Friday, April 25, 2014

How Not To Protect The Naira, By Ifeanyi Uddin

Published:

Ifeanyi Uddin disagrees with official statistics saying inflation has been on the upswing all year, causing rising food prices, reducing disposable income, and hurting households’ welfare

The recent resolution by the House of Representatives calling on the Central Bank of Nigeria (CBN) to stop the “dollarisation” of the economy is indicative of how poorly the economy is being run.

Two related preliminary observations. One, the CBN is not driving this process. (Two), it is instead, the consequence of the “uncoordinated” actions of disparate local actors in the economy.

Having used these caveats up, I acknowledge that there is common agreement that we fail as a country largely because we are unable to implement even the small things that we agree on. But the untold part of this failure is that we often do not think through the issues that we rush to reach the appearance of a consensus on. This conceptual flaw is the burden that weighs on the House of Reps resolution.

Rather than the fiat of a resolution, why not investigate the reason(s) why Nigerians have come to prefer the dollar to the local currency? Currencies, incidentally, present a conceptual dilemma. Do they have any (intrinsic) value outside of their use as a means of exchange?  Are they worth more than the paper (polymer substrate) that they are printed on? Or the metal with which they are minted? After all, there is a difference between the value of money and the cost to produce and distribute it, which the mint earns on each unit of currency.

On the available evidence, our honourable lawmakers seem to favour the case for an intrinsic value for the national currency beyond whatever other uses the people may put it too. But, in truth, most people relate to currencies in the sense in which they are received as payment for work done, and after that, in terms of what they can buy. I earn a salary or profit from a transaction.

And then pay my rent, buy food, clothing, and pay school fees for the kids out of these. Beyond these essentials, I also aspire to acquire the trappings of modern life: more white goods, a car maybe, and with plenty of prayers, vacation abroad. So I work a lot more, hoping to earn more, or profit more. It helps, therefore, if the prices of the services/goods that I (hope to) buy remain fairly stable. That way, I may then be minded to save, assured that with enough diligence, and forbearance, my aspirations may be met some day soon.

Wrong macroeconomic policies, though, and this dynamic is altered. If I have the assurance that prices will continue to fall (as in Japan in the last decade), then savings make sense. Defer spending today, and chances are, I may get bargain basement prices tomorrow. This, even investments are put off, and the economy stagnates. Conversely, rising prices make nonsense of savings. I am compelled to buy today in apprehension of higher prices tomorrow for the same set of goods/services. The precautionary motive is extirpated, savings are rapidly used up. Investments, again, fail to happen. And, once more, the economy comes to a grating stop.

The concern of the average man on the street, therefore, is with naira-denominated assets, and not with the naira itself. Indeed, a sovereign could call its currency whatever it so wishes. It could, in our case for instance, remove two zeroes from the naira, compelling every holder of the currency to exchange the old N100 for a new N1. By this act of conjuration, we may confer a semblance of “virility” on the naira. Or, like Robert Gabriel Mugabe’s Zimbabwe, government could pursue policies that turn all of us into naira millionaires.

As an economy strengthens its links with the rest of the world, though, the policies of different sovereigns matter. Economic actors will, in this circumstance move their savings away from assets denominated in one currency into assets denominated in a different currency, if price volatility, or adverse exchange rate movements erode the value of assets held in the former currency.

On this basis, the House of Representatives should have looked to correcting those policies that have made the local currency less a store of value than the dollar: poor fiscal management, and its deleterious consequences for the building of new capital, for price volatility, and for the naira’s exchange rate. Arguably, the well-intended members of the lower house may have acted in haste.

For, the yield on naira denominated assets is today one of the best in the world. Add to this, the recent inclusion of our domestic debt instruments on the world’s leading indexes, and you have a basis for understanding the unusual size of the inflows last year of foreign portfolio investment into the country.

The CBN has played a crucial role in this process: by keeping both consumer prices and the naira’s exchange rate stable. The fiscal authorities on the other hand have played the course below par. The executive arm continues to play the ostrich. While the legislature commands!

Mr. Uddin, a monetary theorist, and economic historian, writes a weekly column for Premium Times.

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