Emefiele’s CBN and its currency war

News analysis
By Emeka Anaeto

We have just had what looks like the best week for Nigeria’s foreign exchange (forex) market, just on the heels of its worst week (last week). After tumbling to an all time low of N520/USD1, Naira began to appreciate early last week following a swift roll-out and execution of counter-speculation measures by the Central Bank of Nigeria, CBN.
The good news is not really about the appreciation of the local currency. It is all about the policy response to one of the most vicious ‘currency war’ going on in Nigeria today.

Currency war not currency crisis!
Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele Like most issues in Nigeria, the standard concept of currency crisis does not apply here. A currency crisis depicts a state of low or absence of confidence in a local currency to earn and sustain exchange rate stability. On the surface, this appeared to be the situation in Nigeria. But on a deeper insight into the nature of demand and speculative positions taken against the Naira in the past 20 months, it is clear that there were more problems beyond the usual market forces, or even speculative attacks.

The only latent of the underlying problems, the external reserve position, has changed for better and on positive trajectory since fourth quarter 2016. But it is noteworthy that the forex market had its worst weeks while this development in external reserves was trending. Ordinarily, a nation’s currency gets strengthened with increasing reserves, but Nigeria has just witnessed a reverse of this principle.
Beyond this latent feature, a massive but invisible hand of illicit currency trade at the background, involving some institutional and political establishments, is at play. Inadvertently, CBN is at war with some invisible forces.

Beyond monetary and exchange policy
Beyond these, CBN has been battling a twin problem of macroeconomic instability and fiscal lethargy for quite some time now. This appears to be lost to most analysts and commentators on the long-stretched forex problems Nigerians have been experiencing since the advent of the President Muhammadu Buhari regime. Unfortunately most commentators have rightly or wrongly, blamed the CBN.

Conventionally, CBN would be at the receiving end of the frustrations, pains and the attendant criticisms arising from the forex quagmire. This is because central banking all over the world, including Nigeria, has a key role and even a mandate on exchange rate and price stability.
In Nigeria today, between the two (exchange and price) the most virulent appears to be exchange rate.
But the picture appears more sordid when we also note that inflation rate, at near 15 year high with the January 2017 figures, is rendering the price stability role of the apex bank muddy.
One is therefore, compelled to look at what has been happening in recent days following the developments in the forex market since February 2, 2017 when tension heightened spilling exchange rate beyond the landmark N500/USD1, and then last week’s nerves-calming policy response from the CBN.

Like no other before now, the policy response became almost a magic wand, first, reversing the depreciation train back to pre-February 2 band of N495 and N498/ USD, and then pushing further back to a three months point of N455/USD1. This shows a regulatory capacity to stay above the fray, while mustering enough energy to counter the several anti-policy tendencies in the market.
Since second half of 2014, when the external sector of Nigeria’s economy began a downward trend following the steep declines in oil prices in the international market, management of Nigeria’s forex market and all other interconnected economic variables became severely challenged. A few observers have noted that in this circumstance, unusual policy issues would become inevitable in addressing unusual economic circumstances.

This clearly underpinned CBN’s, rather, non-conventional policy responses so far, but which has drawn harsh criticisms from both the informed and uninformed.
A few supports have come the way of the apex bank but the remarkable ones were focused on the role of the fiscal policy executives in the whole trajectory. Most observers here easily see a huge gap where, in some instances, the fiscal actions (or more correctly, inactions) go directly in undermining monetary and exchange policies, especially as regarding price stability. Yet the apex bank carries all the blames.

In a general instance, most economists believe and agree that federal government should reverse the recessionary trend through substantial and targeted public spending. This could easily be executed through budgetary strategies. But this is hardly the role of CBN, yet the apex bank carries the burden of blames.
A well articulated and executed national economic recovery plan by the government remained the only enduring solution to the exchange rate and price instability, and not quick fixes from CBN.
It remains to be seen how long the present reprieve achieved by the one week old measure would last.

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