Any lessons from CBN’s surreptitious devaluation of the naira?, By Uddin Ifeanyi

With the naira’s exchange rate plumbing new depths and the balance on the gross external reserves scraping the bottom of the barrel, there is now a compelling case for a policy reset. Thus far, we have attacked economic problems the same way that our forebears did – by throwing the state’s resources at it. Thus far, we have achieved the same suboptimal outcomes…

The only reason why Nigeria has a long list of items whose import is technically “banned” because their importers may not access official foreign exchange sources and the only reason why restriction on activities in any economy along such lines makes sense is because we used to have an official foreign exchange peg. Although since reshaped with the “recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the NAFEX exchange rate”, as the International Monetary Fund (IMF) recently described it, the foreign exchange peg was a beautiful, if not effective mechanism.

At its best, it neither reflected the opportunity cost (the yield, for one, which a punter could obtain from holding investments in either currency) of the naira or the dollar. While depending, at its worst, on what side of the bed the relevant monetary authority panjandrum woke up on. Conceptually, it also continued to reflect the national sense that a strong exchange rate for the national currency, rather than represent an impediment to the development of an export industry and a let on the competitiveness of the economy,is a gauge of national economic virility.

All of which was good as long as crude oil exports and the global price for Bonny Light, our main crude oil blend, remained high. For, bereft of a broad export base, earnings from the export of crude oil has remained the major source of addition to the country’s gross external reserves. However, in the last two decades, the dialogue around crude oil has changed remarkably. The adverse effects of fossil fuels on the climate, renewable energy’s prospects for cooling the earth and electric vehicles’ for moving it about without emissions have become long term constraints to crude oil’s outlook. Significant improvements in the energy efficiency of global production, on the other hand, especially because of the transition of the global economic engine rooms to intangible assets, along with new sources of premium grade crude (the shale oil revolution), are immediate constraints.

With scarce resources, as the debate over containing the effects of climate change is teaching us, the only way to ensure disciplined consumption is to make sure that current prices fully capture the cost to the economy (especially the cost to next generations of its non-availability) of the good or service in question.

Irrespective of how this mix pans out over the coming decades, it was obvious by the turn of the century that the contribution to the economy of our most important resource was going to be our scarcest, going forward. With scarce resources, as the debate over containing the effects of climate change is teaching us, the only way to ensure disciplined consumption is to make sure that current prices fully capture the cost to the economy (especially the cost to next generations of its non-availability) of the good or service in question. Accordingly, it made sense long ago to have unhooked the price of the naira from the artificial peg favoured by our policy wonks and to have moved it on to a market-based pricing mechanism.

True, one immediate effect of this is that costs will balloon. But to the extent that the additional gains to the government in naira is used to improve the economy’s resilience, including through investment in education, healthcare, infrastructure, bettering the economy’s private sector supply responses, and the provision of what the IMF describes as “well-targeted social support to cushion any impact on the poor”, this would have been a transitory effect.

Forget Albert Einstein’s insistence that one definition of insanity is doing the same thing over and over again but expecting different results. And look instead at the straitened means available to us for prosecuting the task at hand. And our need to pivot away from dirigiste policies is self-evident. The problem is whether those currently in charge know how to.

Instead, the promise from the monetary authority was to singe the phalanxes of speculators in the foreign exchange market, while doggedly continuing with the peg. Consequently, we have frittered away a king’s ransom in foreign exchange defending this sense of a strong naira exchange rate being in our sovereign interest. While we have been at it, domestic costs have risen, as has unemployment – all of which a strong naira was supposed to have mitigated. Worse, speculators are traipsing to their banks as the devaluation of the naira, which their shorting of the currency implied was going to happen, just crept past us.

With the naira’s exchange rate plumbing new depths and the balance on the gross external reserves scraping the bottom of the barrel, there is now a compelling case for a policy reset. Thus far, we have attacked economic problems the same way that our forebears did – by throwing the state’s resources at it. Thus far, we have achieved the same suboptimal outcomes that our forbears have achieved since 1960. Forget Albert Einstein’s insistence that one definition of insanity is doing the same thing over and over again but expecting different results. And look instead at the straitened means available to us for prosecuting the task at hand. And our need to pivot away from dirigiste policies is self-evident. The problem is whether those currently in charge know how to.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.