Jobs. Jobs. Jobs. III

So after spending two posts painting a gloomy picture, I feel it’s only fair to suggests possible solutions to the Central Bank. Here goes…

1. Accept Foreign Currency Cash Deposits: If I learnt anything from reading Hernando De Soto, it’s how regulation forces people to leave formal markets for informal solutions. Once the CBN stopped banks from accepting cash deposits, it was clear people who hold foreign currency notes where going to find other means to transact. This is why I can only smile in regret when President Buhari says “the money is not there!” This link suggests at least $5 billion comes into Nigeria outside the CBN every month. If you compare that amount with this article, you can estimate at least 20% of the $5 billion is held in cash. While I understand the concerns around money laundering, banning deposits at a time of foreign currency scarcity makes no sense. The CBN should lift this ban immediately, and engage a money transfer operator like Travelex to begin an export of cash notes, which will boost foreign currency liquidity. By doing this, the CBN can mop up at least $3 billion in the short term, which is over 10% of our entire reserves. In exchange for receiving cash, banks can charge a commission of maybe 5% to exchange cash notes for electronic value, and tighten its KYC rules to prevent money laundering.
2. Convert Domiciliary Accounts: According to the the CBN Banking Supervision Report for 2014 which you can read here, 26% of the N18 trillion deposits are kept in domiciliary accounts. This means about $23 billion, just $6 billion less than our entire reserves, sit in bank accounts. The CBN can decide to issue all those account holders dollar (or foreign currency) certificates and convert the deposits to Naira. The dollar certificates will ensure account holders have access to their foreign currency at the rate it was converted to Naira. By doing this, the CBN can address the short-term supply challenges, and review this policy when the structural challenges around foreign exchange supply are solved. There is no point in keeping balances in domiciliary accounts with the lack of dollars in circulation. While the CBN can expect short-term complaints from account holders, Nigeria won’t be the first place to try this. If it can be done successfully, it means we can double our reserves immediately, and manage the short-term pressure on the Naira.
3. Devalue the Naira: Despite the first two solutions, there is no way to avoid the painful decision: The Naira must be devalued to stimulate investments. The argument that devaluation causes a rise in prices is nonsense. Between November 2014 and February 2015, the Naira was devalued by 25%, yet inflation was 8.4% in February 2015 and rose to 9.4% in November 2015. This means a 25% devaluation of the Naira caused inflation to rise by 1%. If anyone tells you devaluation will cause prices to rise significantly, buy sellotape to cover their mouths. I know the President is a Welfarist at heart, but he can rest assured. I have not seen any data set that supports the assertion that devaluation automatically leads to higher inflation. The other excuse is that devaluation rewards speculators, which is not such a bad thing. If someone was smart enough to see your currency was trading above its value and took a bet on it; just accept you’ve lost and cut your losses. The CBN cannot continue to act like a gambler who is now borrowing money from his family and friends to win back lost money; we know how it usually ends, you only end up in more debt. Like my good friend says: “when you are in a hole, the first thing you is to stop digging.” Let the speculators who bet before now take their profits, but if you price the Naira correctly, nobody will try to speculate again. The CBN can learn from the Minister of State for Petroleum. After weeks of trying to get marketers to sell petrol at the agreed price of N87, he finally understood the problem. By suggesting the price of petrol could move between N87 and N97, he gave an incentive for marketers to hoard the product which created the scarcity. The moment he suggested prices could fall to N85, there was only one result, an abundance of petrol. The fear of losing N2 per litre was the beginning of wisdom. As Adam Smith famously said “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
4. Dirty Float is Best: I like this video, it explains the concept of dirty float quite well. An economy like Nigeria cannot take the risk of leaving its currency in the complete control of market forces. Even the patron saint of free markets, United States, intervenes in its exchange rate when necessary. In 1994 the American government bought huge amounts of Mexican pesos to the Peso’s rapid loss in value, which ensures American exports to Mexico remained competitive. In simple terms, the Dirty Float is a system where central banks intervene only periodically, to stabilize volatile fluctuations in foreign exchange rates. The exchange rates are free to fluctuate, but central banks are committed to intervene under conditions of perceived instability. For example, the CBN can decide that the Nigeria will trade freely as long as it does not appreciate or depreciate by more than 10%. This means if the exchange rate is N250:$1, the CBN will allow the market determine rates as long as the Naira trades between N225:$1 and N275:$1. If the Naira trades at N280:$1, the CBN will increase the supply of foreign currency to reduce the scarcity; or if the Naira appreciates to N220:$1, the CBN will simply buy foreign currency till the scarcity pushes rates up to N225:$1.

These four suggestions are not universally popular, but are necessary to balance the need to limit exchange rate volatility, and also make foreign currency available for cross-border transactions. The CBN and FGN must also recognize that monetary policy interventions don’t work in isolation. There is no point endorsing a currency devaluation if it takes 2 weeks and multiple bribes to clear goods at the ports; or we cannot guarantee decent roads or a rail system that moves products between locations. However, if the Government wants to ensure its targets to grow the economy by 4% and create 3 million jobs are met, the current CBN policies need to change.

I can’t think of a better quote to close with than the wise words of my man, Thomas Sowell. He said

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Godwin Emefiele, your call.