“Central Bankers Read Election Returns, Not Balance Sheets’ Robert Z. Aliber
Last week, the Central Bank of Nigeria (CBN) announced the devaluation of Naira by N13 as part of of its dictated measures ostensibly to strengthen the nation’s economy. The CBN Governor, Godwin Emefiele, disclosed the devaluation after a meeting of the Monetary Policy Committee. (MPC). The MPC consists of the Governor of the Bank as the Chairman, the four Deputy Governors of the Bank, two members of the Board of Directors of the Bank, three members appointed by the President; and two members appointed by the Governor. MPC in number compares with the Central Working Committee of the Communist Party of the collapsed Soviet Union and true to type its method is far from being democratic.
Under the new monetary dispensation, Naira now exchanges for N168 instead of the old official rate of N155 to one U.S. dollar. According to the CBN governor, MPC also decided to increase the Monetary Policy Rate (MPR) by 100 basis point from 12 percent to 13 percent. The MPR is the rate at which banks borrow from the Central Bank to cover their immediate cash shortfalls. It is an open knowledge that the higher the cost of such borrowing, the higher the rate at which banks advance credit to customers. The conventional wisdom has it that central bankers as monetary advisers to government should pursue policies with an eye on public welfare not necessarily on balancing the book as the MPC members did recently. CBN wrongly targets inflation rather than targeting real production and employment creation.
In fact CBN Governor, Godwin Emefiele , it seems, moves in the opposite direction of the global trends of lowering interest rates to boast productivity and create jobs. Yours sincerely searches in vain for any known modern democracy where votes truly count and few months to a general national election, the Central Bank for whatever reasons, would arbitrary devalue the national currency and at the same time hike the interest rates ( already in injurious double digit!). When we add already less than 50 per cent capacity utilization in the real sector, 50 per cent open unemployment a drop in foreign reserve from, these miserable macro economics could lead to an electoral retrenchment of any democratically elected government.
As a consistent supporter of the autonomy of the CBN, the latest dictatorship of injurious macro economic variables of 8 per cent Naira devaluation and increase in interest rate challenges all Nigerians to watch how the CBN exercises it’s autonomy and to whose interest. The CBN governor said the decision to lower the value of Naira against the Dollar was to strengthen the currency. How devaluation strengthens the Naira beats imagination. For an import dependent economy for inputs and finished goos of varying brands, devaluation puts further pressures on Naira value.
The often-repeated declared objectives of monetary policies are stable external value of the Naira, domestic price stability and a viable external balance of payment for the country. The recent announced measures would certainly fuel inflation and undermine price stability. Certainly you cannot talk about price stability when at a stroke you record such per cent devaluation that further puts pressure on inflation rate officially put at 12 per cent by the government.
Certainly the objective cannot be improved capacity utilization given that manufacturers now need more money to oil their ever-rising production cost for imported inputs, no thanks to devaluation. For a new CBN that has promoted in recent times Development financing as one of the requirements for sustainable economic growth through various intervention funds at single digit interest rate, a return to hike in interest rate only privileges the money market operators and punishes the real sector of the economy. The challenge lies in how the CBN must urgently resume its regulatory role especially with respect to the foreign exchange market. CBN must return to basics. It must return to its core objectives of maintaining sound financial structure, promotion of monetary stability, safeguarding the value of Naira and stable exchange rate and prove a financial adviser to the federal government, in the areas of price and exchange rate management. As a banker of last resort and financial adviser to the federal government, the new governor of the CBN must impress on the government to drastically cut the costs of governance which truly puts pressure on the value of the Naira in the face of dwindling oil revenue. CBN must promote policies that will grow the real sector of the economy and lessen the scandalous dependence on oil revenue. It must re look the twin mutually destructive measures of devaluation and increase in interest rate. The new upward review of interest rate will definitely discourage borrowing by small and medium business enterprises and will not help in reviving the collapsed businesses. Sustainable mass industrial jobs cannot be assured under the monetary regime of Naira devaluation and high interest rate.
Issa Aremu mni
