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Contradictions in the Strategic Agenda of the Naira By Nazifi Abdullahi Darma
It is surprising that at this material point in time; the Central Bank Governor Professor Charles Soludo has brought to fore, his disdain for the Nigerian people through his proclaimed Strategic agenda for the Naira.
The policy pronouncement in essence contained four major planks, each of which left alone to be implemented to the fullest, portend grave danger to the livelihood of 140 million Nigerians living and earning their incomes in the geographical entity called Nigeria.
The policy pronouncement contains four fundamental flanks namely: § Inflation targeting as a major tool for Monetary Policy implementation § Re-denomination of the Naira by removing two decimal points § Distribution of a portion of federal revenue to the three tiers of government in US dollars § Complete liberalization of current account/convertibility and accession to article VIII of the IMF convention
In respect of the first policy, its operationalisation entails strict monitoring of Inflation as the most import yardstick for ensuring effective implementation of monetary policy, involving curtailing ways and means advances to the government and strict monitoring of deficit/GDP ratio to specified threshold of 4% of our GDP as a means of maintaining macroeconomic stability and compliance with the ECOWAS single currency protocol.
On the surface, this policy seems desirable, but in reality, its implementation would entail massive reduction in governmental expenditure towards the provision of social services that the budget deficit incurred is used for.
In Nigeria with the noticeable absence of a coherent, organised and productive private sector that can lead to sustainable income generation, output expansion and employment creation, the economy is left with no option, but to rely on the public sector as a lead actor in the quest for sustainable economic growth and development. With over 60%, of our population characterised with a ravaging poverty and the near collapse of social infrastructure, the Nigerian economy is in dire need of increased public spending to help in the drive towards improvement in power generation, water supply, road construction and rehabilitation, expansion in health and educational infrastructure to cope with a rising demand from a growing population and provision of adequate security for our properties and lives. It is imperative to note that, most of the aforementioned social services cannot be priced by a private entrepreneur, hence their production/provision by the public sector becomes inevitable.
Suffice is to say that same argument was used by the market apologist of the last administration’s economic team to freeze spending on vital social infrastructure in the country premised on the fallacious argument that the Nigerian economy lacks the absorptive capacity to withstand massive injection of public funds, only for the same economic team to approve contacting over US$2 billion non-concessionary lending from China to finance Railways and other infrastructural projects, when same could be comfortably financed from our external reserves most of which is denominated in United States treasury bonds at a minimal opportunity cost to the Nigerian tax payer.
The second plank of Soludo’s policy thrust is the re-denomination of the naira by removing two decimal points. The main objectives of this policy as argued by Soludo is to reduce the volume of Naira in daily transactions, move towards e-payment system and reduce the cost of handling, printing and administration of the naira by the economy as a whole. This argument may sound appealing, but none of the reasons adduced by Soludo can withstand the strand of evaluation especially when viewed from the experiences of most of the countries he cited to have undertaken currency re-denomination.
The most valid argument for any country to undertake Re-denomination is the existence of either or all of these factors:
Hyper-inflation, loss of national pride in the domestic currency and high exchange rate with other internationally convertible currencies.
To a significant extent, none of these problems is manifest in our economy today. The naira exchange rate is relatively stable at the band of one US dollar to N125-N130, the rate of inflation is below the double digit as attested to by the CBN figures released recently for the second quarter ending July 2007 and there was no noticeable loss in national pride for the Naira. What is most possibly discernable from the rushed policy pronouncement is the need to complete an earlier phase of an agenda that saw the removal of the Ajami Inscription on some of the naira denominations and the need to implement same on those denominations that were not effected by the earlier Islamaphobic agenda of Soludo that saw the removal of the Ajami Inscription of these denominations, as if anything Arabic is equated with Islam and as if there are no Arabic Bibles used by the 40 million Coptic Christians living in the Middle-East and North-Africa.
The third policy thrust is the commencement of disbursing a certain portion of the federation account allocations in US dollars, aimed at deepening the forex market and reducing volatility of the Naira exchange rate. This is rally bizarre as the disrespect for the national currency has gone to the extent of disbursing a portion of the revenue due to the three tiers of government in the United State dollars by a principal actor in our economic management.
The ultimate end result of this policy is the acceleration of demand for imported goods by the State officials masqueraded in import demand for their states, capable of increasing the aggregate demand for foreign exchange and consolidating the import dependency orientation, worsening the supply side bottlenecks and resource leakages for the Nigerian economy.
The last policy component of the CBN Governor’s address is the issue of complete liberalization of current account/convertibility and accession to article VIII of the IMF convention. The primary aim of this policy is the need to remove all controls that are often associated with the free flow of Foreign Direct Investment (FDI) into our economy, with the quoted companies listed in the Nigerian Stock exchange being the major beneficiaries.
The proponents of the policy are no other than the “Washington Consensus”- the trio of the IMF, The World Bank and the United States treasury department. The instrumentality of this article VIII of the IMF convention had given unfettered access to the capital markets of many developing and newly industrializing countries for a lot of foreign investors originating from Europe and the United States.
By far my fellow country men, this is the most obnoxious, wicked, dangerous, disheartening, unpalatable and repugnant among the four policy components of the Naira Strategy. To me and any careful economist that is abreast with developments in the international financial market knows that, the adoption of this policy is the most useless decision any developing country can under take, post 1997 Asian financial crisis.
The possible benefits of attracting Foreign Direct Investment into the Nigerian economy courtesy of the relative stability achieved in the macroeconomic aggregates can easily transform to a monumental crisis once confidence in the economy is lost. Indeed, it is only a matter of time for the artificial stability to be eroded, since the confidence is premised on the high oil prices, not the outcome of sustained expansion in the output of the productive sectors of our economy.
Once such a scenario is unfolded, a run on the capital market is sure to happen which would ultimately lead to massive capital flight and the collapse of quoted companies on the capital market that are the beneficiaries of the free capital injection arising from the capital account liberalization. The end result of this run is better imagined in terms of capital losses of investors, small savers and pensioners and the ultimate push of the effected companies to bankruptcy, loss of output, income, employment and fiscal revenues accruing to the government derived from these companies.
As reported in his celebrated book titled “Globalization and its discontents”, Joseph Stiglitz, a former deputy managing director of the world bank and former chairman, national economic council of the United States in the Bill Clinton administration, the equivalent of our Economic Management Team (EMT) in Nigeria, clearly indicated in no ambiguous terms that, the major factor that insulated the economies of China and Malaysia from the “1997 Asian Financial Contagion” was the insistence of the two countries not two have an IMF programme of which current account liberalization is a component.
On a particular instance, Malaysia at the beginning of the crisis revert the limited liberalization it adopted in the current account transactions into an exit tax and introduce stringent controls to insulate their economy from the contagion. The IMF and the World Bank later proved in their post crisis reports that the major factor that insulated the economies of Malaysia and China from the crisis was their insistence and refusal to having an IMF programme and the retaining of several control/regulatory mechanisms in their financial transactions.
On the basis of the foregoing analysis, I am motivated as a citizen of the federal republic of Nigeria, educated in the public school system with hard earned tax payers money to offer the following suggestions as an exit strategy out of the deliberately created quagmire that Soludo is hell bent on pushing Nigeria into.
As the first and most important decision that need to be taken, the President should cause the Attorney-General of the federation to immediately, initiate the process of reviewing the so called CBN 2007 act that confer wild powers to the CBN governor to assemble state chief executives elected through a popular and address them on vital economic issues, not the President who ultimately assume full and absolute responsibility for the success of failure of any economic decision undertaken by economic actors acting on his authority as the chief economic manager of 140 million Nigerians. Indeed, there is simply no where in the world today, where a CBN governor can act with the bizarre repugnancy that undermines that authority of the chief economic manager of a nation elected under a people’s mandate like Soludo does.
As regards to his first policy thrust regarding inflation targeting as a major strategy for monetary policy implementation, government should continue with its reflationary spending in infrastructure and human capital development capable of expanding the aggregate demand and supply for goods and services, hence neutralizing any perceived inflationary pressure arising from additional expansion in public spending.
Complementary to this is the institutionalization of policies and programmes, through stakeholder consultations among the three tiers of government that are capable of reducing to the barest minimum, public fund leakages that are often the source of the inflationary pressures.
Secondly, the policy of Naira re-denomination should be consigned to the dustbin of policy making as there is simply no basis for undertaking such a policy, since the exchange rate of the Naira is stable, there is no loss of national pride in the Naira and there is not even a signal for Hyper-inflation in Nigeria. In the process, the potential loss to the economy running into billions of Naira that may arise from the discarding of the already printed higher denomination that are less than three years old and the direct and psychological cost that will ultimately arose from the new notes introduction is saved.
With regards to the proposed policy on allocating a portion of the federation account allocation in United State dollars, that policy should also be discarded due mainly to its potentiality of increasing the demand for foreign currency and deteriorating the relative stability achieved in the exchange rate regime. This argument is buttressed by the revelation of the Minister of Finance that an unnamed State is seeking import duty waivers for the importation of 600 cars in respect of a sporting festival it intends to organise.
Finally, there is no problem with positioning Nigeria as the financial hub of Africa which the accession to the article VIII convention of the IMF seeks to achieve through current account liberalization. While it is expedient to institutionalize policies and programmes that increase the quantum of Foreign Direct Investment that comes into Nigeria, a cautious and gradualist approach to capital account liberalization of 20-30% be adopted and evaluated over a four year time band, taking into cognisance the specific peculiarities of the Nigerian economy.
Nazifi Abdullahi Darma teaches Development economics at University of Abuja, and can be reached on nazeefdarma@yahoo.com
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