Former Governor of the Central Bank of Nigeria, Professor Charles Soludo has accused the Federal Government (FG) of playing politics with the Foreign Exchange (forex) rate.
He said Nigeria’s foreign exchange policy worsened the impact of oil shock and drove the economy into recession, stressing that collateral damage of previous errors will remain for a while as the country continues to take 100 steps backwards and 15 steps forward; making it difficult for early restoration of confidence and credibility.
In the light of the above, the Central Bank of Nigeria’s (CBN’s) responses became a panicky and fire-fighting approach as it loosed grip on demand management thereby intervening in the market to the tune of $4billion since this year.
In his keynote address at the ongoing annual Pan-Africa investor conference organized by Renaissance Capital in Lagos, Soludo said the current policy regime will lead to debt overhang and future debt servicing at higher forex rates; higher interest rate regime than otherwise and lower stock markets/other asset prices than otherwise. It will also lead to low rate of forex reserve accumulation, lower than predicted future needs and hence high risk of massive currency adjustments when next shocks occur.
The former CBN governor said part of the policies that led the country to where it is today included: defense of overvalued forex between 2010 to 2014 with no foregn exchange accumulation even during oil boom; frequent CBN’s circulars with “costly and confusing trial and error directive”; grudging fixed-flexible forex regime with promise of rate settling around N250 to the dollar; many objectives with limited instrument and “populism trumped economics.”
He also said that President Mohamadu Buhari’s public comments has recently become his directives to the CBN, as the government suffers from politics and nostalgia of yesterday.
According to Soludo, the Nigeria’s recently launched Economic Recovery and Growth Plan (ERGP) suffers from the challenge coherence, robustness and implementation, stressing that the budget that is supposed to kick start the implementation of the ERGP is yet to be operational in the month of May.
He noted that, “with all its defects, there is no credible substitute to sound market economy framework for an economy such as Nigeria’s. Hot emotions, infantile nationalism or neo-socialist command and control patchworks will not do. Economy will recover, albeit from a low base but if current forex and monetary policy regime continues, recovery will be tepid.
“To accelerate the momentum of recovery that can make dent on poverty and unemployment, forex and monetary policy must change fundamentally. Stop playing politics with foregn exchange management with multiple windows. The economy is paying heavy price under the current opaque regime.
“ For confidence to return in the medium-term, CBN should transparently commit to: clear objectives and make clear its instruments; a commitment to financial stability; stable price level and nominal forex rate with competitive Real Effective Exchange Rate (REER); diversification of the economy especially into competitive industrialization cannot occur with overvalued REER.”
Also speaking, Charles Robertson, Global Chief Economist, Renaissance Capital said that the currency restrictions imposed on investors will likely mean that investors demand a higher return to invest in
Nigeria again.
“We believe Nigeria, having already improved its legal system by more than any other Frontier
market (according to the World Justice Project), will in 2017 also show sharp improvement in the
Ease of Doing Business. So should Ghana, and perhaps Zambia too.But it is debateable whether foreign capital will help turbo-charge the recovery, “he stated.
According to Robertson, when General Buhari took power in 1983 – GDP had shrunk for 3 years and in 1985 Nigeria saw the best growth
in nearly a decade. Then the oil price more than halved to the equivalent of $40/ per barrel (bbl). GDP per capita fell by over 10 per cent for two years running, and the falling oil price led to a four-fold naira devaluation over two years and IMF support. He further recalled that the next four-fold devaluation in
1999 did not cause negative GDP.