and rising employment.
It is important to stress that there is no painless monetary
policy option on the table for Nigeria at current low oil prices, especially
for a country that has squandered its previous oil windfall savings. A Buhari
government with its strong patriotic credentials and integrity has the goodwill
to take tough economic decisions and get the buy-in of the Nigerian
people. As it dilly-dallies however
running away from tough economic conditions, with declining economic output and
rising unemployment, it begins to inevitably loose the goodwill that it seeks
to protect. This government or ruling party has only a two year window to fix
the economy and present its economic management credentials to Nigerians as it
seeks re-election in the last two years of its administration. It risks boxing itself
into a corner as current monetary policy are largely palliative, attempting to
provide symptomatic relief for a patient whose fundamental underlying condition
is rapidly deteriorating. The patient does not have to get into intensive care before
the right medicine is administered. It may be too late. There is a “fierce
urgency of now” to act with more flexible economic policies. We wish President Buhari well.
Olu Akanmu publishes a blog on Strategy and
Public Policy on http://olusfile.blogspot.com
