One Year of Buharinomics: Reality Check On Floating The Naira | Independent Newspapers Limited
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One Year of Buharinomics: Reality Check On Floating The Naira

Posted: Jun 20, 2016 at 2:00 am   /   by   /   comments (1)


By Magnus Onyibe.

The very seminal book ‘The Monetary History of The United States’ by Milton Friedman and Anna Schartz which l read in the course of my academic pursuits, particularly when l was trying to understand the causes and solution to the Great Depression, was too tedious.

In the book, Friedman, Nobel Prize winning economist and Anna Schwartz identified four main policy mistakes made by the (U.S.) Federal Reserve -equivalent of Central Bank of Nigeria, CBN, that led to a sharp and undesirable decline in money supply in the U.S financial system before the Great Depression.

All the four points bear so much resemblance to recent occurrences in Nigerian economy such as the introduction of the Treasury Single Account ,TSA, and capital exportation restrictions ,that l could not resist sharing them in this piece, so that the current managers of our economy may draw some lessons in public policy administration  and see how possible it is sometimes for unintended outcomes to creep in and create scenarios whereby a solution to a challenge may create new crisis. The authors recalled that:

(1), in the spring of 1928, the Federal Reserve  began to tighten its monetary policy(resulting in rising interest rates) and continued that same policy until the stock market crash of October 1929. This tight monetary policy caused the economy to enter a recession in mid-1929 and triggered the stock market crash a few months later.

(2), in the fall of 1931, it (Federal Reserve) raised interest rates to defend the dollar in response to speculative attacks, ignoring the difficulties, this caused to domestic commercial banks.

(3), after lowering interest rates early in 1932 with positive results, it raised interest rates again in late 1932, causing a future collapse in the U.S. economy.

(4), the Federal Reserve was also to be blamed for a pattern of ongoing neglect of problems in the U.S. banking sector throughout the early 1930s. It failed to create a stable domestic banking environment by supporting the domestic banks and acting as lender of last resort to domestic banks during banking panics.

The book was so illuminating and thought provoking that although it was written way back in 1963, the four ‘sins’ of the Federal Reserve of the US that caused the Great Depression, which are the wrong headed capital control policies under then President, Hubert Hoover’s watch in 1929,appear to have been replicated in Nigeria in 2015 when 41 items (tooth pick etc) were banned from Import eligibility signaling the resort to foreign exchange, fx, rationing. The TSA which mopped up government funds in banks and has almost asphyxiated the financial services sector as evidenced by the shortage of over one trillion naira in bank vaults compared to the same period last year is another culprit .The Nigerian stock market which suffered massive looses until last Thursday when the market responded positively to the new flexible exchange rate announcement, was also not spared in the strangulation occasioned by uncoordinated fiscal policies like the TSA.

So it’s a kind of dejavu to me that the adoption of a floating exchange rate by Nigeria on June 14 ,2016 was informed by similar challenges faced in the U.S. June 2, 1929 when the U.S stock market crashed, triggering the Great Depression.

Despite the fact that the book was very illuminating, it was too academic and didactic.

That’s why when l recently came upon the book ‘The money makers: How Roosevelt and Keynes ended the Depression, Defeated Fascism and Secured Prosperous Peace” written last year and published by Eric Rauchway, l seized the opportunity to take another look at the events leading to the Great Depression and how the USA was pulled out of it by Franklin Delano Roosevelt, FDR, the 32nd President of the USA. relying on advice from John Maynard Keynes-the British economist who advised him to, among other measures, take America out of the gold standard two years after England did.

It is important to keep in mind that pulling out of the gold standard by England in 1931 is the modern day equivalent to floating a country’s currency, a policy that has just been introduced by CBN’s Godwin Emefiele and President Muhammadu Buhari, with a view to equally lifting Nigeria out of the economic dungeon that it is currently trapped in.

Could the duo of Buhari and Emefiele be on the cusp of history as our own version of FDR and Keynes? Time will tell.

Upfront, it is important to point out that Nigeria’s economic malaise is not in any manner, shape or form comparable to the Great Depression. However, some of the factors that had compelled Nigeria’s joining of the popular global economic trend of floating their currency are derived from the belief that during depression, a flexible exchange rate is critical.

With a weak aggregate consumer demand; falling oil prices; negative GDP growth; alarming inflation and unemployment rate as well as a huge backlog of payment of workers’ salaries by 27 State governments, situations that are currently the case in Nigeria, the nation is on the verge of a recession, which is why a flexible exchange policy is being adopted as a panacea.

I can testify that it is much more pleasurable to read the book ‘The Money Makers’ which gives credence to FDR’s introduction of the New Deal, a set of fiscal measures combined with the monetary policy of pulling out the USA from the gold standard in 1933, to manage the Great Depression, so l recommend it to President Muhamadu Buhari and his economic team.

Now, I have had the privilege, in several articles that l have written  in the past one year to  encourage Mr President to emulate FDR’s politics and borrow one or two leafs from his economic blue print, as l believe it is the best escape route out of the socio economic doldrums in which Nigeria is now mired.

Today, after about one year of resistance that resulted in severe economic crisis such as the downward slide of all development indices in Nigeria including dropping from the position of the world’s number 2 in global ranking of FDI destination, 2 years ago, madam Largade’s desire for flexible exchange regime in Nigeria is being fulfilled through the new policy announced by the CBN, June 14, 2016.

In my reckoning, the economic fundamentals in England that necessitated the scrapping of the gold standard during the economic depressions of 1931, were quite different from the situation in Nigeria now, hence the authorities seemed to have been in quandary about how to go about it and thus dithered for a long time.

For instance, agricultural produce which was the main export commodity in those days-wheat etc- which were in great demand worldwide were controlled by the U.K and her U.S allies, hence, they were able to enjoy comparative advantage in its output. They also occupied pole positions in technological advancement and therefore had great export potentials, but Nigeria has no such luxury.

Right now, although Africa has comparative advantage in agriculture, the nation is unable to sustain her food need, how much less export and neither does she have any experience in the production of technological items such as iPhones, airplanes or even motor cars which provide incentives for countries to devalue or float their currencies to boost export trade.

At least that’s the justification that President Buhari and his close advisers had been holding onto, and they have a point, but that cannot be a cogent excuse for sticking to a policy that had been counterproductive for so long.

They needed to think out of the box and thank goodness, Mr President has now decided to cure Nigeria and Nigerians of the perennial ailment of grandiose illusion of the naira, in terms of exchangeable value for it. Incidentally, President Buhari is not the only Nigerian with an exaggerated impression of the naira. Most of our compatriots who were in leadership positions or around in the 1970s when Nigeria started reaping bountifully from newly found oil wealth shared similar grandiose illusion of Nigerian currency.

With such sea of change in Nigeria’s foreign exchange policy, government has chosen to expand her horizon by not just sticking to the era of former finance minister, Ngozi Okonjo-lweala’s policy of selling treasury bills/bonds at exorbitant rates that attracted a motley crowd of portfolio investors whose funds are short term and can hardly be invested in the real sector.

Under such circumstances, the question remained, how do we obtain long term funding support for the real sector which should constitute the cornerstone of any economy of substance?

How could policies that would boost the confidence of international entrepreneurs and encourage them to bring in Foreign Direct Investments, FDIs into Nigeria to boost growth in the real sector, be fashioned out and sustained? Is the recent decision to float the naira adequate catalyst, or a combination of both fiscal and monetary policies as FDR and Keynes did back in 1933 and what are the fall back positions of government, should the floating of the naira strategy prove not to be as efficacious?

The pertinent questions above, to me are what the authorities in charge of the economy should urgently seek viable answers to.

Mr President has also graciously accepted the removal of the controversial fuel subsidy which he initially opposed because he feared its removal would hurt the poor masses whose interests are very close to his heart and now the floating of the Naira, which he was initially vehemently opposed to, is today an official policy of Nigeria. For the reasons earlier cited, the Chinese deal should be consummated without further delay.

Right now, whether President Buhari’s positive change in economic outlook by becoming less tedious and having an expanded and broader world view would gain momentum and be sustained when he returns from his current medical tourism to the U.K., is a prospect that Nigerians are anxiously trying to decipher.

Nevertheless, a combination of plummeting oil revenue resulting in the present economic meltdown, plus a floating Naira may not augur well for a nation in dire need of economic elixir, if the leadership is not dynamic and astute. Worse of all, the nation may be in double jeopardy if the new policies are truncated as opposed to being pursued to their logical conclusion.

So our prayers should be that Nigeria makes it through the dark hours.


Comments (1)

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