Experts differ on naira exchange rate, floating

TWO experts, a Nigerian political economist and former Deputy Governor of the Central Bank of Nigeria (CBN), Professor Kingsley Chiedu Moghalu and the Lead Faculty of Tekedia Institute, and Chairman of Tekedia Capital, Professor Ndubuisi Ekekwe, have expressed opposing views about how to strengthen the weakened Naira, and whether or not the ‘floating’ decision was good or bad.

To the former CBN Deputy Governor, the problem with the Naira today is not that it was or has been “floated”.

According to him, Nigeria no longer has the oil revenues (for various reasons) to underpin a managed float exchange rate regime with robust foreign reserves.

“The real failure of Nigerian economic policy is that of having failed to diversify its economy away from reliance on natural resources for forex supply towards an export economy based on value-added manufacturing and services. This is the zone of industrial and trade policy. The reason for this failure lies in Nigeria’s political culture that fosters a rentier economy.

“The floating is inevitable because we no longer have foreign reserves or a healthy dollar revenue income stream to back up the value of the Naira. Spending dollars you don’t have to back up the value of the Naira while you are amassing foreign debt has failed, “ Moghalu wrote in his ‘X’ (formerly Twitter) handle at the weekend.

This is coming barely two days after the Governor of the Central Bank of Nigeria (CBN), Yemi Cardoso, declared that the Nigerian Naira is undervalued, promising to expedite the discovery of genuine price in the near term.

According to Moghalu, habits, especially bad ones, are hard to break. But Malaysia, Thailand and Chile, all originally resource based economies, successfully achieved ‘economic complexity’ over time, manufacturing and exporting increasingly sophisticated products. For Nigeria to achieve this, he said it will require what its present generation of politicians appear to lack, “for you cannot give what you do not have.”

He said, “the level of political will required to change course is extraordinary, and requires a focus on merit and competent technocratic management rather than crony- empowerment based on vested self interest.  Until these fundamentals are fixed, there is little hope for the Naira. The world has changed from the days of our being awash with oil money. Many other countries that are not in OPEC now produce massive amounts of oil.”

Professor Ekekwe did not agree with Moghalu’s position completely.

Instead, he said that the current floating of the Naira is one of the worst economic policies in Nigeria since 1999.

To him, that decision has a score of “F” (failure), because if demand continues to rise for US dollars in Nigeria and the country has no means to improve the supply of US dollars (as is the case now), the Naira has been disarmed, since market forces will weaken its positioning.

The unstable state of the Naira is more dangerous to the economy than mismatch on pricing between official and black market currency rates which ironically the Naira floating did not close, making the core reason for the floating largely unrealised,” he said.

According to the expert, despite what any person could say, from the IMF to the Central Bank of Nigeria, economics is “science” played by the people. And science operates on principles.

He explains that in the natural philosophy domains like engineering, those principles are self-evident: “you cannot throw a beam during construction without supporting systems.”

In social science like economics, Ekekwe noted that a central bank cannot float a currency without first ensuring that it can create parity on demand and supply.

He believes that this is Economics 101, adding that every WAEC Economics textbook always begins with Professor Lord Robbins definition of economics where he posited on the relationship between the ‘end and scarce means,’

“In the past, we credited people with cheap US Dollars and they could divert the funds to other things. If we change to a rebate system, we would remove that loophole as before payment, we would reconcile data from customs, banks and the company, making sure cheap US dollars were going to productive things over expanding mindless consumerism.

“From basic economics, removing frictions to attain market transaction equilibrium faster does not mean price can radically improve if demand and supply positions remain misaligned. That is fundamental and cannot be disintermediated,” he said.

“If 90 people each wants to buy $100 with Naira, and you have only two people selling each $100 for Naira, whether you use mobile app, bank hall, bureau de change, etc, the price of Naira will go up, because there is no parity between demand and supply here. The impact is clear: lack of stability in the exchange rate makes making long-term investments impossible, pushing the nation into a trading and rent-seeking ground.”

In his recommendation, he stated that the government can ideally do this floating later once it gets a good picture on how to have access to US dollars via any means possible that excludes borrowing.