AT the recent spring meeting of global financial institutions in Washington, USA, the World Bank and the International Monetary Fund (IMF) faulted key monetary policies of the Central Bank of Nigeria (CBN). They urged the Nigerian government to “float” the naira and liberalise the financial market. They also argued that the current foreign exchange policy amounts to a guided regulation and manipulation of the naira.
In their view, the dictates of the market should determine the actual value of the naira, because the floating of the naira, (another name for devaluation of the currency), will make the Nigerian economy more competitive and attract foreign investments into the country.
The CBN has since responded to the Washington consensus. Speaking on the sidelines at the Washington meeting, the CBN spokesman, Isaac Okoroafor, described the position of the global business community as laughable and unacceptable. He argued that the suggestion will hurt Nigerians terribly and have far-reaching negative consequences for the economy. The CBN also maintained that floating the naira will amount to playing into the hands of currency speculators and those having proceeds of corruption, which they could use to create bubbles in the economy. The CBN insists that the forex market is already extensively liberalised. It, however, said that Nigeria’s infrastructure is so poor, and its production capacity so low, that it cannot withstand leaving the national currency to market forces.
There is no doubt that the naira has been experiencing a free fall against major currencies, and the CBN has injected several billions of dollars into the forex market to meet the demands for foreign exchange for imports and other invisibles. It has also created a separate window for Small and Medium Enterprises (SMEs).
Even though the CBN needs to redouble its efforts in the management of the country’s monetary policy in order to strengthen the naira and promote domestic production capacity to boost exports, we do not think floating the naira is the solution to the problems facing our import-dependent economy.
President Muhammadu Buhari insists that his administration will not succumb to pressure to devalue the currency, arguing that it will not be in the best interest of Nigerians. But, beyond that, Nigeria’s experience with the recommendations and conditionalities of international money lenders shows that their options are not the best way forward for the country. Egypt is a classic example of the dangers of floating a national currency. Egypt, on the recommendation of IMF, floated its currency with effect from November 2016 as a precondition for a $12 billion loan facility. Today, the result is a runaway inflation rate of 31 percent. Currently, IMF officials are in Cairo for a review of the loan. The visit will last till May 11.
Theoretically, the idea of leaving the currency to the dictates of market forces makes sense in advanced economies with good infrastructure; it can also encourage competition and investment inflow. However, the Nigerian economy is still way off the mark of the fundamentals required to float a currency and allow it find its level. We maintain that any attempt to float the naira will have grave repercussions that could push the economy further into depression.
The problems of inflation, income inequalities (both personal and regional), unemployment, poverty and misery are likely to get worse as unfettered financial market operations could enrich only few participants in that sector of the economy at the expense of the greater majority of the people.
We are not unaware of the many interventions by the CBN to firm up the forex market and stay the naira on course. However, with the low demand for the naira in the forex market and the nation’s insatiable appetite for imported products, the way forward is the diversification of the economy to non-oil exports. So far, tangible results have not been seen in the federal government’s diversification efforts. We, however, welcome the CBN’s ongoing Investors Exporters Forex Window. It should be transparent.
Altogether, we urge the CBN to review some of its monetary policies that are unfavorable to the growth of small businesses by reducing the current high interest rates, to curtail inflation. It should also review the activities of some Deposit Money Banks that are undermining the federal government’s economic reform programmes.