Graffiti… Our Central Bankers have gone mad

By Michael Oluwagbemi …

Nigeria has been going through some sort of fiscal-monetary policy mumbo jumbo in the past few weeks if not months. In the same week that the Economist magazine ridiculed the Central Bank of Nigeria’s (CBN) much bashed policy of FOREX ban on certain items for importation, our government was busy declaring laissez-faire policies in foreign exchange largesse granted Christian pilgrims whom of course could not bear the burden of the “Emefielization” of our currency!

It has been like CBN “commercial turn central” banker leadership has suddenly discovered the religion of economic nationalism, given its rafts of policy pronouncements since February designed to stop the bleeding of its reserve but cloaked in the apparel of national interest! At the same time, the bleeding continues!

First it was the somewhat laughable election season policy that all local transactions were to be settled in naira. This policy was floated and was to be enforced during an election season where the then President relocated to a whole region of the country to share dollars and related hard currencies. Yet our Central Banker was concerned about which schools charged fees in dollars, and swiftly moved to more or less ban domestic access to domiciliary accounts.

The immediate impact of this were felt by the numerous expatriates and the upper middle class in Nigeria, but the pain was soon distributed to the entire population as recent events have shown. The soon to follow forty plus banned items list, soon confirmed to every watcher of the Central Bank that it was not about the nation per se, but about its own inability to stop the oncoming wreck. Simply put, they were running out of gunpowder to defend the naira, with the value of the currency sliding from 160 naira at the peak of oil price to 240 naira to a dollar; a 50% decline! What is clear regardless of what CBN advocates might say is that the policy of Governor Emefiele is not working; numbers don’t lie.

The pain is now spreading from just the upper-class expats to ordinary people seeking to transfer money to wards overseas in schools, as Western Union imposed quotas on banks as foreign exchange windows have tightened in the past week. Also, many legitimate businesses in Nigeria including multinationals are now finding it difficult to do business as they cannot access the dollar, even as price of everything rises as the value of our currency depreciates being a largely import dependent economy.

The policy of FOREX bans on certain imports is a misplaced and irresponsible central bank policy, which could only have been made by a commercial banker and not an economist – better suited for the role. The policy is wrong on many bases, primary of which is that it cannot even achieve what it claims to want to achieve.

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Import substitution as a policy goal will have to be driven by a fiscal agenda that builds infrastructure, empowers local producer and bans importation on the Customs side. The CBN has no such powers, and it can only look on helplessly as the demand side for these imports goes to the open market to source their FOREX needs, further depressing the naira at the parallel market and widening the gulf against the official rate that encourages round tripping!

The Central Bank cannot claim it is ignorant of the fact that the nation barely produces enough power (less than 5000 MW for a nation of 170 million people) to even provide domestic lighting in her top ten major cities for more than six consecutive hours talk less of producing steel, nails, sheets and iron rods that made it into CBN banned list! It cannot also be overlooked that the same CBN that wants to encourage import substitution, was busy jacking up the borrowing rate that makes it ridiculous for entrepreneurs to borrow to finance production just late last year from a level that was already inimical to manufacturing; talk about policy mumbo-jumbo.

Let it be said at this point that it is not as if toothpicks and cements don’t deserve import bans, perhaps even outright- but the CBN is the wrong agency of government to do so because it cannot do so effectively and even in its attempt to do so, it will do more harm. Every policy must first meet the standard of “do no harm”, this particular policy does exactly the opposite. An import substitution policy must also be correctly sequenced after infrastructural investments that support local production has been made, and incentives are in place to support producers.

Indeed, the CBN itself was being economical with the truth when it claimed import substitution as the reason for its ban, as the not so unobvious reasons for the ban was the preserve its fast declining foreign reserves on the back of how much less the federal government earns from oil, and not due to any import increase as it will like us to believe.

It is also common knowledge that most of the FOREX claims in the window for imports are often redundant acts of paperwork shuffling that is meaningless. Nigeria banking system is replete with forged customs documents claiming foreign exchange for virtually non-existent transactions, as such there is no guarantee the CBN is actually preventing or making any importation harder! Heck, this is a country where over a trillion naira was paid for petroleum products never imported and the subsidy thieves are still free men as we speak.

Furthermore, import substitution is not one of the policy objectives of central banking: not in Nigeria and definitely not in other climes. The generally acceptable terms of reference for central banking are inflation targeting, currency value management and employment maximization. On these three counts, this policy is a failure- as this essay demonstrates.

The most visible work of the Central Bank (not the most important), is to maintain the value of the currency. Since the demise of the gold standard, paper currency is permanently inflationary because it subsists on psychology. Basically put, the value of every currency in the world is not so much about balance of trade (otherwise the Chinese Yuan will be stronger than Euros used in Greece), but a combination of state intervention in the case of China that have the foreign reserve due to trade surplus to support it, but psychology in the case of most free floating currencies. As such, the worst mistake a Central Bank can make is to signal panic and ruin the psychology that underpins her currency. This was exactly what the CBN did when it banned those imports, and this what have led to the more than 15% slide since then.

Certainly, the policy that pushes otherwise legitimate users of the official window into the black parallel market does not help the value, as it puts pressure on that narrow “non-official” window and further depresses the value of our currency. This is like a beast that feeds itself, as the widening of the gap between official and parallel markets then persuade buyers in the official market to start the process of round tripping that further depresses overall value. Basically put, this current policy has set off a chain of events that depresses the value of the naira and defeats the common sense policy goal of currency management while barely stanching the bleed of the reserve it sought to prevent.

Lest we forget, credit rating agencies won’t take kindly to the signals coming as a result of the policy, so Nigeria must be prepared for a spate of downgrades and increased cost of borrowing globally even as we begin to steadily lose our shine as a premier destination of capital due to the free flowing policies that our central bank have adopted in the last few decades that Mr. Emefiele is now cynically undoing. Already, PUNCH recently reported that “JPMorgan warned in June it could eject Nigeria from its benchmark index by year-end unless it restored liquidity to currency markets in a way that allowed foreign investors to transact with minimal hurdles.”

Inflation will naturally be on the rise in an import dependent economy when the currency devalues as fast as Nigeria have experienced. This impact is immediate, as our nation spends $30bn on food imports, $10bn on automobile and parts import, and up to $60bn on importing petroleum products that impact transportation, food and about everything else. Inflation makes every body poorer, and this is the very reason why it usually ranks highest on the responsibility list for central bankers.

Speaking about inflation, the food items banned on the list including poultry and rice will lead to immediate increase in local prices that will bite the consumer in the absence of production. This is where the rubber meets the road, and every sane Nigerian reading this is better served buying and keeping food for the next few months until this CBN undo its policy or is cleaned up by the new Sheriff in town. Beyond these of course, producers are more likely to find it difficult to find foreign exchange for their raw materials, even as importers will demand more and bankers will tighten money and raise rates. The net effect on Nigeria is a heightened inflation level, which defeats the second mandate of our dear central bank.

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The third mandate of job creation, which Mr. Emefiele will like us to believe will be achieved by this policy can clearly not be achieved in the absence of coordinated fiscal policy of infrastructure and shared service investments, coupled with skills acquisition and capital incentives. The mopping up of capital and tightening of money by banks due to FOREX unavailability will force them to raise rates (to make money in other ways), which invariably will impact local production and job creation. Net-net, one can expect job loses not job creation due to this policy as the production problem is a fundamental energy mix issue. An economist and perhaps the common man understand this reality better than a banker in stuffed suit!

Lastly and speaking about energy, the Central Bank was better off perhaps starting its import substitution policy with Nigeria’s largest and least defensible import i.e. refined petroleum product. Nigeria at some point expended $7bn – $10bn per annum on subsidizing petroleum imports, which by itself ensured a $40-$50bn per year FOREX demand on the country. This is a country that earns about $60-$70bn per annum from crude oil and gas sales, of which it is the seventh largest producer in the world! Basically put, if we eliminate fuel importation, our foreign reserves will swell dramatically, as we will stop spending 60-80% of it to support importing something we produce enough of its raw material.

Does the CBN have the ball to bite? I bet not! Stop the madness!

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