Emefiele: Why We Can’t Allow Unfettered Float of the Naira

Says Nigerians must embrace economic nationalism

Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, has explained that the reason the apex bank is opposed to the idea of unfettered float of the naira is because adopting such policy could hurt the nation’s currency.

Speaking yesterday at the Vanguard Newspaper Awards, where he was recognised as the "Personality of the Year," in Lagos, Emefiele noted the gap between the interbank and parallel market exchange rates, averring that a purchasing power parity analysis would confirm that the naira is not as weak as the rate in the parallel market suggests,.

He said the only logical explanation for the high rates in that market "is that a lot of illegal and criminal activities are being carried out there."

Given this scenario, he said the CBN would not sit idly by and allow such faceless and criminally minded people to destroy the currency under the guise of a free float as is being canvassed by some experts.

"In fact, I have always had one simple question for this group of persons: name just one country in the whole world that practices a freely floating exchange rate regime? Just one. I have heard commentators suggest we should follow Egypt’s example and free the naira.

"What they do not tell you is that following their currency adjustments; inflation today in Egypt is over 30 percent. Is that what we want in Nigeria? As with most economic problems, we need to understand the kind of inflation we have in Nigeria. Is it demand-pull, where too much money is chasing few goods, or cost-push, where supply constraints lead to few goods in marketplace?”

Emefiele said: "In Nigeria, I believe we have cost- push inflation, exacerbated by supply shortages in food, fuels, and FX. And that is why the CBN is supporting farmers across the country through various schemes to increase food supply. We are also very responsive to the needs of fuel importers to ensure availability. And we continue to respond as much as possible to FX supply shortages in the market.

"In view of the fact that our current episode of inflationary pressure is coinciding with contracting economic growth, we have to recognise the dilemma it poses to policymaking. This is because no single macroeconomic policy can address rising inflation and slow growth simultaneously, because fighting inflation may require implementing policies that might, in the short term, be inimical to economic growth."

Commenting on the exchange rate, the CBN governor noted that like every product, the exchange rate ought to be determined by the forces of demand and supply in a fair, competitive, and open market.

He however recalled that shortly before he assumed the position of Governor in June 2014, the monthly foreign exchange (FX) inflows into the CBN was about US$3.6 billion.

Emefiele explained: "For five straight years preceding June 2014, crude price averaged over $110 per barrel and indeed in September 2008 specifically, Nigeria’s external reserves stood at US$62 billion after the country had spent US$12 billion in settling the Paris club debt.

"It is quite surprising and disingenuous that some of the people talking today about how we can manage our exchange rate were the same persons who frittered away these reserves such that when I assumed office, I met only US$37 billion in FX reserves. To make matters worse, in the aftermath of the sharp drop in oil price, made worse by falling production volumes in Nigeria, the monthly FX inflows into the bank dropped precipitously to less than US$700 million per month. Yet, the demand for FX from the market has continued to be about US$4.8 billion monthly.

"Given this situation, the CBN dealt with the supply side of the problem by allowing commensurate depreciation of the currency several times. Having done this, and bearing in mind the devastating effects of significant depreciations on inflation, purchasing power, government debt service, financial system stability, fuels and energy prices, unbiased and reasonable people would agree that we also needed to do something with the demand side of the problem.

"Why exactly should we spend scarce FX resources paying for things we can produce here in Nigeria? I believe that only entrenched interests, who do not have the interests of ordinary Nigerians at heart, would want us to do so."

Speaking on the rationale behind the continuous exclusion of 41 items from the FX market, Emefiele who said the policy was basically borne out of necessity to conserve FX, urged policymakers across the country to pay attention to global trends and ensure that they reflect upon their strategy and thinking. Furthermore, he pointed out that there was the new realities of nationalist and populist sentiments sweeping across the world.

"It is on record that variants of this policy have proven to be highly effective in other climes and even here in Nigeria. For example, throughout the early days of South Korea’s economic renaissance, the government intermittently used excessively stiff tariffs, quantitative restrictions and prohibitive inland taxes to effectively ban many items with potential for high imports, and simultaneously, offered generous and subsidized loans to firms for export promotion causes. In fact, at some point, about 93 percent of total imports into South Korea were subject to one or more such restrictions.”

Giving further explanation, the CBN governor said: "And here at home, this policy have been used to achieve significant sufficiency in cement, a product whose importation could have been costing us over US$3.2 billion in FX Reserves annually. In effect, therefore, this policy needs to be supported not just in response to the pressure on the naira but as an opportunity to change the economy’s structure, resuscitate local manufacturing, and expand job creation for our citizens.

"Take rice imports, for example: why should we keep allocating scarce FX to rice importers when vast amounts of paddy rice of comparable quality produced by poor hardworking local farmers across the rice belts of Nigeria are wasted, and farmers are falling deeper into poverty while we export their jobs and income to rice producing nations.

"I am not unaware of the short-term pains we are all going through right now. But I urge you all to use it as an opportunity for us all to look inwards, diversify our economy, produce locally, and create jobs for our unemployed youths. We are a resilient and hardworking people.

"We definitely cannot survive as a people by importing everything and anything. Even when we disagree about the way forward, we need to treat each other with respect and fairness, and realize that together we are greater.”

Emefiele said CBN was acting in the best interests of ordinary Nigerians, regardless of the noise from the few entrenched interests whom the bank’s policies may be hurting.

"Let me also reiterate the central bank’s willingness, determination, and capacity to continue to meet all legitimate transaction-based FX demands in the market. I obviously cannot be of help to people or businesses who are into speculative FX demand. My promise instead to this group, whether foreign or local, is that the CBN will make sure they lose money!"

Emefiele therefore stressed the need for Nigerians, especially policy makers, to develop a sense of national consciousness in carrying out their duties.

He pointed out that with events such as the Brexit, issues surrounding the election of Donald Trump as the US President, as well as recent development in France and some other developed economies, there was need for Nigeria to now begin to look inward so as to harness its resources for national development.