By Rafiq Raji, PhD
Okay, Nigeria is back on track. It is all about the economy. President Muhammadu Buhari certainly knows this now. He made a mistake. But now he has changed course. For the better.
Floating the naira was a bold move. But the real test is yet to come
That time when it may begin to seem like it was all a mistake, as the naira potentially weakens to jaw-dropping levels. When this happens – if it does – Mr Buhari must keep his nerve. If he does, the long-term benefits could be huge. His resolve would be crucial to helping spur the much-needed diversification of the economy. If imports are expensive, Nigerians would adjust their tastes.
Foreign investors remain wary
I have received enquiries about how committed the Central Bank of Nigeria (CBN) is – or would be – to its new floating foreign exchange (FX) regime. Foreign investors are wary. There is a reported FX demand backlog of US$4 billion. It is probably twice as much or more. To meet this, the CBN would need to deplete its FX reserves by at least 15 percent to US$22.7 billiion (FX reserves were US$26.7 billion as at 10 June 2016) over the next month. Add say, US$600 million in crude oil earnings in the period, and the level could be about US$23.3 billion by mid-July. Beyond this threshold, it would have to give in if pressure persists.
Central bank is still well-placed to ensure stability
Considering the lingering scepticism of President Buhari, the CBN is likely going to try to ensure there is not too sharp a drop in the exchange rate; to the extent that it can. By still banning some 41 imported items from the FX market and the stern anti-money laundering stance of this government, it would probably still be in a good position to ensure stability. In the past, corrupt proceeds made for a signficant portion of FX demand.
Do not backtrack
More importantly, what investors would be looking to see is whether authorities would not backtrack if there is a negative surprise. If there is more FX demand than anticipated, for instance. Why should this be a worry? Some of the demand backlog are mostly requests in the normal course of business. With capital controls now lifted, some investors and businesses might have decided it would be best to get out while they still can. They cannot soon forget the utter despair of having their funds stuck for so long while the capital controls lasted. So expect some panic demand. The tentative view I have taken is that the CBN – which remains the main FX supplier and would still be able to determine the price – would try to hold the naira exchange rate for a US dollar at the 300 level. If that is not market-clearing and crude oil receipts remain challenged, expect further depreciation.
Appoint an economic management team
There is more to be done. Mr Buhari must appoint a proper economic management team to advise him and serve as a think-tank for the National Economic Council – which consists of governors of the federating states with the country’s vice-president as chair. The team should be dominated by independent economists who are not afraid to speak truth to power. A special adviser of cabinet rank should lead it. I recommend Dr Doyin Salami of the Lagos Business School, an independent member of the monetary policy committee, who was courageously consistent throughout the period of the wasteful CBN policy.
Leave the central bank alone
It is also quite clear the CBN is not going to be independent under President Buhari. So, he is the one that needs to be admonished. It is important to point out to him that the benefits of a floated currency would only come if it is sustained. Because if the CBN buckles when things seem like they are about to get out of control, it would all have been for nothing. The Nigerian leader should be told to expect some initial volatility. He must not be given a false sense of comfort. The exchange rate would balloon. Prices for imported goods would rise significantly. But Nigerians would eventually adjust, boosting demand for locally-manufactured goods. That is how to create jobs. What Mr Buhari really fears is a Babangida-era structural adjustment programme deterioration of the 1980s – which could have worked if it were sustained. As it is his mettle – not that of the CBN governor – that really matters, more courage is asked of him.
Also published in my BusinessDay newspaper back-page column. See link viz. http://businessdayonline.com/2016/06/on-the-economy-buhari-has-to-do-more/