Who shall tell Mr. President?

Another commentator have alerted “our” world to the danger ahead of Nigeria in her quest for market based economic policies. The demons vary, but one that keeps rearing is head is that demon which seeks to muddle up the policy water, creating a narrative for a dangerous policy reversal that will leave all on its path destroyed.

We can already see the seeds of this demon in the undulating attitude of Mr. President, a forced convert to the gospel of appropriate pricing of Nigeria’s forex regime in the last 3 months, these past few days as he denounced his own “new policy”. Mr. President is sending mixed signals and it is dangerous. Markets are responding (down) and investors are wary. You can’t be for a policy and be against it.

First we start with Quotable Quotes on all sides of the FOREX matter from Mr. President….(the President have variously said that the experts around him have failed to convince him — despite giving in, which may account for these contradictory statements)

While speaking at an interactive session with Nigerians living in Kenya, President Buhari reiterated his stand on the devaluation of the Naira and strong currency restrictions saying he requires more convincing before agreeing to devalue the Naira. He said a devaluation of the Naira would “kill the Naira, cause higher inflation and hardship for the poor and middle class in Nigeria.” — January 2016 in Kenya
“The central bank has moved to introduce a greater flexibility in our exchange rate policy. These actions are a down payment on our people’s ability to succeed,” June 16, 2016 (Wall Street Journal Essay)
“President Muhammadu Buhari says he does not see any benefit the country could derive from the devaluation of the naira.” June 28, 2016 (Ramadan Fast Breaking with Business Community)

Since the experts surrounding Mr. President are yet to convince him, let us help him out with four points that perhaps the “experts” meeting with him can drop behind on a cheat sheet the next time they visit.

It is simple:

1. By selling official reserve short, states are short changed on a monthly basis as dollar or forex income from oil is always converted at official exchange rate to determine what is shared monthly. They can’t pay salaries or pensions. People die. People suffer. We are poorer. Osun state for example that received 6 million naira in February could easily have received 4 billion naira, and would still have 1.5 billion naira in hand to pay March salaries. May be the President should listen to the governors and not the financial experts. They know the people are suffering and would keep him convinced. By the way, it also helps the President to finance the deficit in this year’s budget, the revenue side of the budget just went up at least by 15–25% based on crude oil sales.

2. By selling official exchange lower than market price, corruption is encouraged. As people who get it at officially low value will roundtrip- despite the President’s threat otherwise. The sources (like Femi Adeshina) gain, while state workers suffer because that money should have gone into official pockets not individuals. The profit of the crime is too great not to act on the arbitrage opportunity. Patriotism cannot trump economic common sense for private market actors.

3. By selling official exchange lower than market price, government is encouraging imports of certain items not discouraging it. By also creating certain items as favorite, you can create obverse incentive for those items to be imported even when not needed. Let us have a consistent import policy, of encouraging local production not importation. Higher exchange rate officially almost at par with private market puts all items on near equal footing and will make imports expensive

4. Higher official exchange rate will boost IGR in the short term especially after the slump. Duties is set to go up by 42% even as importation fell 40%. Essentially we can achieve net zero impact on national revenue. Under previous scenario, you will have importation fall due to economic crisis (lower GDP and higher inflation) and consequent fall in local demand for imported products any way, but the IGR will stay low because exchange rate have been kept artificially low by under selling the forex in the official vault relative to those held in private hands.

Ultimately the end result (of the previous system) was that effective exchange rate was higher for all not lower as the existence of an official selling window underselling forex will put supply pressure on true market which will continue to over price the few forex left or sourced by round tripping (there is an implicit cost to messing with market forces, after all) .

Few will buy at official rate, as we’ve seen for the past year and the psychology of low rate will be useless to the economic ruin of this reality because forex will be scarce for production, and an implicit cost for market interference will be paid for in distraction, and additional inefficiency of the dual sale window. Good news: BDCs may get CBN dollars after all, it may help continue to narrow the gap between the new interbank window and the parallel window which has since collapsed. So it was rumored then denied…

Hope it is clearer to PMB and the deniers who are unconvinced converts to Emefiele 2.0 despite the tepid intellectualism of the proponent — if I have my way, Emefiele won’t have a job.

Case Note Advisory to Customers on the Impact of New FOREX Policy (Source: Diamond Bank Plc)

Higher exchange rate is not the problem. Lack of infrastructure for production, corruption and obsession with mere figures are the problem.

But why we can’t produce and seem chained to our forex reserve for our happiness is because we are a dangerously corrupt nation that is only adept at importing instead of producing because we’ve stolen all that is meant to build the infrastructure necessary to support local production and make our producers even locally competitive talk less of exporting.

Japan is at 110 or so to USD, still didn’t prevent her from being 3rd largest economy in the world. But why we can’t produce and seem chained to our forex reserve for our happiness is because we are a dangerously corrupt nation that is only adept at importing instead of producing because we’ve stolen all that is meant to build the infrastructure necessary to support local production and make our producers even locally competitive talk less of exporting.

You’re what you produce, not your exchange rate. And what you produce cannot be dictated by fiat

Moreover there is more to be said about the doctrine of the “crude oil standard” which like the gold standard have reduces Nigeria’s fiscal policy to how much crude oil money it can make. One Bola Ahmed Tinubu has something to say about this in another fora, it is good reading.

You’re what you produce, not your exchange rate. And what you produce cannot be dictated by fiat, it is a product of making your economy productive by easing the cost of doing business relative to other countries. That starts from registration to permitting, to taxes and to infrastructure especially power & transportation. One has to be disappointed that one year going, no tangible efforts to make the life of businesses easier have been made; rather decrees to the effect of what they can do or can’t do patriotically have been the order of the day ignoring the realities of doing business in Nigeria.

To help Mr. President further, and the naysayers…especially those that take the patriotic or “we are stuck” strategy of arguing against reality, we first examine this talk… (apologies to Fela)

“those who can afford foreign education for their children can go ahead but Nigeria cannot afford to allocate foreign exchange for those who decide to train their children outside the country. We can’t just afford it. That is the true situation we are in.” — March 5, 2016 on Al Jazeera Interview

This is lose talk. Forex reserve of your country is not just what is held by CBN but what is held by private citizens in their homes and vaults.Hence, while the official reserve is held by the CBN with some foreign banks, or in its vaults- the national reserve is more relevant and that which is outside the control of the Central Bank will continue to determine the market price — which (exchange rate) can be exaggerated as it is now, if the full supply of the CBN is not brought to bear on this real market.

So if they source it from somewhere else, it is still part of the reserve available for import. And all you do is create room for black market by pushing demand into the shadows which creates corruption. The demand for forex — real or imagined- will be met at a certain price point, why then should Nigeria sell its official reserve held in CBN short priced compared to that held by private individuals, and then turn around to complain of lack of revenue?

To explain what the official reserve is:

The reserve is always shared. It is mostly oil money (plus FDI coming through official banking and converted for local use) converted monthly to naira. We print naira to back the reserve up. So it is not savings. It is just useful build up for purpose of imports- for which it is meant really. The only way to stop depletion (or shore the reserve up) as such is to reduce imports (or increase exports — when we get our infrastructure especially POWER right), which will happen when forex becomes more expensive as it is now under the new policy. If you sell to lowest bidder, then forex is cheap and everyone will import — causing the reserve to deplete. Get it now?

Economic theory and policy positions shouldn’t be that difficult to explain, should it Mr. Emefiele? Shall we share with the President?

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